The Energy Transition in 2024: Eight Key Moments to Watch

2023 was a paradoxical year for the energy transition, marked by unparalleled progress and notable new challenges. Renewable energy installations grew at a record pace, as solar capacity, EV sales, and battery storage surged to new highs in the United States and China.

However, amid global progress, new roadblocks emerged: over 1,500 GW of solar and wind power are delayed in grid interconnection queues, and the transition contends with increasing capital costs and inflation. Low-carbon stocks also performed poorly, even as the broader market recovered.

As we begin 2024, a pivotal year for the global transition, this mix of promising developments and persistent challenges raises three key questions:

• What do voters want? In 2024, the largest election year in history, up to 4 billion people in 76 countries will vote. The outcomes of these elections will shape the global energy transition over the next half decade.
• Will roadblocks hinder progress? Costly capital and ongoing supply chain challenges threaten the transition’s momentum.
• Will we see continued breakthroughs in climate tech? Major innovations, like another nuclear fusion moment, could significantly change the pace and potential of decarbonization.

Here are the eight moments Jefferies is monitoring in 2024 – each poised to shape the trajectory of global progress in the year ahead and beyond.

1. ESG and the Energy Transition Are on the Ballot
2. China: Could Emissions Peak in 2024?
3. Japanese Transition Bonds
4. India: Coal Expansion and Renewable Energy Go Head-to-Head
5. Will Grid Bottlenecks Persist?
6. Rising Capital Costs Pose New Challenges
7. Does Carbon Capture and Storage (CCS) Deliver on its Promise?
8. The EU Innovation Fund

ESG and the Energy Transition Are on the Ballot

As 76 countries and up to 4 billion people head to the ballots, two elections particularly stand out: the United States and the European Parliament.

The United States presidential election, likely featuring a rematch between President Biden and former President Trump, could critically influence U.S. energy policy and support for decarbonization. Former President Trump has indicated intentions to repeal parts of the Inflation Reduction Act.

Elections for the European Parliament will also prove critical. The current leading party, the European People’s Party, has supported legislation within the European Green Deal. The outcome of 2024 elections could see Europe reaffirm its support for the energy transition – or shake up the status quo.

China: Could Emissions Peak in 2024?

China saw a year-over-year emissions increase in 2023, but its post-COVID return to economic activity also drove significant progress in low-carbon infrastructure and technology. An impressive 230 GW of renewable capacity was added last year, and hydropower is posed for strong growth in 2024.

If low-carbon sources continue replacing fossil fuels in power generation, and incremental power demands continue to be met by renewable additions, China could enter an emissions decline for the first time in 2024.

China energy growth in China (FY ’21) will be greater than average demand.

Source: China Electricity Council (CEC), IRENA, Jefferies Research

Japanese Transition Bonds

In December 2022, the Japanese government unveiled its 10-year, 150-trillion JPY (~$1 trillion) Green Transformation Policy. Central to these initiatives is the use of transition bonds to support industry decarbonization.

Upfront investment of $20 trillion JPY of Climate Transition Bonds is intended to catalyze a public-private investment of $150 trillion JPY. Investment destinations of these bonds include non-fossil energy, industrial restructuring, energy conservation, and resource recycling and carbon reduction technologies. The first auction of these bonds, scheduled for February 14, 2024, marks a key step in Japan’s journey towards a greener economy.

India: Coal Expansion and Renewable Energy Go Head-to-Head

As the world pursues net-zero goals, India is in a unique position. The country can demonstrate that rapid economic growth is compatible with an ambitious decarbonization agenda.

Jefferies recently hosted investors across four states in India. The trip revealed the two competing narratives that will define the country’s trajectory:

• Growth in coal volumes will continue. Increasing power demand, established technical expertise, powerful SOEs, high utilization rates, and plants with decades of useful life remaining all mean coal consumption will increase over the next two decades.
• Simultaneously, renewables will see robust growth, given policy support and a need for energy security.

The year 2024 will be a critical indicator of how these competing forces will shape India’s energy landscape and its role in the global energy transition.

Coal production and renewable capacity additions will continue to grow in 2024 in India.

Source: IEA, Jefferies Data

Will Grid Bottlenecks Persist?

