Future green

investments
Emerging energy transition infrastructure
beyond renewables
 Abstract

Renewable energy has been one of the most popular target sectors for infrastructure
investors in recent years. With the rising maturity of renewables, returns of traditional
projects such as wind and solar have compressed significantly, typically offering single
digit Internal Rate of Returns (IRR) in mature markets. Investors that are looking for higher
returns in this rate environment are keen to explore other technologies. For example,
energy storage has become increasingly popular among investors, which we explored in a
previous paper1, and is also maturing rapidly as an asset class. The natural question for
energy transition investors is – what’s next?

Beyond traditional renewables, energy storage and grid infrastructure, there is a world of
clean energy investments that sits in non-electricity industries. The electricity and heat
sectors only account for 32% of global greenhouse gas (GHG) emissions, which means
there are many other sectors, such as industrials, transportation, agriculture, and buildings
that could potentially attract USD 2 trillion of annual investments in the future to enable a
full energy transition, according to the International Renewable Energy Agency (IRENA)2.

This paper will provide an overview of the most promising technologies to reduce
greenhouse gases (GHG) at each of these industries. We will touch on the business cases
for carbon, capture, utilization and sequestration (CCUS), hydrogen, fuel cell electric
vehicles (FCEVs), clean transportation fuels, renewable natural gas (RNG), energy-as-a-
service (EaaS), and others. Most importantly, we will discuss the potential for
infrastructure investors to allocate capital in these new segments.

1 Energy storage: At a tipping point; March 2022 link

2 World Energy Transitions Outlook 2023; June 2023 link

Page 2 of 17
 Renewable energy alone
will not help us achieve net zero

Energy transition has recently become one of the most Under the broad spectrum of energy transition
important secular trends across all asset classes. Global investments, well understood technologies such as wind,
clean energy investments have increased five years in a row solar and energy storage deservingly receive the most
and will likely surpass USD 1.7 trillion in 2023. However, attention, and will continue to attract significant
global greenhouse gas (GHG)3 emissions have also investments in the next decade, as shown by IRENA, and as
increased significantly from five years ago, painting a we have highlighted in our previous research4.
somewhat sobering picture despite the major investments
(see Figure 1).
Figure 2: Recent annual investments and incremental
annual investment needs in 2023-50E (1.5°C Scenario)
Figure 1: Clean energy investments vs GHG emissions
Renewable energy (power)
2,000 42 Building energy efficiency
Power grid
1,600 41 Industrial energy efficiency
EV chargers
1,200 40 Transport
Hydrogen
800 39 Grid / Energy storage
Biofuels
400 38 CCUS
Renewables direct use
0 37
2015 2016 2017 2018 2019 2020 2021 2022 0 500 1,000 1,500
Recent years Annual average investments (USD bn)
Global clean energy investments (USD bn 2022) - LHS
2023-2050E (incremental needed)
Global GHG emissions (Gt CO2 eq.) - RHS

Source: IEA, CO2 Emissions in 2022, May 2023. Source: IRENA, World Energy Transitions Outlook, June 2023

IRENA highlighted the required investments in all sectors However, according to the World Resources Institute , the
and technologies between now and 2050 that the world electricity and heat sectors only account for 32% of GHG
needs, in order to reach net zero and keeping the global emissions (see Figure 3). This means even if the world’s
temperature rise to 1.5 °C (see Figure 2). electricity grid were to use 100% renewable energy, there
are significant GHG emissions that remain unaddressed.
Not surprisingly, current investment trends are simply
insufficient to meet these goals across the board. High level For example, one large emitter of GHG is the industrial
government policies such as the US Inflation Reduction Act sector, which includes hard-to-abate industries such as
(IRA) and Bipartisan Infrastructure Law (BIL), together with steel and cement, and accounts for 16% of global GHG.
the European Green Deal and Fit for 55 legislation will help The daily operations of these businesses tend to be very
bridge this gap. But another important piece to the puzzle emission-intensive due to specific industrial or chemical
is simply to educate investors and the broader public about processes that are integral to production. Simply relying on
different clean technologies and why they are needed. electricity from a cleaner grid alone will not be enough to
displace these emissions.

