Investor returns from renewables assets must increase if the sector is to undergo expansion on a scale that will meet energy transition targets, according to the head of US-based private equity giant EIG.

With $25 billion under management, EIG has a bustling portfolio of oil and gas and energy infrastructure assets but the institutional investor has been busy piling into renewables projects across several continents.

In an exclusive interview with Upstream, EIG chief executive Blair Thomas says the industry shift towards renewables is under way, but concedes that attracting capital on a scale demanded by decarbonisation targets poses challenges.

The answer, so far, has been reliance on subsidies, whether government-led or in the form of private sector offtake agreements, he concedes.

“Returns are not where they need to be yet,” Thomas says, citing the example of the nascent hydrogen sector in Chile, where the company has a stake in green hydrogen developer AME.

“You won’t get widescale adoption until efficiency gains drive down cost.”

Thomas believes power prices will ultimately have to rise for capital flow into renewables to gather pace.

“We won’t be able to attract the quantum of capital necessary to drive renewable penetration unless investors get a reasonable rate of return,” he says. “Power prices at the margins are going to have to go up.”

EIG has been building up its positions in renewables, responding to opportunities and investor demand. Its oil and gas upstream businesses went from a 45% share of funds invested to about 20% today, with corresponding growth in the portfolio weighting of infrastructure and renewables.

A seat at the table

EIG advocates a methodical approach to reducing emissions from its hydrocarbon assets.

“We’re taking the carbon intensity [the assets] have today, take that as baseline and reduce that over time.

“That’s our strategy, and for that to be credible you have to put real substance behind it,” he says.

“You measure, report and compensate based on achieving those targets — that’s what investors want to see.”

Thomas believes that involvement and positioning within companies is the best way to foster innovate and paths to transition, defining this as “having a seat at the table” from where to have direct impact on company operations and actions.

The approach can be applied to bigger deals such as the recent $4.8 billion acquisition of a 25% stake in Spanish major Repsol’s upstream business, and last year's move for a stake in a new subsidiary of Saudi oil giant Aramco.

An EIG-led consortium paid $12.4 billion for a 49% stake in Aramco Oil Pipelines Company, which will lease and then lease back usage rights in Aramco’s stabilized crude oil pipelines network for a 25-year period, receiving a tariff payable by Aramco, backed by minimum volume commitments.

The stance taken by EIG and also in a similar deal between Aramco and BlackRock Real Assets is that responsibly managed natural gas infrastructure has a meaningful role to play in the energy transition.

“Most investors are open minded about investing in hydrocarbons. They want to do it with responsible actors that are part of solution, not part of the problem,” Thomas says, adding that he is confident that EIG’s approach of “balancing decarbonisation and security of supply” meets those criteria.

False dichotomy

There has been a perception in some quarters that that security of supply was a left on the sidelines of the energy debate in the run-up to the COP 26 climate summit in Glasgow last year, but Russia’s willingness to weaponise energy commodities left Europe scrambling to diversify sourcing away from Moscow.

International Energy Agency executive director Fatih Birol is among those who argue that transition to clean energy is “the solution, not the cause” of the ongoing energy crisis, but Thomas detects a lack of realism in the debate an energy transition which cannot be achieved with what he describes as the flick of a light switch

He argues that energy transition and security are “not destined to be in opposition”.

“It’s about recognising that you have to make accommodations. You have to have responsible energy supply that’s hydrocarbon-driven to get us through the transition,” he said.

This touches upon the issue of policymaking and the risk that a public backlash to skyrocketing energy bills could jeopardise the whole transition effort.

“We have to be able to execute that transition without massive price spikes,” said Thomas. “The single biggest threat to energy transition is lack of public support.”

Thomas remains confident about the medium-term outlook, including the growing place that renewables occupy in the asset manager's portfolio.

EIG believes these regions such as Chile, the Middle East and North Africa and Western Australia will stand out as major drivers of low-carbon energy supply.

“The scale of the change is much larger than people think,” said Thomas. “In 10 years from now, we’re not going to recognize our energy delivery system.”

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