S2G Ventures (S2G), the direct investment team of Builders Vision, has released a new report, The Missing Middle: Capital Imbalances in the Energy Transition. The report analyzes the current private capital markets landscape for clean-energy investments, highlighting the necessary shifts needed to build a fit-for-purpose system to adequately support the energy transition.
Meaningful progress on decarbonization requires a massive acceleration in energy transition–focused capital deployment over the next decade. Analysts estimate the cumulative investment required will amount to almost $200 trillion, which translates to an annual investment of more than $6.5 trillion for the next 30 years. This is equivalent in scale to the entire 2022 U.S. federal budget ($6.3 trillion).
There have been promising advancements in some areas, particularly clean electricity, over the past decade. However, investment into sectors outside of power generation has been much more limited, despite these being specific areas where the need for progress on decarbonization is now the most pressing.
"While in aggregate large amounts of capital have flowed into the energy transition–focused private markets over the past few years, this capital is siloed in funds with investing mandates that do not necessarily align to the needs of the transition," said report co-author Dr. Francis O'Sullivan, managing director at S2G Ventures. "The reality is that in some critical respects, the energy transition faces a significant deficit in capital availability today, particularly when it comes to supporting growth-stage companies developing solutions for hard-to-abate sectors."
Delivering the energy transition is a generational investment challenge, and it is vital that action is taken to address the limitations of today's market structures. This will require significant investor education, changes to long-standing conventions on how capital is allocated to managers and asset classes, shifts in design for policy supporting the energy transition and more.
Key report findings:
- Though headline numbers on the capital committed to the energy transition are impressive, there is a mismatch between the types of capital available and where capital is needed to support the energy transition. Without access to enough growth equity and first-of-a-kind project funding, vital earlier-stage technologies will struggle to successfully de-risk to the point where they can achieve full-scale deployment.
- The capital being deployed by today's energy transition–focused private markets does not necessarily align with where the emissions reduction needs are greatest. For example, the personal mobility sector has been the target of 5 times the amount of private market investment compared to commercial transport since 2017 even though both subsectors account for roughly the same amount of overall emissions (~10 percent each).
- The siloed nature of today's capital markets creates natural barriers to effective progress on the energy transition. Energy transition-focused capital markets are heavily skewed toward either early-stage or infrastructure-focused funds, with much less headline capital available for the growth stage. This creates a critical funding bottleneck for higher-potential concepts that are yet to be de-risked.
To read the full report, please download here.