3 Note that GHG includes CO as well as other non-CO emissions such as

2 2
methane, nitrous oxide and hydrofluorocarbons
4 Is 2023 the year for renewables? link; US Inflation Reduction Act: Top 5

takeaways link

Page 3 of 17
Figure 3: World GHG emissions in 2019 by sector Surface transport is making the most progress with 26
million electric vehicles on the road at the end of 2022
according to the IEA, mostly passenger cars. The take-up in
the commercial vehicles has been lower with fleet users
Others, hesitant to electrify given the high upfront costs and
11% Electricity & heat
(indirect emissions), inconvenience of switching.
Buildings, 32%
6%
Agriculture emissions and other fugitive emissions are also
Fugitive important sources of GHG. What is unique about these
emissions sectors is that these emissions often contain methane gas,
(non-ag), 7%
which is 80+ times more potent than CO2 in its impact on
global warming over a 20-year period. Tackling methane
emissions therefore provide a great bang-for-buck in
Agriculture, reducing climate change impact.
12%
Finally, the building sector is a significant emitter of CO2.
Although technologies and businesses already exist to
Industrial,
19% reduce building emissions, economies-of-scale is a bigger
Transport, challenge for infrastructure investors as these businesses
14%
tend to be smaller and more fragmented.

This paper expands on recent work that we have already

Source: World Resources Institute, June 2022.
Note: Electricity & heat shown above has already been allocated to the end done on energy transition and clean energy technologies.
consuming sectors (i.e. it includes Scope 2 indirect emissions from In the following sections, we will examine the potential
electricity & heat purchased by other sectors such as industrials, transport pathways to reduce GHG across different sectors, including
etc.); Emissions from non-electricity & heat sectors are direct emissions
from in-house energy generation, industrial processes, or other fugitive industrials, transportation, agriculture, and buildings.
emissions
We will discuss how new technologies such as carbon,
Another example is the transportation sector, which capture, utilization and sequestration (CCUS), hydrogen,
accounts for 14% of global GHG emissions (20%+ of renewable natural gas (RNG), energy-as-a-service (EaaS)
global CO2 emissions) and needs decarbonization solutions businesses, and more. We will also discuss the current and
across land, sea and air. future investment opportunities in these markets.

Page 4 of 17
 Potential investments in industrials –
Carbon Capture Utilization and Sequestration
(CCUS), Hydrogen

Many industrial activities such as ironmaking, steelmaking − Post-combustion capture: Capturing CO2 from the flue
and cement production have carbon intensive processes gas or emission stream after a fuel has already
embedded in their daily operations. combusted, usually by using a chemical solvent.
− Oxy-Fuel combustion capture: When a fuel is
For example, ironmaking requires the use of metallurgical combusted with a mixture of oxygen and flue gas, it
coke (made from coking coal) for the direct reduction generates easily separated steam, water, and CO2.
process, while blast furnaces for steelmaking often use − Pre-combustion capture: Chemically decomposing a
pulverized coal injection to increase heat and performance. fuel (e.g., coal) to produce synthetic gas, which is
Cement production also emits significant carbon emissions further processed to separate the CO2.
due to an unavoidable chemical process that creates clinker − Direct Air Capture (DAC): Large fans directly draw in air
(an intermediary product for cement) under extreme heat. from the atmosphere to filter out the CO2.

Carbon capture, utilization, and sequestration (CCUS) Without going into the technical details, intuitively, it
One potential solution to tackle the emissions of these makes sense that higher concentrations of CO2 are easier
hard-to-abate industries is carbon capture, utilization, and to capture than lower concentrations. It is more cost
sequestration. CCUS “captures” the CO2 by chemical or effective to capture carbon at a gas processing facility that
physical methods, transports it, and stores it underground, releases significant amounts of high purity CO2, than
or sells it to other industrial customers for extra revenues. capturing CO2 directly from the atmosphere (see Figure 4).

There are various carbon capture technologies that are Naturally, the current CCUS investments that we see in the
available right now: market mainly target fossil fuel and chemicals industry, as it
is easier to capture CO2 at these plants. These facilities are
also often consumers of CO2 themselves and have existing
CO2 pipeline infrastructure in place, which makes CCUS
more economically viable as the captured CO2 can be
reused locally without significant new infrastructure.

Figure 4: Levelized cost of CO2 capture and CO2 concentration by sector

CO2 partial pressure (kpa) Levelized cost of CO2 capture (USD/ton)

0.04
Atmosphere (DAC)
4-5
Power genereation
20-30
Cement
32-35
Iron and steel
>85
Bio-ethanol
>92
Ethylene oxide
Hydrogen SMR 300-480
750-2,500
Coal to chemicals
up to 5,000
Nat gas processing
0 100 200 300 400

Note: CO2 partial pressure is a reflection of the concentration levels of CO2 at the emission source
Source: IEA, Global CCS Institute, March 2021

