The Energy Transition II: Disruption to Growth

12 months ago, we analyzed the ongoing energy transition within the US market and the shift towards a greener future. Since then, there has been a significant increase in activity affecting both commodity trading firms, as well as the United States as a whole.

Whilst the global economy and supply chain has undoubtedly been heavily affected by COVID-related difficulties, 2020 saw more than $500 billion invested in infrastructure aimed towards the energy transition. From a US centric geopolitical perspective, the Biden administration has committed $2.25 trillion towards an infrastructure investment plan in a high indication of the pledge towards a carbon pollution-free power sector by 2035 and shift away from fossil fuels. Most recently, the release of the UN’s IPCC report has amplified everyone’s sense of urgency when it comes to climate change and sustainability. So, what has changed and what could we see occurring over the next 12 months?

As predicted, wind and solar energy have seen a major uplift in terms of development and joint-venture projects as well as AI tools to enable efficient usage. Wind power in particular has seen vast investments being made this year as the climate concerns becomes more prominent in media coverage. It is promising to note that according to the US Department of Energy, 42% of land-based power in the United States came from wind so far in 2021. There has also been a continuation of interest in offshore wind farms, which saw a $50 billion surge in expenditure over the last three years not only taking place in America, but across the globe as well.

Whilst not exclusive to renewable energy, AI tools have seen a large uptick in terms of how firms are continuing to rely upon quantitative data points. Energy focused companies are investing in various artificial intelligence tools to help them optimize their processes with more intricate forecasting capabilities to allows for accurate predictions. Naturally by identifying potential problem areas, firms can help designate where to funnel resources to gain a competitive edge over competitors. Such tools can also help optimize grid operations and they can also help develop materials innovation, as companies search for new substances that are sturdier and more eco-friendly. Whilst these can be a short term expense and time-consuming process to implement, AI tools are drastically helping improve trading firms’ abilities and strong fundamental understandings of the renewable market’s behaviour.

When looking at a top level at the job market, opportunities across the commodities industry have seen a revival after the turbulent and COVID-stricken 2020. Off the back of the pandemic recovery comes a number of changes behind hiring strategies, as the market has seen a shift towards revitalising company culture. Even the most bureaucratic firms are now opening up to the possibility of remote hires and/or flexible working on a more permanent basis.

Major firms are evolving towards building out and expanding their own renewable capabilities. The Carlyle Group, for example, launched a dedicated renewable energy infrastructure unit. Their project is expected to deploy $700 million in capital and secure over $6 billion in finance, advancing the development of assets through the company’s Copia platform.

Chevron, one of the worlds largest oil firms, is diversifying its portfolio by focusing on building out its low-carbon unit, tripling its spending on biofuels, hydrogen, and carbon capture. Through 2028, it is estimated that they plan to spend $10 billion within these sectors. Mercuria has also been particularly active with hiring, having poached a number of leading renewable professionals from BP as they continue to expand their low-carbon trading capabilities under Zach Scott.

Turning attention to coal and fossil fuel retirements, and with mounting geopolitical pressure for renewable energy plants to replace non-renewables, there has been an increase in hiring for structured finance and principal investments teams with strong knowledge of renewables and clean energy product specialists. The same is seen in trading opportunities as well; where the low-carbon market was previously densely overpopulated with brokers, more RECs, RINs, and LCFs-focused traders are emerging within in the market as it continues to become a significant area of growth.

Aside from well-established firms, there has been a large increase in newly formed small-to-medium sized asset management and trading firms that focus solely on renewable energy and products. Such firms are now looking for seasoned industry veterans to help them grow, especially in regards to middle office functions and risk. Tax equity and originator are becoming vastly important, and we are working with a variety of firms looking to recruit industry experts to assist in these complex deals.

So, is the renewables industry flawless and ready to be a focal point? In summary, no, at least yet. The market itself is still somewhat juvenile and trading markets for many products are still somewhat illiquid. The assets themselves have also come under criticism, having been accused of being unreliable. The California wildfire was an extreme example showcasing this issue, with smoke clouds blocking out sun rays, making solar panels nearly redundant. Wind is too difficult to predict, providing difficult to rely on for accurate pricing. However, there is no denying that renewables will continue to be at the heart of all investment strategy conversations going forward. When building infrastructure of any kind, there are inevitable teething problems to work out. But as technology and innovation progresses, contingency systems and most robust energy networks will be implemented to make renewable energy a core facet of our power grid. Overall, this has been a fascinating period within the energy transition as the market shows little sign of slowing down any time soon.

Be sure to follow us on LinkedIn to stay up to date with all the latest trends and developments across the commodities supply chain market. To discuss alternative proteins further, please don’t hesitate to get in touch with me here. For more insights from Proco Commodities, visit our website.

This article is part of a report from Proco Commodities – ‘The Journey to Carbon Zero’. The download the report, click here.