Energy Transition: Untangling Promises and Reality

June 04, 2024 | 4 Min Read

Executive Summary:

Cautious Optimism Warranted in Evaluating Energy Transition Investment Opportunities

  • Despite a vast and rapidly evolving opportunity set, buyer beware; the energy transition is not a beta play where investors should blindly deploy capital.
  • Energy markets are complex and volatile. Transitioning will not change this.
  • The devil is in the details; generalities can obfuscate opportunities and challenges to decarbonizing and accessing a robust opportunity set.

The world is moving away from fossil fuels and towards decarbonized sources of energy. For all the hype around the energy transition, moving away from fossil fuels has yet to become a reality, with coal, natural gas and oil consumption increasing in 2023. This is not to say that renewable energy has not experienced substantial growth in recent years, but the truth is that we have yet to reduce our consumption of fossil fuels, making a transition aspirational when viewed globally. Furthermore, although real progress is being made on exciting new technologies, unrealistic timelines for commercialization and overstating the capabilities of established technologies can create disillusionment and confusion.

Google Search Trends: Energy Transition (2010 - 2024)

In the chart above, we can see that worldwide Google searches for the phrase “energy transition" started to increase significantly in 2018, despite fossil fuel consumption increasing over the same period. 

Global Energy Consumption by Source (2000 - 2022) 

Why haven’t we seen more of a transition for all the talk? This is best addressed by putting things in perspective. Industrial and transportation sectors collectively consume over 70% of the primary energy supply in the U.S., with the balance coming from residential and commercial applications. Many of these sectors are more challenging to decarbonize and electrify relative to others for cost and technical reasons (electric planes, anyone?). Electricity and self-generated renewable energy comprise a small fraction of energy inputs for these sectors, suggesting the need for more complex solutions. Does this allude to vast opportunity for private investment or significant challenges? Our view is both.

U.S. Energy Consumption by Source and Sector, 2022

Amidst cautious optimism, where do we see opportunities to invest? Across the energy transition opportunity set, which encompasses generation, energy transmission and storage, de-carbonization and demand-side solutions. Despite strong tailwinds and a vast opportunity set spanning the risk spectrum, buyers beware: Facts can be obfuscated amidst the excitement to jump on the transition bandwagon. Case in point: Renewable energy developers, practically all of whom have ‘bragawatts' to boast of (although reality is often less electrifying than one may expect).

Despite a seemingly homogenous product, don’t overlook the fine print, with inconsistent project stage definitions and wildly different underwriting assumptions observed in the market. Examples of these inconsistencies can be found across key underwriting assumptions, including project costs, availability, degradation, availability, lifespan, curtailment, the inclusion/exclusion of certain tax breaks/subsidies, revenue sources and associated prices, discount rates, developer margins, etc. To make matters worse, many transaction “comp” sets referenced in the market can be meaningless at best as they fail to account for wildly different valuations commanded across markets and development stages.  

Recently Observed Project Underwriting Assumptions: Solar

So, how do we invest in the energy transition? Selectively and through a rigorous and analytical approach, leveraging a trove of proprietary data, while also harnessing the breadth and depth of our relationships in the market. What do we avoid?

As infrastructure investors with a primary focus on core- plus and value-add risk, we’ve somehow avoided confusing ourselves for investors focused on venture capital, growth equity and buyout transactions, as difficult as this has been for many in the industry. Although we’re excited about an ever-evolving and increasingly robust opportunity set, discipline and experience matter. After all, energy markets are volatile, with history littered with spectacular failures and successes. A volatile market in transition should make for an exciting, albeit bumpy ride. Buckle up!

We provide further insights and observations across real estate in our 2024 Real Assets Market Overview. Please complete the form below to receive an emailed copy of the report. 

This presentation has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this presentation are requested to maintain the confidentiality of the information contained herein. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.

The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, the fund presented or its portfolio companies, or other events contained herein. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, or the control of the fund or the portfolio companies, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future. 

All opinions, estimates and forecasts of future performance or other events contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable, but the accuracy of such information cannot be guaranteed. 

This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. We do not intend that any public offering will be made by us at any time with respect to any potential transaction discussed in this presentation. Any offering or potential transaction will be made pursuant to separate documentation negotiated between us, which will supersede entirely the information contained herein. 

Hamilton Lane (Germany) GmbH is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (Germany) GmbH is authorised and regulated by the Federal Financial Supervisory Authority (BaFin). In the European Economic Area this communication is directed solely at persons who would be classified as professional investors within the meaning of Directive 2011/61/EU (AIFMD). Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients. 

Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the United Kingdom this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients. 

Hamilton Lane Advisors, L.L.C. is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the financial services by operation of ASIC Class Order 03/1100: U.S. SEC regulated financial service providers. Hamilton Lane Advisors, L.L.C. is regulated by the SEC under U.S. laws, which differ from Australian laws. 

Any tables, graphs or charts relating to past performance included in this presentation are intended only to illustrate the performance of the indices, composites, specific accounts or funds referred to for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision. 

The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein. 

The calculations contained in this document are made by Hamilton Lane based on information provided by the general partner (e.g. cash flows and valuations), and have not been prepared, reviewed or approved by the general partners. 

As of June 5, 2024

Recent Content

Insights | 5 Min Read

The Case for Private Infrastructure in the Modern Era

Learn where private infrastructure stands today and where it may be headed through 2024.

Read the Research Article

The Evolving Opportunity Set in Infrastructure Secondaries

Learn why secondary infrastructure transaction volume is primed for growth in 2024 and beyond.

Read the Research Article
Insights | 3 Min Read

2023’s Real Assets Fundraising Data May Surprise You

Learn how 2023 compared to previous years for real assets investing and how 2024 is shaping up for real estate, infrastructure and natural resources.

Read the Research Article

We use cookies to improve user experience, and analyze web traffic. For those reasons, we may share your site usage with our analytics partners.

Learn More