Impact Investing | December 21, 2023

At Stake in ‘24: Playing climate offense to scale up and phase out

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Dec. 21 – The transition to a low-carbon economy is a “mega force,” as BlackRock declares in its 2024 outlook. How quickly the transition unfolds, and whether that’s fast enough to avert catastrophic warming, depends on factors both macro and micro. 

High interest rates and inflation, which have derailed many offshore wind and other capital-intensive clean energy projects, are subsiding. Geopolitical instability, which gave cover for the expansion of fossil fuels in the name of energy security, has also accelerated the race to onshore supply chains for batteries, EVs, chips and other components critical to the low-carbon transition. In 2024, consequential elections in the US, South Africa, Mexico, India, the UK and dozens of other nations could speed, or stymie, progress to net-zero. 

“We’re entering the two years that are the decisive years of the decisive decade,” said Ed Miliband, the UK Labour party leader, who is campaigning on climate action in his bid to replace Prime Minister Rishi Sunak, who has dialed back climate commitments. 

The table is set for action. At the recent COP28 climate conference in Dubai, nearly 200 nations agreed to triple renewable energy capacity and double energy efficiency by the end of the decade – and to “transition” from fossil fuel-based energy. By early 2025, countries are expected to submit more ambitious, near-term targets to reduce emissions, even as overall emissions continue to rise. 

The more convincing case for optimism:  “The astonishing scale-up of clean energy technologies,” as Mark Campanale of CarbonTracker puts it, driven by falling cost curves and exponential growth of renewable energy, EVs, and battery storage. Supercharging it all: AI-based tools that promise breakthroughs in materials and processes, sparking new cycles of innovation and accelerating timelines for commercialization.

Some of the signals we’re watching for in the year ahead:

Revving up the Great Deployment

How do you transform an entire economy? We’re about to find out. In the US, the Biden administration’s ambitious efforts to spur energy retrofits, green jobs, domestic supply chains and critical climate tech is kicking into high gear. Propelling the effort is a trio of laws that can deliver hundreds of billions of dollars in grants, loans and tax credits to project developers, entrepreneurs and municipal and tribal governments working on climate-smart development.

Since the Inflation Reduction Act, or IRA, was passed in August 2022, $140 billion in private capital has been invested in clean energy manufacturing. EV and battery plants are popping up across the South and Midwest. Tax credits enable manufacturers to recoup almost half of the cost of new plants, especially when “bonus” credits are layered on for paying prevailing wages, using union labor, or locating in low-income communities. The tax incentives are able to be sold, opening their use to nonprofits, government agencies, tribal groups and others without tax obligations. 

The IRA “is beginning to spark an economic renaissance in communities that had been left behind,” Treasury Secretary Janet Yellen said on a visit to an electrical union in Las Vegas this summer.  

The spigots should really begin to flow in 2024, as the agencies involved in dispensing IRA funds finalize rules and subsidies for EVs, heat pumps and other consumer products ramp up. This spring, the Environmental Protection Agency is expected to award $14 billion in IRA funds to nonprofit lenders for a “national green bank” intended to catalyze private capital and provide low-cost financing for community solar, energy retrofits and other local green projects.

A looming election is feeding a sense of urgency. A new crop of organizations are helping entrepreneurs, project developers and city leaders in low-income or disadvantaged communities optimize the historic federal funding

“It became really evident that this was a pivotal moment for all philanthropy to engage and make sure that the federal funding is being reached by marginalized communities,” Rachel Isacoff of the Rockefeller Foundation, a backer of the newly launched Invest in Our Future, told ImpactAlpha.

Climate funds go big – or go small

Not long ago, a billion-dollar climate fund was considered large. How quaint. Private equity and venture investors are training huge pools of capital on decarbonization opportunities. 

Brookfield Asset management is looking to follow its inaugural $15 billion energy transition fund with a second fund that could hit $25 billion. TPG has committed more than two-thirds of its $7 billion Rise Climate Fund, raised in late 2022, and is actively marketing its next one. 