Page 5 of 17
In recent years, large industrial and energy companies are Hydrogen produced via renewable electricity and
accelerating the development of CCUS projects. For electrolysis is known as “green hydrogen.” Alkaline
example, BHP (a global mining company) is piloting electrolyzers are currently the mainstream technology to
different CCUS technologies with China’s HBIS Group produce green hydrogen, while polymer electrolyte
(one of the world’s largest steelmakers) at HBIS’s steel membrane (PEM) electrolyzers have more potential in the
operations5. The captured CO2 will be used in food and future due to scalability and flexibility.
industrial sectors. In Europe, HeidelbergCement is also
commissioning the world’s first carbon capture project at a Currently, grey hydrogen production costs around
cement production facility in Norway in 2024, which would ~USD 1/kg in the US and ~USD 3/kg in Europe, while green
cut 50% of the emissions from the cement produced at hydrogen is generally more expensive depending on the
the plant6. availability of cheap electricity and electrolyzer costs (See
Figure 5). A major tailwind for the industry was the
Another investment opportunity is CO2 transportation introduction of a USD 3/kg tax credit for green hydrogen
(e.g., pipelines or ships) and storage infrastructure (e.g., under the U.S. IRA, which brought US green hydrogen
salt caverns), which needs to be built to complete the costs in some regions to parity with grey hydrogen,
CCUS value chain. However, one major controversy around especially around the Gulf Coast where there is existing
CCUS is around the utilization of CO2, because currently, hydrogen infrastructure and relatively cheap electricity.
much of the CO2 that is captured by these facilities is
reused in energy and petrochemical industries. For As a first step, green hydrogen can potentially replace
example, the oil industry uses CO2 in enhanced oil recovery SMR-produced grey hydrogen in traditional industrial
(EOR) operations, where they pump CO2 into mature oil applications such as in refining and chemical production.
wells to boost production. For example, TotalEnergies recently signed an agreement
with Air Liquide for the supply of green hydrogen to a
Some critics therefore argue that this is contrary to the refining and chemical facility in France starting in 20267,
spirit of the energy transition, as CCUS directly supports which would replace the use of grey hydrogen.
traditionally high emitting industries by prolonging the
useful life of fossil fuel production. The counterargument
to this is that CCUS still provides a net reduction to
emissions compared to the status quo, so it is still
supportive of the energy transition and provides a gateway
for scaling up CCUS infrastructure and potentially new
applications for captured CO2.

Green hydrogen
Aside from CCUS, another promising solution for reducing 5 BHP signs Carbon Capture and Utilization pilot agreement with China’s

HBIS Group; March 2023 link

GHG emissions in the industrial sector is to use hydrogen 6 HeidelbergCement to install the world's first full-scale CCS facility in a

as a clean alternative to fossil fuels, especially for processes cement plant; December 2020 link
that require significant heat. Hydrogen is a combustible gas 7 TotalEnergies and Air Liquide join Forces on Green Hydrogen to

Decarbonize the Normandy Platform; September 2023 link

that is carbon-free and is mainly produced from natural gas
via a carbon intensive process known as steam-methane
reforming (SMR), which produces significant GHG
emissions. The hydrogen produced from SMR is known as
“grey hydrogen.” To lower the carbon emissions of this
process, SMR facilities can be paired with the CCUS to
produce what the industry calls “blue hydrogen.”

We can even take this a step further. As renewable costs

continue to fall and with the support of subsidies (such as
the US IRA’s hydrogen production tax credit), cheap and
clean electricity can perform electrolysis on water to create
hydrogen by splitting the molecule into hydrogen and
oxygen using electrolyzers, thus entirely bypass the SMR
process.

Page 6 of 17
Figure 5: Hydrogen cost comparison (USD/kg and USD/MMBtu)

10

0
Europe USA Europe Australia Middle East USA (Gulf) USA (Gulf) USA gas price
Grey H2 Cost (USD/kg) Green H2 Cost (USD/kg) Natgas Equiv. Cost (USD/MMBtu)

Henry hub gas price IRA tax credit Green H2 cost Grey H2 cost

Source: Reuters, S&P, ICIS, UBS Asset Management, September 2023

Another interesting opportunity is to produce ammonia On the other hand, at USD 8/MMBtu equivalent, US green
(NH3) using hydrogen. Ammonia is an important fertilizer hydrogen could potentially be exported to other countries
and is currently produced from natural gas. Green that have higher natural gas prices (e.g. European natural
hydrogen can be processed into green ammonia, which gas price is currently ~USD 12/MMBtu). But this is also a
does not release any carbon emissions during the synthesis long-term proposition as the transportation and export
process. infrastructure still needs to be built out. As discussed
before, it could make sense for the US to export hydrogen
In addition, ammonia is easier to transport than hydrogen indirectly by first converting it into ammonia.
on ships due to its higher energy density (by volume),
which could create a globalized hydrogen market with Hydrogen transportation infrastructure such as pipelines
ammonia shipping as a way to indirectly export and import therefore could also be an investment opportunity.
hydrogen. For example, Iberdrola, the Spanish power Traditional natural gas pipelines made of steel can only
company, announced a green ammonia project8 that will blend a certain amount of hydrogen before they face
supply ammonia to Trammo, a shipper and exporter. “embrittlement” (i.e. hydrogen causes metals to reduce in
strength and potentially crack over time). New or
Ultimately, the goal is for green hydrogen to replace retrofitted pipelines made by plastics such as polyethylene
natural gas in combustion processes. This can be in a could counter the embrittlement issue.
cement plant, a steel mill, or even in power generation.
However, these opportunities are longer term. Finally, hydrogen can also be used in vehicles that are
equipped with fuel cells or specialized combustion engines,
Even at USD 1/kg, US green hydrogen may be cheap which we will discuss in more detail later in this paper
compared the other hydrogen production processes, but under the “Transportation” section next.
that is still ~USD 8/MMBtu on a natural gas equivalent
basis (see Figure 5), which is significantly higher than the
current USD 2.5/ MMBtu Henry Hub natural gas price, and
limits the domestic usage of green hydrogen as a natural
gas replacement.

