While the broader sentiment around energy transition turned more pessimistic in 2023, investments in clean energy and related technologies still increased by more than 20%. This included renewables, biofuels, and a wide range of low-carbon solutions. Despite this growth, we anticipate a more measured pace of progress in 2024, as reflected in the following themes:
- Publicly Traded Cleantech Companies: Public cleantech companies took a hit in 2023, and we don’t expect the S&P Global Clean Energy Index to reach its 2021 highs again this year or next. However, as interest rates stabilize and the sector recovers, some upturn is likely.
- Early-Stage Investment Challenges: Investments in predominantly early-stage energy transition and climate tech companies totaled just over $30 billion in 2023, a significant 25% drop from the previous year. High interest rates, renewed energy security concerns, declining cleantech stock performance, permitting hurdles, and the stringent qualification criteria for Inflation Reduction Act (IRA) funds all contributed to this decline. We expect these factors to persist in 2024, leading to similar or even lower levels of investment. Focusing solely on cleantech stock performance or early-stage fundraising paints an incomplete picture of the long-term energy transition trajectory.
- Flight to Quality: Investors in the energy transition space will likely prioritize projects and technologies demonstrably nearing commercial viability. This “flight to quality” could mean fewer funding opportunities for startups and early-stage technologies seeking Series B and C investments, while projects closer to pilots or commercial plants garner greater interest.
- Emerging Traction Areas: We expect carbon capture and storage (CCS), sustainable aviation fuels, and critical minerals recovery and extraction to attract the most fundraising as these technologies and projects gain traction. Solar and wind will continue to see investor interest, and some companies in these areas might be ripe for liquidity events, with oil and gas companies potentially playing an active role as buyers.
- U.S. Election Impact: The upcoming U.S. election could significantly impact climate tech policies. While we consider it highly unlikely for the IRA to be repealed, changes or even pitched battles around its specific details are probable. We saw a preview of this stringency in late December with the U.S. Treasury’s definition of “carbon-free electricity” for green hydrogen production, with stringent “three pillar” requirements for IRA tax credits. Similar stringency is likely for other IRA incentives under the Biden Administration.
- EV Sales Slowdown: EV sales are expected to continue climbing, but reaching 25% of global new car purchases in 2024 seems unlikely. Shrinking EV incentives in China, Germany, France, and even Norway make them less attractive to buyers. The EU, aiming for all-electric new cars by 2035, is caught in a crossfire with its anti-subsidy probe into China’s EV exports potentially leading to import restrictions and jeopardizing its ambitious green goals. The UK, echoing these concerns, has delayed its 2030 ban on new petrol and diesel cars due to affordability worries.
- Protectionist Walls: Western countries are building walls around their car industries in an attempt to ditch China and boost domestic EV production. However, these protectionist policies, like the U.S. Inflation Reduction Act and the EU’s Critical Raw Materials Act, could backfire by making EVs more expensive and slowing their adoption. This decoupling push comes at a challenging time, with weak metals demand and high mining costs already squeezing the industry.
- Permitting and Regulatory Hurdles: Energy transition continues to face permitting and regulatory hurdles. Each U.S.state has its own policies and priorities, with California racing ahead with ambitious renewable energy goals while Wyoming remains heavily reliant on coal. While the IRA offers some clean energy incentives, it lacks nationwide emission reduction targets or transition deadlines. Additionally, practical challenges exist, such as the complex interplay between the Federal Energy Regulatory Commission (FERC) overseeing national power lines and state agencies controlling local energy matters. Despite these hurdles, regulatory bottlenecks are being addressed, and grid buildout efforts could ease current constraints.
Overall, 2024 shapes up to be a year of transition and adjustment for the energy transition sector. While the euphoric highs of the past may not return, significant opportunities for measured progress remain. Policy developments and technological advancements will continue to shape the landscape, making it an exciting time for all stakeholders.
ADI Analytics is a prestigious, boutique consulting firm specializing in oil & gas, energy transition, and chemicals since 2009. We bring deep, first-rate expertise in a broad range of markets including refining and fuels, where we support Fortune 500, mid-sized and early-stage companies, and investors with consulting services, research reports, and data and analytics, with the goal of delivering actionable outcomes to help our clients achieve tangible results.
We also host the ADI Forum, one of Houston’s distinguished industry conferences, to bring c-suite executives from oil & gas, energy transition, and chemicals together for meaningful dialogue and strategic insights across the value chains.
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– Uday Turaga