The UAE, looking to make a splash as it hosted the COP28 climate summit that ended earlier this month, topped them all with its $30 billion Altérra fund. It aims to mobilize up to $250 billion for climate investments in the Global South – a step-change in size for private climate funds. In the incestuous circles of high-level climate finance,  Altérra’s first commitments went to funds managed by… Brookfield, TPG Rise, and BlackRock. 

Some of the latest funds are employing private debt, which can be better suited to project finance than equity. Blackstone in August raised a $7.1 billion private credit fund for global green infrastructure, calling it “the largest energy transition private credit fund ever raised.” BlackRock in October debuted a private debt transition fund for middle market companies in the US and Europe. Carlyle is eyeing $2 billion for a  transition-focused debt fund. Other funds are acknowledging the need for catalytic capital to drive funding into hard to reach corners of climate finance. 

The mega funds are looking for mega opportunities. They are finding them in industrial-scale decarbonization efforts and emerging markets.  Brookfield this year dropped a cool $1 billion investment into Mumbai-based Avaada Group to finance green hydrogen and ammonia projects, as well as $360 million into CleanMax, a supplier of renewable energy to corporate consumers in India. 

On the other end of the spectrum, early stage funds are targeting specialized opportunities. Superorganism, launched by a conservationist and a venture investor, is one of the first venture firms focused on biodiversity and preventing extinction. Overture, founded by former Obama administration officials, leverages its experience to help portfolio companies win government support and navigate regulatory complexity. Azolla Ventures, launched by Prime Coalition, blends catalytic and commercial capital to de-risk solutions with big decarbonization and commercial potential. And the women behind Overview.Earth are looking to solve near-term climate challenges like methane emissions.

Clean energy goes exponential

Globally, $1.7 trillion will be invested in clean energy technologies in 2023, compared to $1 trillion in fossil fuels. Solar and wind power already are the cheapest forms of energy on the planet. Renewables are projected to overtake coal as the world’s largest source of electricity in 2025, according to the International Energy Agency. The IEA revised its five-year forecast for renewables by 30% just since last year, its largest-ever upward revision. In the US, it’s more expensive to operate a coal plant than to build new solar or wind capacity. 

The pace of climate tech innovation and falling cost curves are dizzying. AI, with its ability to digest and learn from vast volumes of data, could make things downright vertiginous. 

Clean energy alternatives beyond wind and solar are coming into focus. This year saw another milestone for fusion energy, when Microsoft signed an advance purchase agreement with Helion Energy for grid-connected fusion power – to be delivered in 2028, at least two years ahead of mainstream timelines. Investors have poured billions into  a dozen fusion startups. The notoriously tricky technology, which mimics the sun to fuse atoms and generate energy, holds the promise of cheap, abundant, clean power. 

Fusion’s more mature cousin, fission, aka nuclear energy, is also getting a fresh look, with a new crop of small, modular reactors. Green hydrogen is finding use-cases in replacing high-emission ammonia production and decarbonizing heavy industry. In October, Natick, Mass.-based Electric Hydrogen became the first green-hydrogen unicorn with a $380 million raise. And battery tech advancements are solving solar and energy intermittency issues and putting electric trucks, cargo ships and airplanes within each. 

Driving a stake in the heart of fossil fuels  

In the face of the unstoppable march of clean energy, incumbent forces are staging only a tactical retreat. COP28, held in the petrostate of the United Arab Emirates, called out the need to “transition away” from fossil energy for the first time in 28 years of global climate gatherings. It was heralded as the “beginning of the end” for fossil fuels. At the same time, it created a massive opening for near-term expansion. The transition was framed as optional, and left out other petro uses like transportation, plastics, and fertilizer. Saudi Arabia and OPEC cheered the COP28 agreement.

“We may be increasing the good stuff, but we’re not yet cutting the bad stuff,” said Tzeporah Berman of the Fossil Fuel Non-Proliferation Treaty.