This is why under the US Department of Energy’s hydrogen 8 Trammo and Iberdrola Sign Agreement for Purchase and Sale of Green

Ammonia; June 2023 link

roadmap9, hydrogen will not replace natural gas in steel, 9 U.S. National Clean Hydrogen Strategy and Road Map, Department of

cement, and power generation sectors until the “second Energy, June 2023
wave” and “third wave” of hydrogen development, which
in their definition means after 2030.

Page 7 of 17
 Potential investments in transport –
electrification, clean fuels

The transport sector, often classified as a hard-to-abate This trend is driven by supportive public policies, changing
segment, consists of surface, sea and air sub-sectors. consumer preferences and the improvement in the total
Overall emissions are growing and the sub-sectors are cost of ownership (TCO) – a metric which looks at the cost
decarbonizing at different paces, but since 2010, the of the electric vehicle, including fuel and maintenance over
sector’s emissions have increased faster than for any other the useful life of the asset. This is driven by falling battery
end-use sector, averaging +1.8% annual growth10, costs of 90% over the past decade11.
highlighting the need for urgent investment. The
decarbonization of transport benefits from converging The electric take-up is lower for commercial applications,
tailwinds: falling technology costs, supportive policies and with vans and trucks representing less than 3% electric
stakeholder pressure to reduce emissions. sales. Given freight makes up 30% of transport CO2
emissions, this represents a significant opportunity for
Surface transport investors looking at accelerating the transition to zero
Surface accounts for ~70% of transport emissions, within emission transportation. We expect battery electric vehicles
which, the passenger segment makes up ~45% while to be dominant for road transport except for long-distance
freight accounts for ~29%. The transition to zero emissions trucks where a clear technology winner has not yet
vehicles in the personal autos space is well underway with emerged.
BEV reaching 9.4% of global sales in 2022. BEV sales in the
commercial vehicles segment are less than 3% globally, Figure 7 shows that despite higher upfront capex of
and as of 2022, almost all of the fleet is powered by diesel commercial Battery Electric Vehicles (BEVs), the
powered ICE vehicles (Figure 6). combination of fuel savings and lower maintenance cost
can deliver a significantly lower total cost of ownership
(TCO). In the case of a last mile delivery van, we estimate a
Figure 6: Share of EV in total vehicles stock (%) ~27% saving in the US and a 30-40% saving in Europe.

2.5% 0.45
CAGR
Figure 7. Light duty vehicle sample TCO comparison12
39% 0.4
2.0% 0.35
Internal combustion

Capex
0.3
engine (ICE)

1.5%
0.25 O&M & Fuel
0.2
1.0%
CAGR Total cost of ownership (TCO)
25% CAGR 0.15
15%
0.1
Battery electric vehicle

0.5% Capex (unsubsidized) +28% vs. ICE

0.05
(BEV)

0.0% 0 O&M & Fuel

Vans Trucks Cars

Total cost of ownership (TCO) -27% vs. ICE

2018 2022

Source: IEA, April 2023 0 50,000 100,000

USD

Source: UBS Asset Management, OEM catalogue, EIA, Transport &

Environment, September 2023
10 IPCC AR6 WGIII, Chapter 10, November 2021
11 Lazard's Levelized Cost of Energy Analysis 16.0
12 Example for Mercedes Sprinter van

Page 8 of 17
BEVs require new infrastructure to deliver the fuel, i.e., the Figure 8: CO2 equivalent emissions in marine
charging stations. Closed-loop applications are low segment, 2022 (Mt)
hanging applications for electrification as charging can be
centralized at the base, allowing lower capex, higher
Tanker
utilization and removing the dependence of public
charging infrastructure. Container vessel