2023 marked a pivotal realization for investors, policymakers, and developers: grid bottlenecks are a critical barrier to the decarbonization of the power sector. Last summer, the Federal Energy Regulatory Commission’s (FERC) issued a new rule aimed at reforming the integration procedures for new generators into the existing transmission system.

These changes could mark an important moment for the expansion of and improvements in grid infrastructure. Faster rates of deployment could allow over 1,500 GW of wind and solar to enter capacity. The impact on the pace of the transition would be marked.

Rising Capital Costs Pose New Challenges

The energy transition faced a challenging macro landscape in 2023 The era of low-interest rates and minimal inflation, which previously bolstered the transition, gave way to a high-rate, high-inflation post-COVID world. This shift has introduced substantial challenges for low-carbon developers, impacting both renewable energy stocks and project financing.

The world will be watching interest rates and inflation closely in 2024. Continued economic tightening and elevated capital costs don’t represent a long-term impediment, but they could decelerate the shift towards cleaner energy sources in the short and medium term.

Does Carbon Capture and Storage (CCS) Deliver on its Promise?

Carbon Capture and Storage (CCS) remains a topic of intense interest and debate in the energy sector. Despite high expectations and substantial investments, the performance of CCS projects has thus far been underwhelming.

Chevron’s Gorgon CCS project in Australia serves as a cautionary tale. As the world’s largest CCS facility, its performance has fallen drastically short of expectations, capturing only about half of its projected capacity. In 2022-23, Gorgon injected merely 1.71 million tons of CO2, far below its annual target of 4 million tons. This shortfall has raised serious doubts about the viability and effectiveness of CCS technology, with Chevron resorting to purchasing carbon credits to offset its deficiencies.

Santos’s Moomba CCS project in South Australia is a project to watch in 2024. With aims to store up to 1.7 million tons of CO2 annually, its success or failure will be a crucial indicator of the potential of CCS technology. A successful implementation by Santos could reignite confidence in CCS, while any shortcomings might further fuel skepticism.

Carbon Capture and Storage projects’ poor report card.

Source: Jefferies, IEEFA, The Carbon Capture Crus: Lessons Learned: September 2022

The EU Innovation Fund

The EU Innovation Fund stands as one of the world’s most significant financial initiatives to foster innovative low-carbon technologies. With a substantial budget of 4.8 billion EUR, the Fund is a cornerstone in the European Union’s strategy for a low-carbon future. Running from 2020 to 2030, it is primarily financed by revenues from the EU Emissions Trading System, potentially accumulating up to 20 billion EUR depending on carbon pricing.

The current focus of the Innovation Fund is on two key calls for proposals: the IF23 Auction for renewable hydrogen and the IF23 Call for net-zero technologies. These calls, launched in late 2023, are set to close in the first and second quarters of 2024, respectively. These initiatives represent crucial steps in the EU’s commitment to advancing the next generation of low-carbon technologies, potentially setting a global precedent for innovation in the transition to a sustainable energy future.

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As we move through 2024, the highlighted eight key moments will critically influence the pace and potential of the global energy transition. As stakeholders and observers alike watch these events unfold, the collective actions and decisions made in 2024 will chart the course of our global energy landscape in the years to come. Follow along with Jefferies Sustainability & Transition Team for continued insights on these eight developments and more.

The Energy Transition is Opening Up Immense Opportunity in the U.S. for PE Firms

The energy transition has been picking up steam for a while. But a confluence of new factors has the potential to further accelerate growth and create unusually promising investment opportunities for private equity.

Last year, global spending on energy transition goods and services was nearly $1.2 trillion, representing a five-fold increase from a decade earlier. The U.S. market was $211 billion (including investment in the power grid) making it a little more than half the size of the electronics market (smart phones, computers and peripherals); nearly twice as large as the market for medical equipment; and three times larger than the market for commercial aircraft.

Since 2010, experts’ projections have dramatically underestimated the speed of the energy transition and the size of the markets for related goods and services that it would create. Forecasts for everything from coal consumption to global solar deployment to electric vehicle sales were way off.

