We have seen a substantial surge in investment in net-zero tech, with investment reaching record highs in 2021 and remaining relatively resilient in 2022 despite a wider market downturn. Yet there are significant challenges to developing and scaling the net-zero technologies needed in time to enable net zero by 2050. The International Energy Agency estimates that to achieve net-zero emissions in the energy sector, the investment needed to develop, scale-up and deploy clean energy technologies would need to be between $4-5trn per annum between 2030 and 2050.
Many different net-zero technologies will have a role to play to transition to net zero and examples of some of the key focus areas include: the generation and storage of clean electricity, the electrification of transport and industry, the development of the supply and demand for green hydrogen as an energy source, the decarbonisation of building materials and the transformation of energy usage by the built environment, changes to agriculture and food distribution to reduce greenhouse gas emissions, and the ability to capture and store carbon from the atmosphere at scale.
Developing any one of these areas alone would be challenging but this widespread evolution of different technologies needs to occur in parallel, across the world, with solutions being, in many respects, inter-dependent – in short, a systems issue of immense scale and complexity costing tens of trillions of dollars to address.
Investment across the eco-system
Investment will be needed across all stages of technology evolution – from the equity financing of deep-tech start-ups through to the high value project financing necessary to develop large scale facilities. The sources of finance are similarly diverse with venture capital, private equity, sovereign wealth funds and pension funds all playing a part alongside corporates, banks, multilateral agencies, asset managers and national governments.
Role of public policies and investment
Government carbon reduction policies and initiatives are essential to creating certainty for the investor community, enabling investors to invest in climate innovation with confidence. Governments around the world are seeking to set clear policy goals and committing significant capital to promote net-zero technology investment, and to subsidise technologies they consider critical to the future of energy.
China has invested tens of billions of dollars into its clean energy sector over the last ten years, developing a strong global market share of technologies such as solar manufacturing and wind turbine manufacturing.
More recently, the US passed the Inflation Reduction Act which is reported to authorise $391bn in spending on energy and climate change. At COP27 in November 2022, the European Investment Fund signed investments totalling €247m to enable five equity funds to back €2.5bn of climate action investment. The UK launched a Net Zero Hydrogen Fund in 2022 with £240m of funding available for eligible low carbon hydrogen projects.
There are challenges in attracting investment in nascent industries. For example, Europe has around 40 giga-factories at different stages of development. These have attracted and will need to continue to attract significant levels of institutional finance. Northvolt, for example, has raised more than $3bn of debt and equity financing including a $1.6bn project financing for the construction of its first giga-factory.
Investors have had to find ways to balance a range of risks in this evolving area covering the facility’s complex supply chain, construction of the facility and certainty of offtake, so they could build a bankable business case. With the risks and challenges of such projects becoming better understood, we see continued interest from the banks, funds, and multilaterals for many other projects in the pipeline.
Uncertainty in the interest rate environment will inevitably make financing more challenging for certain of the net zero projects/businesses through 2023 and we have already seen some high-profile companies facing liquidity issues. Overall though, given the stated policy goals and the impact of the evolving ESG reporting regimes, we expect net-zero technology investment and M&A to remain a strong source of deal flow through 2023 and beyond.