The Energy Transition’s Triple Tailwinds

Extreme inflation and a potential global economic storm are forcing central bankers’ hands; the US Federal Reserve has hiked the federal funds interest rate to the highest level since 2008, with the Bank of England and European Central Bank (ECB) closely mirroring this aggressive action. Despite traditional economic wisdom indicating that spending should slow in a more expensive economic environment, investment in the energy transition was expected to expand 8% to $2.4 trillion in 2022. In recent months, three tailwinds have aided energy market growth—but will they be enough for the energy transition to power through a potential recession?

Legislative Support Encourages Clean Energy Investment in the US

In the US, recent regulatory support for the energy sector can potentially offset the impact of the current economic environment and provide a vision of how the energy transition may crystalize. The 2021 Infrastructure Investment and Jobs Act and the 2022 Inflation Reduction Act enabled demand certainty for businesses. As just one example, the National Electric Vehicle Infrastructure Formula Program and the Discretionary Grant Program together offer $7.5 billion to states to construct nationwide charging infrastructure. Drawing on this demand certainty, SK Signet recently announced an investment of up to $37 million to construct a charging manufacturing facility in Texas, becoming the first Korean charger maker to establish a plant in the US. Additionally, innovative public-private partnerships are providing banks more certainty that they will receive an ROI. The rapid acceleration of policy support has already reduced costs, which will help industries weather further economic storms.

The European Energy Crisis Creates a Rare Opportunity to Accelerate Change

In Europe, national security concerns raised by the energy crisis have created a once-in-a-generation opportunity to accelerate the transition to clean energy. In a November 2022 speech, Luis de Guindos, vice president of the ECB, reiterated the bank’s commitment to supporting clean technologies despite an emerging tradeoff among energy security, the green transition, and price stability. October 2022 saw an aggressive 75-basis-point interest rate hike, with indications of more on the way, displaying the lengths the ECB is willing to push the policy tradeoff to tamp down inflation. With solar power saving the EU an estimated $29 billion on energy in the summer of 2022 alone, the energy transition can serve as a solution to Europe’s security and economic woes in the long term. In the short term, however, elevated financing costs and reduced stockpiles of renewable technologies may put a damper on the recent clean energy enthusiasm spurred by the crisis.

Focus on Supply Chain Security Spotlights the Importance of the Energy Transition

Green technology supply has thus far met the moment to match skyrocketing demand and deliver the start to a clean energy transition. But as renewable installations accelerate internationally, reliance on imports can expose the energy transition to unforeseen disruptions. It is therefore imperative for governments to safeguard clean technology chains and ensure energy sovereignty. In the US, the Biden administration has laid out a whole-of-government approach to secure supply chain access to renewable energy; the strategy calls for “clear market signals to increase the adoption and deployment of clean energy.” Supply chain security should be an immediate priority for governments looking to salve energy sector inflationary pain. Additionally, establishing a domestic supply of renewable technologies can lock in prices to attract project financing. As rising interest rates narrow the scope of economically feasible renewable deployments, shoring up energy supply chains will help continue the current pace of energy transition financing.

The energy transition will be defined in the next half decade. While economic uncertainty threatens the pace of deployments, legislative, political, and financial tailwinds are advancing the energy market to new highs. Until inflationary pressures ease and economic outlooks brighten, national efforts and technological innovations must continue to sustain critical upward energy sector trends.