Forecasts may again be too conservative for four reasons:

New Wave of Cost Reduction Driven by Onshoring: The cost of solar modules, wind turbines, and batteries as well as many other energy transition technologies has been falling for decades. This has made them increasingly competitive – if not less costly than – conventional solutions. But most of the reduction over the past ten years has come from economies of scale rather than breakthroughs in technology or manufacturing methods. That has in part been due to most energy transition products being manufactured in China, which has a long track record of reducing costs through production efficiencies rather than technological innovation. With the U.S. government recently passing the Inflation Reduction Act, CHIPS Act and Infrastructure Investment and Jobs Act, there are tremendous incentives to bring manufacturing, particularly of energy transition related products, back to the U.S. While most experts see more goods being produced in the U.S. as a result, they haven’t factored in the innovation that will likely come from large-scale manufacturing of energy transition products in the U.S. and its potential to accelerate cost reduction and adoption.

Higher Prices for Fossil Fuels: Energy companies are paring back investments in production despite record cash flows. Less than half of the record free cash flow that oil and gas companies are generating is being invested in new supply. Instead, they are plowing that money into stock buybacks, dividends and debt repayment. The underinvestment in exploration could mean much higher prices for fossil fuels in the future. That, in turn, should make energy transition technologies that are being worked on now more competitive on a relative basis even without further cost reduction.

National Security Imperatives: In the past, the primary driver of policy support for the energy transition was fighting climate change. But the war in Ukraine added a new one for many governments – national energy security. Every country has renewables (the sun shines and wind blows everywhere) but only 20% of people live in countries with sufficient fossil fuel supplies to meet their energy needs. The attractiveness of renewables from a national security perspective is that every country has them and no one can take them away. The E.U. has redoubled its support for renewable energy in the wake of Russia’s invasion of Ukraine, which underscores how powerful the national security imperative can be in driving incremental policy support for the energy transition.

Outsized Growth Potential in the U.S.: The U.S., with just 4% of the world’s population, consumes a disproportionate share (25%) of just about everything in the world – except energy transition goods and services. The U.S. is a significantly smaller market for energy transition goods and services than the E.U. or China, consuming only about 12% of energy transition products produced globally and just 9% of all electric vehicles. In fact, China and the E.U. consume energy transition goods and services at 2.7x and 1.1x the rate that they do all goods and services, respectively. If the U.S. were to consume energy transition related goods and services at the same rate that it does all good and services, the U.S. market would more than double in size. There is a good chance this will happen, as there is no reason why the U.S. should be so far behind China and the EU in its consumption.

An Emerging Opportunity for Private Equity: At the same time as these new drivers are emerging that could accelerate growth, public market valuations for energy transition companies have compressed dramatically. The median company in the Wilder Hill Clean Energy index, one of the most widely followed indices of energy transition companies, currently trades at a multiple of just 13.3x next 12 months consensus EBITDA which compares to 25.1x at the index’s peak in Q1 2021 and 9.4x for the median company in the Russell 2000 today – which has lower growth prospects and is more sensitive to GDP growth.

The potential for faster growth in energy transition markets coupled with historically attractive valuations creates a very attractive risk/reward opportunity. It’s rare for growth prospects to be improving at the same time as valuations are compressing. Private equity should take note.

David Dolezal is Jefferies’ Global Head of Energy Transition Investment Banking where he is responsible for leading the firm’s coverage of companies in the solar, wind, electric vehicle, energy efficiency, energy storage, biofuels, advanced nuclear, fuel cell and sustainability consulting and software subsectors. David has more than 25 years of experience advising companies and investors on financing and M&A. He has completed more than 100 transactions for both Fortune 500 and middle-market companies, including leading three of the five largest cleantech IPOs in history (Array, Shoals and GT Solar), two of the three largest PIPEs into energy transition companies in history (IEA/Ares and Array/Blackstone), the largest sale of a renewable power company to an oil & gas major in history (Savion/Shell) and the largest sale of an energy-as-a-service company in history (Budderfly/Partners).

Kyle Baker is Jefferies’ Head of Energy Transition Investment Banking, Americas and directs the overall coverage effort alongside David Dolezal. She delivers sector expertise to financial sponsors with energy transition investment mandates and brings nearly two decades of investment banking experience covering sectors related to sustainability and energy services in both the U.S. and Europe.