The “UAE Consensus” as the agreement is known, cited the role of “transitional fuels” such as natural gas, and emerging solutions such as carbon capture and storage, or CCS. Get ready for a flood of CCS projects. Critics say the technology, which captures direct emissions from fossil fuel and other polluting plants, will divert resources away from green projects and give cover to fossil fuel expansion. The US Department of Energy last week awarded $890 million to natural gas and coal plants in Texas, California and North Dakota to demonstrate the viability of the technology. 

US politicians are keen to continue the rapid scale-up of exports for liquified natural gas. In the wake of the Ukraine war, the US has leveraged its fracking prowess to become the world’s largest natural gas exporter. Natural gas is a potent source of methane emissions, which have 80 times the warming effect of CO2.  New research from Cornell University suggests that, over its entire life cycle, liquid natural gas can generate 24% to 274% more greenhouse gas emissions than coal, depending on the tankers used to ship the gas.

Advancing adaptation and a just transition

Billions of dollars in foreign capital earmarked for coal-dependent countries have yet to flow for a “just transition.” The hold up is largely due to domestic policy and planning hangups. South Africa is delaying coal plant decommissioning over persistent energy shortages and political issues. In Vietnam, political backing for a $15.5 billion “just energy transition partnership,” or JETP, appears to be weak

The disconnect between what’s pledged for climate mitigation and adaptation in emerging markets and what’s actually happening on the ground is a perennial issue. One big win: a  “loss and damage” fund that helps poorer countries pay for natural disaster recovery moved forward with $700 million in commitments at the COP28. More than $300 billion in climate financing is needed annually in emerging markets. Wealthy nations, which just this year met the $100 billion in aid for poorer countries they promised eight years ago at the Paris climate summit, are due to come up with new funding targets. 

With inflation, wars and domestic politics crimping the ability of some donor nations to write checks, creativity is the order of the day. “Debt for nature swaps,” like ones struck this year in Ecuador and the Gabon, are enabling countries to funnel savings on interest payments into investments into nature and biodiversity preservation. Banks in Jordan and Tanzania issued those countries’ first green bonds. Burundi struck a deal for new power distribution infrastructure that will deliver energy to 70% of its population. The African Development Bank has inked deals worth hundreds of millions of dollars for climate-resilient water and sanitation infrastructure in deeply underinvested countries like Chad, Burkina Faso and Rwanda. 

“What’s first needed is to build confidence, then there can be a replication effect,” says Mariana Graca of the Emerging Africa Infrastructure Fund, which provides debt and leverages blended finance and technical assistance from its sister companies for infrastructure projects in Africa’s least developed countries and conflict zones.

Guarantees and better climate finance “accountability” are underutilized tools that could open the taps for climate finance in emerging markets and “place those most affected by climate change at the heart of decision-making, giving them agency in the design, deployment and evaluation of climate finance outcomes,” according to climate advisory firm Systemiq’s “Better accountability, better finance” report. 

New climate tech markets

Local innovators are rolling out climate tech and solutions designed for their home markets and needs. Kenya-based Kentegra Biotechnology is a rare African biotech company making organic crop treatments to offset the costs and environmental harm of imported pesticides and fertilizers. Kofa in Ghana is making multi-use batteries for powering electric vehicles and lights and appliances in homes and shops. Pakam operates a private household and commercial waste collection and recycling service in Nigeria that works with the country’s informal waste-pickers. 

In Latin America, Guatemala-based Hybrico is helping cell tower operators switch to lower-cost renewable energy and encouraging their expansion into remote, disconnected communities. Santiago-based BioElements is developing plastic alternatives from resin on the bet that other countries in the region will follow Chile’s lead of banning many single-use plastics. 

Strengthening climate tech solutions and ecosystems in the Global South was a focus at COP28 this year, where organizers fielded a climate tech accelerator for the first time, among other entrepreneur-focused initiatives.

India has become a hotbed of innovation for two- and three-wheel electric vehicles and batteries. Organizations there are also figuring out how to tap private investment for more climate-resilient slum housing. Climate Capital Network points out the need in India—as in other emerging markets—for funding to support tech commercialization. “We must move from ‘The Age of Innovation’ to ‘The Age of Adoption’.”

Jessica Pothering contributed to this article.