$2-Trillion Funding Gap Casts Shadow over Energy Transition

By Irina Slav - Apr 24, 2024

• Blackrock: investments in the energy transition are falling behind.
• 
  
• Blackrock: annual investments in the shift away from hydrocarbons need to almost double from their current record levels.
• 
  
• Blackrock: government assistance would need to come in the form of favorable energy pricing policies and market deregulation.

Investments in the energy transition are falling way short of what is needed for its success. The fresh warning comes from BlackRock, which said annual investments in the shift away from hydrocarbons need to almost double from their current record levels. But it’s getting less likely this would ever happen.

In a new edition of its Investment Institute Transition Scenario, the bank said that moving the transition forward would require more money from both public and private sources and that, for its part, would require “alignment between government action, companies and partnerships with communities,” according to Michael Dennis, head of APAC Alternatives Strategy & Capital Markets at BlackRock, as quoted by CNBC.

BlackRock mentioned the $4-trillion figure as the necessary sum to be invested in the transition annually back in December when it released the original IITS. The amount was as impressive then as it is now, not least because it was double the amount of earlier investment estimates. What makes it even more impressive is the fact that last year’s record transition investments came in at less than half that, at $1.8 trillion.

There is little hope that this will change, at least in a positive direction. As more and more analysts begin to issue warnings about the effects of higher interest rates on transition industries, investors are turning away, too, and returning to oil and gas. It must be the worst imaginable transition scenario that not even the BlackRock analysts could come up with in their report.

Last month, Equinor vice president of international exploration and production Philippe Mathieu said investor sentiment towards the oil and gas industry had “completely shifted” from a few years ago. Speaking at CERAWeek, Mathieu said that while the transition remains a priority, energy security has also become one following the pandemic and the Ukraine war.

He was not the only one, either. Investors are flocking to energy stocks seeking to protect themselves against inflation and take advantage of higher oil prices, Reuters reported recently, citing a portfolio manager from Wealth Enhancement Group as saying, “If inflation is going to pop up again ... the hedge is to have some commodities exposure.”

The situation is very much different for transition companies. Many of these are struggling to stay afloat amid higher-for-longer rates despite generous government help. Many are folding or, in the case of European companies, relocating to the U.S. where government help is even more generous. Turning in a profit has become a major challenge, and investors are not sticking around to find out if wind and solar developers are going to overcome it.

This makes filling the $2-trillion annual gap quite a challenge as well—especially since close to two-thirds of the necessary money—at least in the developing world—would need to come from the private sector, according to BlackRock’s Dennis. The funds, he says, are there, but they need to be mobilized and this could only happen with government help.

This help, according to the executive, would need to come in the form of favorable energy pricing policies and market deregulation. Indeed, deregulation is a favorite of energy investors as it tends to make electricity more expensive for consumers, pushing returns for the suppliers higher. However, deregulation is tricky business in developing nations with high levels of poverty—it does not win more voters.

Energy market deregulation is not the only tricky part of the transition. Lately, it seems that everything has become quite tricky and risky, from EV sales, which dropped the moment incentives were phased out, to solar installations, which are driving down European electricity prices, with some plunging below zero. Whether the $2-trillion annual investment gap calculated by BlackRock would ever be filled remains an open question.

By Irina Slav for Oilprice.com