The Impact of the Universal Proxy Card on the 2023 Proxy Season and Beyond

The new universal proxy card (“UPC”) rules took effect in 2022, making the 2023 proxy season the first in which both company and dissident nominees were listed on the same ballot, allowing shareholders to choose among the different candidates in a contested election. Despite widespread speculation that the new rules could lead to a boom in activism campaigns, the actual impact has been mixed. Overall, activism levels remained elevated, despite the challenging macro-environment of the past year.  However, fewer activist campaigns went all the way to a shareholder vote and more settlements were reached.

One reason for the decrease in proxy fights and the increase in formal settlements between corporates and activists was the uncertainty on both sides about how voting dynamics would play out under the new rules. More public companies may have capitulated earlier because they believed activists could win at least one seat in a proxy fight.

This theory is supported by a review of proxy fights that occurred in the 2023 season. According to FactSet data, since the UPC was adopted, shareholders have elected at least one activist nominee in 67% of proxy fights that went all the way to a vote, up from 40% in the 2022 season. This year, there were also more cases of activists winning exactly one seat at the vote, despite fewer campaigns going to a vote.

While the sample size is small, these trends suggest that the UPC is making it easier for activists to win at least one board seat at target companies, a trend we expect to continue in the 2024 season as the rules become more familiar to activists. To prepare for the potential increase in UPC activism, public company boards and management teams should continue to “be their own activist” by regularly and proactively refreshing the composition of their boards of directors to ensure an optimal mix of skillsets, experience and diversity, and by reviewing strategic and financial alternatives to preempt the most likely activist demands for change.

Lessons from eToro: How Digital Adaptation is the Key to Growth

In September 2023, Jefferies hosted its seventh annual Tech Trek, Israel’s largest institutional investor conference. The three-day event connects leading global investors with the Israeli tech ecosystem through a series of panels, presentations, and meetings.

During the conference, Jefferies spoke with Yoni Assia, Co-Founder and CEO of eToro, the world’s leading social investment network. Headquartered in Tel Aviv, eToro offers smart investing tools, multiple asset classes, and a social networking community to over 30 million users worldwide.

Assia discussed the genesis of eToro and its journey to success, highlighting his early inspiration, commitment to digital adaptation, and Israel’s growing role in the global financial and technology sectors. His insights offer a powerful roadmap to young entrepreneurs, detailing the strategies that drove eToro’s steady growth through shifting markets and continuous waves of innovation.

Note: Assia’s comments on Israel were made before the events of Oct. 7. The ongoing conflict may influence the region’s tech ecosystem and investment landscape.

The Founder’s Journey: Complementary Skills Support Innovation

Assia’s passion for finance and technology started in his early teens, as he learned to trade and develop software. While pursuing his master’s degree, he recognized the financial industry’s need for innovation.

“I was conducting research for Bloomberg on ways to simplify their terminal interface,” Assia shared. “I quickly realized the limitations of these platforms’ user experience. There was a huge opportunity to introduce internet innovation to the world of trading and investing.”

Assia brought a background in finance and computer science, and his brother, Ronen, was studying design. Their complementary skill sets laid the foundation for eToro: a user-friendly, visually engaging digital trading platform.

eToro’s Ethos: Embrace Digital Change

Founded on a bedrock of innovation, eToro’s 15-year journey has been marked by continual evolution and growth. The company’s success underlines the necessity of digital adaptation for long-term market leadership.

In 2010, tapping into the burgeoning world of social networking, eToro launched OpenBook, the world’s first social investment platform. The company continued to adapt in 2012, launching mobile apps to align with the rise of Apple and Android smartphones. Since then, eToro has consistently adapted its offerings, adding a diverse range of asset classes and enhancing its platform capabilities.

“Running a global company in a competitive sector isn’t easy,” Assia said. “Our vision has always been innovation, and that guides the design of our user experience; the new technologies we introduced; our integration of cryptocurrencies and machine learning; and more.”

The Market’s Future: AI Empowers Retail Investors

Looking ahead, Assia is particularly excited about artificial intelligence (AI) and its potential to support retail investors. With the growth of platforms like ChatGPT, everyday customers gain access to the sophisticated analytical tools once only available to large investment funds.

The democratization of technology and information is integral to eToro’s mission – and adopting new AI capabilities is the next big step.

“Suddenly, we have technologies that enable users to harness the wisdom of the crowd and leverage amazing analytical insights,” said Assia.  “At eToro, we’re integrating these technologies quickly, rolling out platforms designed to empower better investment decisions.”

