John Wilson, Partner at Energy Growth Momentum, shares why investing in digital energy technology is not only key towards building a sustainable future for us all, but also a key high-growth opportunity that investors should be focusing on right now.
In 2017, with over 15 years of experience in the energy sector, John Wilson and his business partner, Adeeb Asfari, spotted a niche opportunity in the renewable energy market. They set up Energy Growth Momentum, an investment fund focused on scaling SMEs that use digital technology to facilitate and optimize renewable energy with the forward view of selling those businesses onto trade players.
Statistics show that Wilson and Asfari were right to do so. In 2020, despite the pandemic, the growth rate of the world’s renewable energy capacity skyrocketed 45%, according to a new report from the International Energy Agency (IEA). It was the largest annual rate of increase since 1999. In fact, during 2020, renewable power was “the only energy source for which demand increased… while consumption of all other fuels declined,” says the International Energy Agency (IEA).
In addition, the UN and the general public are now starting to understand the gravity of the situation and take action against climate change. Head of the IEA, Fatih Birol, states, “A massive expansion of clean electricity is crucial to enable the world to reach its net-zero goals.” Thus, calling on governments to build on the momentum of the past year to invest more in solar, wind, and other renewables, along with bolstering their electrical grid infrastructures.
Growth in the industry is continuing through 2021 too, with renewable energy on track to set new records. The IEA states that renewable electricity generation in 2021 is set to expand by more than 8% to reach 8 300 TWh, the fastest year-on-year growth since the 1970s.
“I think that people appreciate the enormity of the challenge,” shares Wilson. “Back at COP21, people thought emissions could be a problem but that we would find a solution at a later date. Now, the realization is that this is an enormous challenge and policymakers are being proactive about it.”
The Energy Supply and Demand Transition
From a supply perspective, the industry has seen a huge structural change in capital allocation. The enormity of which cannot be overstated. The IRENA has outlined transition paths for all regions to see higher shares of renewable energy use. Southeast Asia, Latin America, the European Union, and Sub-Saharan Africa are poised to reach 70-80% shares in their total energy mixes by 2050. Similarly, electrification of end uses like heat and transport is expected to rise everywhere, exceeding 50% in East Asia, North America, and much of Europe. However, in order for these paths to be fulfilled, the capital requirement is going to be massive.
This brings about the question – how much investment is needed to support this transition? According to Wilson, “You’re potentially talking about 70 trillion dollars of investment over the next three decades to actually try and transition us to not even net-zero but to just two degrees below pre-industrial levels.”
Wilson adds, “I think people are now beginning to appreciate that this is effectively creating a new business but that we’ve also got to invest on such scale in order to support the energy requirements of the world. With a growing population and increasing GDP per capita, both the challenge and opportunity are huge.”
From the demand side, it’s clear that policymakers are now stepping in and setting time frames around the electrification of society. The introduction of the Paris Agreement, The European Green Deal, and the Climate Investment Platform as well as the transition to electric cars, and other electrical, competing solutions are the first steps towards reducing carbon footprint. However, the industry is seeing other drivers as well.
“We’ve got an insatiable demand for data now,” explains Wilson. “And data centers consume an enormous amount of power. Our requirement for data is seeing an increased demand for electrification and renewable energy.”
Why Invest in Digital Renewable Technologies?
One of the key challenges in the transition to renewable energy is that the power market needs to be in balance. There’s no residual reserved supply. Therefore, generation must meet load. Moreover, the fact that renewables are weather-dependent and consumers are constantly changing their load profile makes balancing supply and demand particularly difficult. Not to mention the addition of data centers in close proximity to cities.
“You’ve got this difficult situation where there’s an erratic generation on the edge of the grid, with a significant change in demand load,” says Wilson. While this presents a challenge for policymakers and business leaders, the UK-based investor insists that with this challenge comes vast opportunities for companies and investors. In fact, he recently closed a $10.5 million investment deal with specialist hydrogen analyzer and leak detection company, H2Scan, via Opportunity Network.
“The market is going to require digital solutions that can balance demand and supply in real-time and that’s exactly what we’re looking to invest in.”
Technology will not only play a key role in providing real-time solutions for balancing supply and demand but also in decentralizing the energy space. In order to decarbonize the utility space, the entire sector, which is extremely centralized, must be decentralized. For that to happen, there is going to be a real necessity for digital technology applications and investment.
Wilson provides the following example, “If you imagine that you’re going from something like 70,000 power plants to potentially 40 billion solar panels, 10,000,000 wind turbines, and four terawatts of battery installations. All of that is disparate, and for utilities to then control that, they’ll require diagnostic technology, which is digital solutions. And that’s really where we saw the opportunity.”
Energy assets need to be identified, authenticated, and measured fiscally, which requires digital solutions. And at the same time, these digital solutions can actually improve the underlying performance and efficiency of the assets as well. According to a recent Reuters report, digital technologies can help new renewables projects reduce time-to-market and cut capital expenditure costs by 8%-12%. If the operational efficiency of energy assets can be improved, less power generation will then be required and demand consumption can be reduced. After all, the cheapest and most carbon-efficient energy is the energy you don’t consume.
Fuelling Future Growth via Renewable Energies
In 2019, the world reached a new milestone when, for the first time in decades, renewable electricity generation increased by more than the increase in electricity demand, while fossil-fuel electricity generation decreased. However, despite this progress, deployment in major energy-consuming sectors like buildings and industrial goods remains well below the levels needed to create a climate-safe energy system. In addition, the supply is not moving fast enough to meet the growing demand.
For example, in the Planned Energy Scenario, the share of modern renewable energy in the final energy supply would increase to 17% by 2030 and 25% by 2050. Whereas, in the Transforming Energy Scenario, this share would increase to 28% by 2030 and 66% by 2050. In other words, the share would need to increase six-fold compared to today, and two-and-a-half times compared to the Planned Energy Scenario.
In order to achieve this, unprecedented policy initiatives and investments are needed. Gauri Singh, deputy director-general at the International Renewable Energy Agency (IRENA), said global investments in energy transition technologies need to increase from $1.8 trillion in 2019 to $4 trillion annually until 2050, to achieve goals set under the Paris climate accord. That’s a total energy investment of $131 trillion.
With this investment comes a significant social impact. The number of jobs in renewables is expected to increase to 42 million globally by 2050, four times more than today. Energy jobs overall would reach 100 million by 2050, about 40 million more than today. And most importantly, environmental and health benefits, along with broad improvements in people’s welfare, would be felt in every region of the world.