Aside from BEVs, hydrogen fuel cell electric vehicles Liquid gas carrier
(FCEVs) have zero tailpipe emissions, and have a number of
Bulk carrier
advantages over BEVs, such as shorter charging times and
less impact on weight. Most importantly, FCEVs have Tugs
longer ranges, which makes them more suitable for
commercial vehicles that are typically driven over greater Ro-Ro vessel
distances and for longer periods of time per day.
Supply / Utility
As discussed in the previous section, green hydrogen is
Ferries
produced through electrolysis using renewable electricity
and can be used as a source of fuel for FCEVs. However, 0 500 1,000
currently, the cost of hydrogen and the cost of the fuel cell
are prohibitive compared to diesel and BEVs. Source: BCG, 2022

Nevertheless, we expect to see hydrogen take up where However, to date, there is no commercially available engine
the users’ purchase decisions are driven by factors other technology that can burn ammonia. The main challenge
than cost, such as the range, time to recharge or weight with ammonia is its high toxicity, creating high safety
considerations. Some practical examples where hydrogen requirements.
may offer a solution are standby assets, e.g. emergency
response vehicles, highly seasonal farming or municipal Electrification is another pathway for decarbonizing the
equipment, or back up range extenders. marine sector. However, electrification is not suitable for
long-haul shipping, and to date, the batteries that are
Marine being commercially deployed onto vessels are all less than
The decarbonization pathway of the marine sector is set by 10 MWh. The use of larger batteries is limited by cooling
the International Maritime Organization (IMO) regulation requirements and volume restrictions of the hull.
which targets a reduction of 40% by 2030, pursuing
efforts towards 70% by 2050 versus 2008 levels. Near shore vessels such as tug boats and utility vessels
could be better candidates for electrification. Some
Of the ~1 billion tons of CO2 annual emissions from the jurisdictions (e.g., California, Rotterdam, Antwerp,
marine sector, short-haul vessels make up ~13%, the rest Singapore, Auckland) have introduced laws requiring
can be attributed to long haul (primarily ocean going) electrification of tugboats since they are typically a major
vessels (see Figure 8). source of local pollution.

From a technology perspective, there is no clear consensus One clearer short-term opportunity is for port
on the winning technologies, with market leaders opting infrastructure. For example, ports generate 6-7% of the
for different solutions, headed by Maersk that seems to be total maritime emissions13, can invest in commercially
betting on E-methanol. This gives investors less certainty proven technologies such as on-shore power (OSP) and
and increases stranded asset risk. through the electrification of port equipment.

Methanol is controversial as it is still a carbon-based fuel

and so there is much debate on whether it should be
considered green. A potential alternative is ammonia
(discussed in previous section), which does not contain 13Figures for the European Union from European Parliament, “European
ports becoming ‘fit for 55’”, April 2022
carbon and could be combusted in an internal combustion
engine.

Page 9 of 17
Aviation
The air sector contributes a similar share
of emissions as marine, albeit it has been
growing at a faster pace. There are
limited options to decarbonize airplanes,
as the weight and range of batteries
make moving to electric power
challenging while the low energy density
of hydrogen creates space limitations.

Sustainable aviation fuel (SAF) is the only

credible option to decarbonize air at
scale. At present, SAF makes up around
0.1% of aviation fuel demand and it cost
2-4 times more than jet fuel14. Upstream
production of SAF needs to be scaled up
to meet vast demand aligned with strong
policy measures contained in the
ReFuelEU Aviation (part of RePowerEU
policy).

The US IRA, which provides a SAF subsidy

of up to USD 1.75/gal, could also support
the industry. Like many other energy
transition technologies, we are also
seeing large corporate offtakers (e.g.
United Airlines is the largest SAF buyer in
the world) who are willing to pay a
premium for SAF due to its environmental
attributes.

A more immediate opportunity in the air

sector is the decarbonization of ground
service equipment (GSE) at airports.
Although some of this is already electric
(e.g. baggage tractors), there are
opportunities to further reduce emissions
through the adoption of fixed electric
ground power (FEGP) and the
electrification of other GSE such as push-
back tractors for certain planes.

14 IATA, SAF Policy 2023

Page 10 of 17
 Addressing fugitive emissions –
Renewable natural Gas (RNG), specialized leak
detection and repair (LDAR)