Israel’s Entrepreneurial Ecosystem

When Assia launched eToro, he faced skepticism about the possibility of creating a global financial and tech institution out of Israel. He drew inspiration from his father, who faced similar challenges with his own Israel-based tech startup, Magic Software, in the 1990s. Both companies helped prove Israel’s potential as a tech hub, with Tel Aviv now a global center for innovation and entrepreneurship.

“Over the past 30 years, Israel has developed a robust entrepreneurial ecosystem,” Assia shared. “Today, people are building businesses, being inspired by their peers, and finding mentors to guide them. There are investors and talented entrepreneurs everywhere in Israel.” 

Yoni Assia’s journey with eToro reflects the remarkable evolution of both his company and Israel’s tech landscape. His experience – blending finance, technology, and a relentless pursuit of innovation – offers invaluable lessons for entrepreneurs everywhere.

The Voice of Asset Owners

How Allocators Aim to Invest in the Transition

The Industrial Revolution, the Information Revolution and now the Energy Transition. Despite challenges and skepticism from many corners, it is inarguable that the global energy transition is upon us. We spoke with global Asset Owners overseeing more than $10 trillion to understand how they are navigating one of the critical secular trends of our time.

The Delicate Pact Between Consumers and Corporates & Victory Cuts 

As he looks to 2024, US Economist Tom Simons believes that the extremely resilient post-COVID expansion is unlikely to continue for much longer. While the US consumer has defied nearly all expectations to this point, their sustained spending has largely been driven by under saving and consumers’ confidence in their ability to remain employed, leading them to spend a large portion of income. Although the business sector is currently confident enough in the consumer to avoid significant layoffs, Tom expects this confidence could begin to wobble as we enter 2024. While Tom expects some components of inflation will remain firm due to a lack of labor and a continually shrinking prime age workforce, he believes the overall reading should approach the Fed’s 2% target in 2H24. This, combined with increases in unemployment, should enable the Fed to make significant cuts to the Fed funds rate, which he sees bottoming at 3.0-3.25% in September. As a result of these cuts, Tom anticipates that the 1H24 growth slowdown will be short-lived, aided by both lower rates and a US consumer that is well-positioned for the long-term. 

Chief Market Strategist David Zervos says the most recent FOMC meeting, and resulting Fed commentary, suggests that the risk of overtightening is in balance with the risk of being too accommodative. This was underlined by the additional 50bp drop in the updated Fed funds rate forecast for YE24, despite just a 20bp trim to the core PCE projection, which brought it down to 2.4%. David says this change implies that the Fed’s focus on inflation-fighting credibility no longer needs to take precedence over employment goals going forward. As a result of their policy-making successes, he expects the Fed to make a set of modest “Victory Cuts” beginning next year.

Global Head of Equity Strategy Christopher Wood says the key explanation for the resilience of the American economy in 2023 remains the extraordinary base effect from the historic expansion in M2 supply in 2020. That’s why the recent contraction in US M2, which was the third largest in 103 years, is notable. The markets remain fixated on the Fed’s recent pivot, which Christopher views as bearish for the US dollar and therefore positive for emerging market equities. From a US and developed stock market standpoint, it should also be more bullish for cyclical equities relative to growth equities. However, he continues to believe that US Treasuries are in a structural bear market, especially with both political parties in the US unlikely to embrace meaningful fiscal discipline.

The Demise of ESG-Focused Activism

Earlier this month, prominent activist investor Jeff Ubben announced he was shutting down his environmental and social investing fund, Inclusive Capital, marking a blow to the ESG activism paradigm. Considered a leader in the then-burgeoning ESG activism sphere when it launched under Ubben in 2020, Inclusive shut down because its mission unfortunately has not been rewarded by public markets, according to various media reports.

The decision reflects the view that ESG focused funds can be risky as they seek to achieve investment returns while seeking longer-term ESG objectives. Fewer activist hedge funds have recently used ESG themes as a wedge to extract concessions from target companies given the challenge of aligning a fund’s investment horizon with what could be a much longer timeline for ESG focused themes.

Further evidence is seen in the shift of Engine No. 1’s investment strategy. In 2021, it won three board seats in a landmark proxy fight at Exxon, predicated on critiques of the Company’s environmental and social corporate performance. Recently, Engine announced that it will no longer deploy an activism strategy and voted its shares against a shareholder climate resolution at Exxon last year. The fund now invests in private companies, including mining assets with poor ESG profiles.

