Behind the Headlines: Who is Financing the Energy Transition?

The global shift towards renewable energy is no longer a distant goal but an ongoing transformation that requires substantial investment in infrastructure, technology, and innovation. As the world aims to decarbonize its energy systems to address climate change, private equity (PE) firms, infrastructure funds, and venture capital (VC) investors are playing a critical role in accelerating the energy transition. The scale of capital flowing into the sector is extraordinary, reflecting both the urgency of the transition and the significant investment opportunities it presents.

Since 2014, commitments by limited partners (LPs) to funds focusing on energy transition infrastructure have surged, reaching a remarkable $892 billion by the first half of 2024. This includes both traditional infrastructure funds as well as those dedicated exclusively to clean energy projects. Specialist energy transition funds, in particular, have raised $235 billion in total commitments, targeting high-growth opportunities in renewable energy, storage, and grid modernization. This influx of capital signals that investors are not only backing the transition but are positioning themselves to capitalize on a global movement that is expected to reshape the energy landscape for decades.

The Rise of Specialist Energy Transition Funds

Infrastructure funds have long been a primary source of capital for large-scale energy projects, but in recent years, we’ve seen the rise of specialized energy transition funds that focus exclusively on clean energy infrastructure. These funds are particularly well-positioned to help scale projects that will replace fossil fuels with renewable energy and build the infrastructure needed to support this transition.

It has not been an entirely smooth ride - historically, funds launched between 2008 and 2013 faced high execution risks, leading to underperformance—funds in this vintage had a median internal rate of return (IRR) of just 3.6%. However, funds opened from 2014 to 2019 have seen much better returns, with a median IRR of 9.3%. This improvement is primarily due to reduced execution risks, technological advancements in renewable energy, and the growing demand for low-carbon solutions.

A number of specialist funds have now emerged to seize the energy transition opportunity and now feature strongly in $500M plus deal activity as they driver hard to deploy. Some of the largest and most influential include:

• Copenhagen Infrastructure Partners (CIP): $17.2 billion raised, with a focus on offshore wind, solar power, and energy storage.
• Lunate: $30 billion raised, specializing in large-scale renewable energy infrastructure, including green hydrogen and offshore wind.
• Brookfield Renewable Partners: $15.1 billion raised, investing in diverse clean energy assets, including wind, solar, and hydroelectric.
• Actis: $9.9 billion raised, with a focus on renewable energy investments in emerging markets.
• BlackRock Renewable Power: $9.9 billion committed, targeting investments across solar, wind, and storage technologies.
• Blackstone Energy Partners: $11.6 billion raised, backing renewable energy projects, storage, and low-carbon infrastructure.

These funds are pivotal in scaling up renewable energy capacity and decarbonizing the global energy system. Their investments are critical in moving the world toward a low-carbon energy future.

Private Equity and Venture Capital Driving Innovation

While infrastructure funds focus on large-scale, long-term projects, private equity and venture capital are playing a key role in funding innovation. Clean energy technology investments have been growing rapidly, with deal activity reaching $21 billion in both 2021 and 2022, and $18 billion in 2023. These investments are focused on new technologies that will address the technical and logistical challenges of integrating renewable energy into the grid.

A significant area of focus for venture capital has been addressing issues in low-voltage distribution networks caused by the growing penetration of electric vehicle (EV) chargers and rooftop solar systems. As more households install EV chargers and solar panels, utilities face new challenges in grid stability, with voltage fluctuations and congestion in local networks becoming more common. To address this, startups are developing smart grid technologies, energy management platforms, and battery storage solutions that can integrate distributed energy resources (DERs) into the larger energy system.

The investment focus is shifting toward platforms that manage and control home energy systems, allowing for better coordination of solar, battery, and EV chargers. These smart systems can interact with the grid to ensure energy is stored when demand is low and deployed when demand is high, thus improving overall system efficiency and stability.

As more distributed energy resources, such as solar panels and batteries, are installed in homes and businesses, the need for advanced grid technologies grows. Smart grid solutions are at the forefront of this shift, enabling the seamless integration of these energy sources into the broader grid.

Smart grid technologies allow for the dynamic management of energy production, storage, and consumption. Energy management platforms are helping to ensure that renewable energy can be dispatched efficiently, even when production levels fluctuate due to weather conditions. These platforms also enable consumers to optimize their energy use, reducing waste and improving grid reliability.

One of the key innovations in this space is the development of home energy management systems (HEMS) that control how homes use energy. These systems can manage the flow of electricity from solar panels, batteries, and EV chargers, while also allowing homeowners to sell excess power back to the grid. Such systems help balance supply and demand, mitigate the risks of intermittency in renewable generation, and optimize energy consumption.

Venture capital (VC) firms are also active in funding early-stage technologies and emerging solutions that will define the future of clean energy. Investments have been directed toward technologies such as next-generation energy storage, AI-driven energy optimization, and carbon capture solutions. These innovations are crucial to overcoming the challenges of renewable energy intermittency and improving the efficiency of energy systems.

VC-backed companies are also focusing on advanced grid management and decentralized energy trading platforms that allow consumers to buy and sell electricity more efficiently. By enabling local energy markets, these platforms help balance the grid without requiring massive infrastructure investments, which could otherwise take decades to deploy.

A Bright Outlook for Energy Transition Investment

The energy transition represents an enormous investment opportunity. According to industry forecasts, global energy transition investments will exceed $50 trillion by 2050, underscoring the vast scale of the opportunity. As Vikas S. Desai, Managing Director of Brookfield Renewable Partners, put it:

"The energy transition represents one of the greatest opportunities of the 21st century. The world is moving toward a low-carbon future, and we believe that renewable energy will be at the center of this transformation. Our investment strategy is aligned with this shift, focusing on clean energy infrastructure that will help reduce global emissions and support sustainable growth."

This opportunity is being embraced by investors across all stages, from large infrastructure funds targeting renewable energy projects to venture capital backing cutting-edge technologies. As execution risks decrease, renewable technologies become cheaper, and global demand for clean energy increases, the energy transition will continue to accelerate, driving both financial returns and environmental benefits.

With over $892 billion already committed to energy transition infrastructure and $235 billion raised by specialist funds, the capital required to support the transition is flowing. The growing role of private equity and venture capital ensures that the innovative technologies needed to integrate renewable energy into the global system will continue to emerge. The energy transition is not just a global imperative—it is one of the most exciting investment opportunities of our time.