Unlike the industries that we previously discussed, a Figure 9: Biomethane/RNG as % of gas demand
significant amount of GHG emissions come from fugitive
emissions, often in the form of methane gas (CH4). The 12%
problem with methane is that it is over 80 times more
10%
potent than CO2 in its ability to trap heat and contribute to
climate change over a 20-year period15. One source of 8%
methane emissions is from the agricultural sector in the
form of biogas from livestock. Another is from methane 6%
leakages at fossil fuel and petrochemical production 4%
facilities. We will address both issues in the section.
2%
Renewable natural gas (RNG) in agriculture
0%
One way to remove GHG from the agricultural sources
Europe North America Europe North America
such as livestock is with renewable natural gas (RNG) or
Stated Policies Scenario Sustainable Development
biomethane. RNG or biomethane both describe biogas
Scenario
produced from anaerobic digesters that converts and
upgrades organic feedstocks into a gas that is chemically 2018 2030E 2040E
identical to natural gas. Aside from livestock at farms,
biogas is also produced from various sources, including Source: IEA World Energy Outlook, October 2022
landfills, food waste, and wastewater treatment facilities.
Project costs vary significantly depending on the source of
Demand for RNG is slated to grow rapidly around the feedstock. For example, based on a study commissioned by
world, albeit starting form a low base (see Figure 9), as the California Energy Commission in 2022, producing RNG
natural gas demand remains strong despite the energy using landfill gas is the cheapest method at around
transition. The ability to substitute conventional fossil USD13/MMBtu, while producing RNG with manure from
natural gas with RNG is therefore a pragmatic solution. livestock costs USD 26/MMBtu (see Figure 10).

Although RNG is chemically identical to fossil natural gas, A major part of this is due to scale – based on this study,
the impact from its emissions is only a fraction of what the the facility using landfill gas produces almost 15x more
impact would have been if the methane is released directly RNG than the facility that uses livestock emissions. Project
into the atmosphere. RNG therefore has one of the lowest capex can also vary from USD 10s of millions to USD 100s
lifecycle GHG intensity of any clean energy sources based of millions depending on project size and feedstock.
on its climate change impact16.
Revenues across projects can also vary significantly, and are
Currently, RNG has attracted significant capital from both highly dependent on the prices of clean energy credits,
strategic and financial investors. In 2022, the sector has which could vary depending on feedstock. The two main
closed almost 60 deals amounting to USD 7.6 billion of credits in the US are California’s low-carbon fuel standard
investments globally, according to Inframation. The reason (LCFS), which is awarded to RNG that is sold in California
for this is because RNG project economics are attractive. In (even if the RNG is not produced in-state), and Federal level
the US, RNG developers often discuss project payback renewable identification number (RIN), which is a part of
periods of around 3-5 years, significantly faster than typical the Federal government’s Renewable Fuel Standard.
infrastructure projects.
As observed in Figure 10, these clean energy credits
account for most of the revenues. Without them, the
15IEA Methane and climate change; Jan 2021 link current USD 2.5/MMBtu natural gas price would hardly
16Energy & Power – Biofuels: Renewable Natural Gas, Stifel Equity
help recover the USD 10-30/MMBtu production costs.
Research, March 2021

Page 11 of 17
Although these clean energy credits are very lucrative, they For example, RNG can be combusted to generate electricity
are also a key source of risk. Prices can fluctuate that is backed by long term power purchase agreements.
significantly – for example, LCFS prices have fallen by 60% Some European countries also have Feed-in-Tariffs
in the last 2 years. Some RNG developers actually opt for (basically a government guaranteed price) for biomethane
longer term offtake contracts with customers to lower their used for electricity generation or injected into the gas grid.
exposure to these highly volatile clean energy credits,
regardless of how attractive they currently are.

Figure 10: Biomethane/RNG unit revenues and costs in US by feedstock (USD/MMBtu)

80

60

40

20

0
Revenue Cost Revenue Cost Revenue Cost Revenue Cost Revenue Cost
Livestock Wastewater Landfill Food waste Biomass

Production cost Gas Price LCFS RINs

Source: California Energy Commission, UBS Asset Management, September 2022

Methane leakages The IRA also includes USD 850 million of grants, rebates
Methane leakages are fugitive emissions that are and loans to improve and deploy new industrial equipment
intentionally or unintentionally released through the and processes to monitor and mitigate methane leaks, and
day-to-day operations of a business (mainly in the fossil USD 700 million to support marginal conventional wells.
fuel industry). For example, unintentional leakages during
extraction and transportation of oil and gas, and This brings an element of active asset management, as
intentional venting of fossil fuels due to excess production. owners of these infrastructure projects will have to
navigate the government programs as well as work with
Oil and gas companies have touted the switch from coal various suppliers to upgrade and retrofit the equipment.
and oil to natural gas as their contribution to The potential to mitigate GHG emissions is also significant.
decarbonization in the last ten years. Yet poor methane
emissions management could invalidate their argument The intentional venting of methane is a different story. This
given the potency of this GHG. According to the World usually happens when there is not enough pipeline or
Resources Institute, 2% of US natural gas production is storage capacity for excess natural gas that has been
currently leaked, which is the equivalent to the annual produced (e.g. natural gas is often a byproduct of shale oil
emissions of roughly 120 million cars17. wells). The result is that much of this natural gas is often
wasted by flaring (burning at the wellhead), which
The unintentional leakages can be tackled by increased produces both methane and CO2 emissions.
monitoring by using technologies such as specialized leak
detection and repair (LDAR), satellite imaging or drone Ironically, the most practical solution is to build more
equipped with sensors, while applying penalties if needed. midstream infrastructure that can take away this excess
For example, the IRA introduced a methane emissions gas, which may raise some environmental concerns, but is
charge on the oil and gas industry that starts at USD 900 still a better outcome than having the gas wasted and
per ton of methane, increasing to USD 1,500 after two released directly into our atmosphere.
years, which is equivalent to USD 36-60 per ton of CO2.
Another solution is to consume the excess natural gas on
site. This involves combusting the gas in generators to
produce electricity for local demand. There have already
been announcements of data centers and crypto miners
17 Capturing the Fugitives: Reducing Methane Emissions from Natural Gas; being built near oil and gas wells to take advantage of this
April 2023 link
18 Data centers that run on gas flares; December 2021 link
as a sustainability angle18. CO2 is still produced through this
process, but once again, it is better than flaring or venting.