Hedge fund activists have for many years targeted public companies’ financial, operational and governance performance as a basis for demanding corporate finance changes. Though we believe the pure ESG activist is waning, we believe ESG critiques will still appear if directly impacting a target company’s performance. It is still imperative companies take a rigorous and proactive approach to investor engagement well before the arrival of an activist.

Recent Trends in Global China Business Restructuring

There is a burgeoning trend of multinational corporations (“MNC”) actively restructuring their China businesses through any number of divestitures and / or carve-outs to realign their balance sheets and maximize shareholder value.

It’s a departure from the start of the new millennium through 2018, when one of the fundamental pillars of every good corporate business plan was growing exposure to China. In accordance with predictions that the 21^st century belonged to China, this massive, homogenous market of over one billion people was opening up, gentrifying rapidly, and presenting almost limitless potential to global corporates. It seemed that every Fortune 500 CEO was constantly thinking about how to capitalize on and secure their company’s share of the China dream. 

Fast forward to 2023, and China now finds itself often at odds with former western trade partners resulting in an entirely different state of play:

• A deflationary economy;
• A bloated real estate market enduring painful deleveraging;
• Shifting global supply chains;
• Decreasing foreign direct investment;
• And record youth unemployment.

The result is that every MNC board of directors is now focused on its “China Plan B” strategy. Board members are asking themselves what the best way is to handle an onshore China business that, for multiple reasons, has failed to live up to expectations and faces severe headwinds for the foreseeable future.  It’s led to a wave of restructuring, including:

• Mitsubishi Motors exit from its onshore China JV (sale to a local partner).

• In 2012, a joint venture between Guangzhou Automobile Group Co., Ltd. (“GAC”), Mitsubishi Motors and Mitsubishi Corporation (“Mitsubishi”), was established and started its operations as the company responsible for production and sales of Mitsubishi Motors products in China.
  • The ownership breakdown: GAC (50%), Mitsubishi Motors (30%) and Mitsubishi (20%).
  • On September 27, 2023, it was reported that Mitsubishi had decided to withdraw from automobile production in China and exit the JV with GAC. GAC will take full control of the joint venture and convert the plant to produce EVs.

• Cargill’s divestment of its China poultry business (sale to a regional PE fund).

• Cargill, one of the top poultry producers in the U.S., has operated in China for more than 50 years in the field of food and agricultural products.
• In 2011, privately-owned Cargill started its China poultry business, including breeding, raising, and processing chickens in Chuzhou in eastern Anhui province.  In 2019, Cargill announced the opening of an additional $48.8 million poultry plant in Chuzhou to address the growing demand for poultry in the country.
• Recent factors such as the Ukraine-Russia war and COVID-19 have greatly compressed the margins of livestock farms in China.
• In May 2023, Cargill announced it agreed to sell its China poultry business unit, Cargill Protein China, to the Greater China-focused private equity firm DCP Capital.

Most MNCs still believe in the long-term potential of China’s marketplace and many have chosen to retain a minority stake in the original business, enabling them a “second bite at the apple,” assuming the business thrives under its new owner. Many MNCs also don’t characterize these restructurings as “exits” from China, instead describing them as strategic decisions to structure the business in a way that is more flexible and adaptable to the fast-changing dynamics of the China market. Regardless of which route or structure the MNC decides, the engagement of a financial advisor deeply familiar with the MNC’s business, the local competitors in China and the local Greater China-focused PE network, can provide a company with the insight required to make the most well-informed decision to meet their strategic needs.

Expect a More Active IPO Market in 2024

After two years of limited IPO activity, we are cautiously optimistic about 2024. 

• The strong equity market performance in 2023 (S&P 500 +[23]%, Nasdaq [+42%], and Euro Stoxx 50 +[20%]), combined with reduced volatility has companies and financial sponsors reevaluating their IPO plans and timing. 

• We have recently seen an acceleration in private companies starting, or in some cases, re-starting their IPO processes. 
  • With US elections later in 2024, we expect Q2 and Q3 to be the most active windows for IPO execution.
  • While the increase in IPO activity will be gradual, we recommend that anyone considering a 2024 IPO should engage in timing discussions now.