Energy Transition, an Investment Opportunity
During this month, we joined two events in Brussels addressing the issue of energy. The first was the Energy Transition Congress organized by Techlink, a trade association for manufacturers, distributers and installers of energy solutions, ODE (Organisatie Duurzame Energie Vlaanderen), a Flemish trade association for renewable energy, and EDORA a French-speaking trade association for products and services related to the energy transition. The other event represented the second meet-up of BeClimate, a young and burgeoning ecosystem of startups, companies, academics, and investors. As outsiders, we seized the opportunity to delve into the energy ecosystem and comprehend the dynamics of a sector facing significant pressure due to climate change issues and recent geopolitical turmoil.
As industry experts illuminated the current state of the sector, we couldn't help but notice the complexity of different moving parts, each attempting to navigate the wave of electrification, decarbonization, and energy efficiency. Many express concerns about the lack of boldness among policymakers to instigate forceful top-down changes, from international climate conferences (COP) to local governments. Others point out practical issues related to technologies and their implementation. For instance, heat pumps are not widely used in Belgium compared to other European countries. Simultaneously, the local market grapples with a shortage of qualified technicians to maintain such installations, which, when widely deployed, can also lead to disturbances. Moreover, it appears that energy technologies evolve rapidly, and unfortunately, technician training and qualifications do not always keep pace. Thermal networks, widely utilized in the Nordics to collect and transport heat from production facilities to consumption sites, require substantial infrastructure investments. In summary, external and internal pressures create a highly dynamic environment in the energy sector, rightly characterized as a transition.
This transitional phase perfectly fits the description of a complex system in a state of high non-equilibrium, shifting toward a new, hard-to-define state. The transition is marked by instability, with things more volatile than the "normal." It reacts to internal and external factors applying forces that, through feedback loop mechanisms, reinforce the change and transition. As with any complex system, the sector is subject to non-linearity, where small changes can have a significant effect, eventually leading to a tipping point toward the new state, making it challenging to predict.
Amid all this, how can an investor benefit from a very dynamic sector while managing the volatility risk, which most likely would lead to a winner-take-all effect, especially when the new state towards which the transition is leading is unknown?
Investment can occur at the technology level, whether centralized or decentralized. However, these technologies are numerous, and the rate of change is accelerating, making it challenging to bet on a single technology. Heat pumps, photovoltaic panels, batteries, thermal networks, and more – which technology will emerge as the winner? Each has its own advantages and disadvantages, with the risk of adoption playing a significant role. Determining which technology will be widely adopted using positive feedback loops and tip the entire sector into the new state requires immense efforts from stakeholders, including policymakers and consumers. Many billions have been invested in companies such as Google, Facebook, and Amazon as a way to push forward the new standard. This mechanism is often less understood among entrepreneurs. In fact, for start-ups or scale-ups, the mere fact of attracting and securing multiple financing rounds constitute itself a significant competitive advantage regardless of the business economics. It contributes immensely in setting the new norm through the use of non-linearity.
Also, the energy sector introduces additional complexity due to its regulation and strategic geopolitical significance. Whether policymakers can muster the courage to strengthen the energy agenda remains to be seen. What about energy data that can help building owners produce and use energy efficiently? Alternatively, should heavy investments be directed toward infrastructure to move beyond gas once and for all? Many questions persist, but few guarantees exist. We believe the best investment strategy, capable of reaping the benefits of a highly dynamic sector while managing transition risks, lies in technology-agnostic business models. Regardless of the minerals being mined, one will always need shovels. Investors need to find the energy transition shovels.