Page 12 of 17
 Reduction of emissions in buildings –
Energy efficiency, Energy as a Service (EaaS)

One last industry that has large GHG-emission reduction Many enterprises have aggressive GHG emission reduction
potential is real estate. Improving building energy efficiency targets. However, they do not have the in-house expertise
is an important pathway to reduce GHG, yet it currently to meet their own green ambitions, especially with the
underinvested in according to the IEA based on current net rising complexities of various energy transition technologies
zero targets (see Figure 11). and applications that we mentioned above.

Energy-as-a-service (EaaS) and similar20 business models are

Figure 11: Annual investment in energy efficiency in therefore becoming more popular. EaaS firms design, build
the buildings sector vs. 2026-30E investment needs and install all the systems for buildings with their own
capital, manage the different suppliers and technologies,
700 and then optimizes the building’s energy supply and
demand over a contracted period. The customer then
600
makes periodic payments to the EaaS company based on
500 the amount of energy savings and other KPIs.

400 This becomes a win-win situation, as a customer with no

energy management expertise can still save on energy costs
300 and increase its green attributes, without incurring upfront
capital investments. On the other hand, the EaaS company
200
owns all the equipment and receives stable and periodic
100 payments from their customer, as long as they deliver on
the KPIs.
0
2026-2030E NZE
2020
2017

2018

2019

2021

2022

2023

A challenge for the EaaS business is the customers are

relatively fragmented. For example, it costs only several
USD 100,000s to upgrade a simple building with latest
distributed resources and energy efficiency technologies.
Europe United States China Other
An EaaS provider therefore either have to work with many
Source: IEA Annual Energy Investments 2023, June 2023 customers, or with single large customers to build sufficient
scale. For example, some EaaS companies work with retail
Historically, energy efficiency is focused on reducing energy or hotel chains with have large real estate footprints, large
demand, which includes upgrading insulation, lighting, data center operators that are major consumers of
HVAC, etc. and electrifying certain appliances to reduce electricity, major universities, or infrastructure assets such
emissions. In the last 10 years, the improvements in as ports or airports, in order to achieve sufficient scale for
technology mean that there has been is now also a focus their businesses.
on improving energy supply, such as rooftop solar panels,
batteries and heat pumps, and optimizing operations using
advanced analytics from data collected from smart meters.
19 VPPs pools distributed resources together (using software) as a single
entity to buy electricity from and sell electricity to the grid, which adds
As distributed energy resources become more integrated
flexibility to the grid, while generating revenues for the building owners
with the grid, buildings can also engage in utility demand 20 These types of business models have many names aside from EaaS,

response programs or virtual power plants (VPPs)19, which including energy service companies (ESCO), energy management, energy
efficiency, micro grids etc.
gives buildings the ability to generate extra revenues by
ramping down demand or selling electricity to the grid,
which adds to the energy cost savings.

Page 13 of 17
 Carbon markets
and policy support

The energy transition cannot happen without strong When the cost of emitting carbon is as high as it is in
government policy support. These often come in the form Europe, all the technologies that we previously discussed
of subsidies, grants or local mandates. However, one become more compelling.
powerful but at times underappreciated tool to accelerate
clean energy investments is the availability of a large scale The US does not have a national level carbon market.
carbon market, as well as high carbon prices. Instead, it relies on a patchwork of local markets such as
the Regional Greenhouse Gas Initiative (RGGI) that is
Europe is ahead of the US as the EU Emissions Trading focused on the East Coast, and another one in California
System (EU ETS) is the largest and most comprehensive run by the California Air Resource Board (CARB). Carbon
carbon market in the world, covering industries such as prices at these markets are significantly lower than
electricity generation, manufacturing, and even aviation. European carbon prices, although they have trended
More importantly, EU carbon prices have tripled since 2019 upward in recent years.
due to more aggressive climate policies (see Figure 12).

