15 Apr 2024

PEI Keynote Interview: Enabling Supply Chain Underpins Climate Transition

“Private capital is going to be critical to driving the transition, and a lot more of that private capital is required”
Kush Patel
Partner, Co-Head of Climate
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Where is Permira focusing its attentions with its new climate investment strategy?

The energy transition is going to be fuelled by hard assets. But those assets need an enabling supply chain in order for them to be built out at scale. While our strategy will target hard assets to a certain extent, it is this enabling supply chain that will be our focus. That supply chain can be broken down into three key components – equipment, services and software – and the themes we will be investing behind include the energy transition, grid modernisation and resiliency, resource efficiency, and a circular economy

What challenges is the energy transition supply chain facing and what does that mean for our ability to reach net zero?

The energy transition is primarily being driven by the build out of solar, wind and batteries, as well as other forms of renewable energy and decarbonisation assets, but those markets are already facing serious constraints. For example, on the solar side, demand for engineering, procurement and construction crews is outweighing existing capacity. When it comes to offshore wind, meanwhile, the US has a goal of installing 30,000 MW by 2030, requiring over $20 billion of supply chain investment. However, most of that supply chain has yet to be built, despite the fact that we are only six years away from the 2030 target. More broadly, across the wind sector as a whole, delays in the delivery of critical components such as blades, generators, gearboxes and power converters are expected over the next few years. As it relates to energy storage, supply of battery metals is expected to fall short of demand, driving the need to accelerate recycling technologies and other circular economy investments. These are just a few examples of the bottlenecks that are emerging, which demonstrate why we believe that investing behind this enabling supply chain is so important and such a compelling opportunity.

What role do you see private capital playing in reinforcing enabling supply chains and driving the transition?

Private capital is going to be critical to driving the transition, and a lot more of that private capital is required. There are projections that suggest the world needs to spend around $3.5 trillion per year to get to net zero by 2050. Private capital funds have raised just a few hundred billion of equity for climate and infrastructure investment in recent years, so a huge supply-demand mismatch remains. More broadly, the climate transition is one of the largest ever mega-trends. Permira has a strong track record of backing and understanding mega-trends, underwriting and evaluating opportunities and supporting companies to achieve growth at scale – that is precisely what the climate transition needs to help drive it forward

Your strategy is focused on the US and Europe – why are these regions particularly attractive hunting grounds for this supply chain?

While we will look for opportunities globally, we will focus on the US and Europe given the opportunity set here. To achieve net zero, the US needs to spend around $1 trillion, while Europe needs to spend around $1.5 trillion. As such, the vast majority of capex required to reach climate change targets is going to be centred on those two geographies. Aligned with this, Permira’s wider platform has experienced teams on the ground across both markets, with eight offices in Europe, and three in the US. We have the local presence and knowledge to credibly do deals in these regions, which is why we consider these markets to be attractive hunting grounds for climate investment.

How is Permira’s approach to measuring and reporting against climate-related metrics evolving and why is this so important?

Permira has developed a framework to inform asset selection and ongoing monitoring against relevant metrics. As we transition to a lower carbon economy, it will be increasingly important for investors to use KPIs to track and demonstrate progress, not just for LPs, but for GPs such as ourselves that want to drive the climate transition forward. We are seeking to have a best-practice and tailored approach, recognising the inherent complexities of measuring and monitoring metrics in this fast-evolving space

Where would you say we are today on the climate transition journey, and what obstacles remain?

There is a huge amount of work to be done over the next five to 10 years to ensure we get on the pathway to 1.5 degrees. There are obstacles that remain in terms of scaling new technologies, and then there are obstacles when it comes to solving the bottlenecks that are emerging. Those bottlenecks not only exist around the energy transition itself, but also around grid modernisation and resiliency. There can be no transition without transmission. Grids in the US and Europe weren’t set up to handle the amount of intermittent renewable capacity that exists today, or the amount of electric vehicle charging that is on its way. Increased demand from data centres, driven by artificial intelligence, are also having a profound impact. In the US, data centres will account for around 7.5 percent of all power demand by 2030, according to Boston Consulting Group estimates. All of these trends have caused an increase in demand for grid equipment such as transformers, for which the delivery times are now 2-3x longer than they used to be. Private capital can help resolve some of these challenges while also helping to scale businesses and accelerate growth, thereby ensuring we remain on track to reach net zero.

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