Figure 12: Carbon prices (Europe vs. US) – USD/mt

120

100

80

60

40

20

0
Jun-20
Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

Jun-17

Dec-17

Jun-18

Dec-18

Jun-19

Dec-19

Dec-20

Jun-21

Dec-21

Jun-22

Dec-22

Jun-23
Sep-14

Sep-15

Mar-16

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Mar-15

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

EU USA (California) USA (RGGI/East Coast)

Source: Bloomberg, September 2023

Although the US lags Europe in its development of carbon The extension of wind and solar energy tax credits and the
markets, and the Federal government has generally new standalone storage tax credits rightfully attracts a lot
displayed a lack of commitment to national level clean of attention. But one impressive aspect of the IRA is the
energy mandate, the US has been remarkably successful in scope of GHG emissions that it covers. Figure 13
rolling out clean energy tax credit programs. For example, summarizes incentives (and penalties) across various
the IRA enacted in 2023 was arguably the most important, industries, which covers almost all the technologies that we
comprehensive and impactful US clean energy legislation in have discussed in this paper.
history, and has the potential to generate over a trillion
dollars of incremental clean energy investments over the
next decade.

Page 14 of 17
Figure 13: Inflation Reduction Act – “beyond renewables” tax credits and penalties

Inflation Reduction Act (IRA) tax credits (and penalties)

Hydrogen Production tax credit (PTC) up to USD 3/kg

Carbon capture, utilization USD 85/ton 45Q credit (previously USD 50/ton); USD
& sequestration (CCUS) 180/ton for direct air capture

Electric vehicle charging ITC up to 30% for chargers; USD 7,500 EV credit
extended (up to USD 4,000 for used cars)

Sustainable aviation fuel (SAF) USD 1.25/gal if GHG reduced by at least 50%, plus USD
0.01/gal for every percentage point above 50% up to
USD 1.75/gal

Renewable natural gas (RNG) Investment tax credit (ITC) up to 50%

Energy efficiency, heat pumps, Up to USD 5 per square ft. for energy efficient
insulation commercial buildings

30% ITC up to USD 2,000 for heat pumps, up to

USD 1,200 for qualified insulation, boilers and air
conditioning

Up to USD 14,000 home energy rebates for low-income

households

Methane emissions Penalty up to USD 1,500/t of methane by 2026 (USD 60/t

CO2 equivalent)

Source: US Government, UBS Asset Management, September 2023

Page 15 of 17
 Focus areas when
investing in new businesses

With the maturity of traditional renewable investments They simply have not been scaled up enough to enjoy the
such as wind and solar, the new technologies highlighted cost savings that other technologies such as wind, solar
in this paper may offer the next wave of green investment and batteries have experienced. As a useful reminder –
opportunities. Since many of these emerging segments are lithium ion technologies were already mature years before
currently still in the earlier stages of development, investors the popularization of grid-scale energy storage. Investors
should focus on several factors that could make these should therefore avoid unnecessary risk when examining
assets more investable and provide them with more various technological options.
infrastructure-like characteristics:
Predictable regulatory revenues:
Attractive offtake agreements: Since project economics of new technologies often depend
Despite frequent cost comparisons between “newer and heavily on tax credits and policies – the stability of
cleaner“ vs. “older and dirtier” technologies, in reality, if supporting regulations is an important factor. Sometimes,
there is a large creditworthy counterparty who is willing to revenues supported by regulations can also be volatile. As
pay a premium for cleaner energy with an offtake we discussed, the price for LCFS credits in California have
agreement, project economics immediately become more fallen 60% since 2019, despite strong regulatory support.
attractive as revenues are de-risked. With significant Investors should therefore have a deep understanding of
corporate interest in climate issues, we could see more the many drivers behind these “regulated” revenues.
long-term contracts even for newer businesses and
technologies. Credible strategic partners:
In any new infrastructure business models, having a
Technological maturity: credible partner that has the expertise in development and
Combining mature technologies with emerging operations of new projects will improve investment
decarbonization investments may seem like an oxymoron. outcomes. In many of the businesses that we highlighted in
The truth is, a lot of these technologies are already mature, this paper, there are already large corporates that are
including alkaline electrolyzers for hydrogen, and anaerobic experienced in these segments, and they could potentially
digesters for RNG. look for financial partners to support their growth.

Figure 14: Private clean energy transactions (last 5 years ending September 2023)

500 5,000

400 4,000

300 3,000

200 2,000

100 1,000

0 0
Solar PV Onshore wind Offshore wind Hydro Energy EV Hydrogen RNG Carbon
storage Infrastructure Capture

Deals USD bn (LHS) Number of deals (RHS)

Source: Inframation, September 2023

Page 16 of 17
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