Private Equity's Role in the Energy Transition

Emmanuel Lagarrigue explains the KKR Perspective

In our first podcast, climate finance expert and Vice Chair of Oliver Wyman, Huw van Steenis joined me to interview Emmanuel Lagarrigue. Emmanuel is the Co-Head of Climate at KKR where he leads KKR’s investments in decarbonization technologies and brown-to-green transitions.

We had a fascinating conversation. Emmanuel explained why he joined KKR and what they are seeking to achieve in financing the energy transition. He explained how they see a gap in the huge $7tn pa investment needed to fund the transition between the early stage investments and the mature infrastructure like renewables area.

This middle area is not really served today and he explained where they see the greatest investment opportunities, why decarbonisation is a good business, and why he is not concerned about political risk. This is a fascinating glimpse into the future and how climate change can be funded.

I set out a few takeaways below but you really should listen to this podcast. There is also a full transcript on the web page.

Areas of Opportunity

They see a number of opportunities in renewables, energy storage, EV charging, and creating a sustainable value chain to make batteries for EVs and for grid storage. Beyond this, there are many other areas, such as decarbonizing steel, cement, shipping, aviation, agriculture, decarbonizing data centers, energy supply and demand, and decarbonizing the operation of buildings and many more.

Types of Investment

Emmanuel identifies 3 types of opportunity:

1            Scaling Up Existing Solutions

They have an investment in Zenobi which has a fleet electrification business with 1200 buses and they see an opportunity to get to 8000 quite easily. There is no technology risk, this is an infrastructure type asset.

2            Scaling Up New Solutions

There are lots of deals in the value chain for batteries. There is tremendous demand for lithium-ion batteries for electric vehicles because the adoption of electric vehicles is quite rapid. And then we have to put in place all the supply chain to make those batteries and the component for those batteries. Here is a significant opportunity.

3            Helping Public Companies Transition

When a company needs to execute on the transition towards a more decarbonized business, it's extremely difficult to do it with its own balance sheet and shareholder money. KKR plans to set up structures to assist public companies who find it difficult to use their shareholders money to invest in lower return outcomes, but can partner with KKR and use its capital.

Risk Profile

These different solutions have different return profiles and different approaches. But there are some common themes: there cannot be any technology risk. Strong entry barriers, things which scale, contracted cash flows, real assets and elements of downside protection. And across a range of sectors: steel, cement, agriculture, batteries, renewables etc.

Duration

Emmanuel perceives a gap in the market between early stage, VC type deals in this space and classical infrastructure deals in for example, renewables. There is a gap when a company graduates from the early-stage climate tech eco-system and before it transitions into a classical infrastructure type investment. And that gap can have a duration of 5-7 years.

Decarbonisation Technologies

There are 10 to 12 technologies that can decarbonise the physical economy. The more mature ones are ready for the transition from climate tech to real scale and becoming infrastructures - renewables, especially solar, and any application of batteries for storage or for transportation. And then you have all the others.

Government Support

This is really helpful in accelerating the learning curve of new technologies. New technologies which otherwise would not be in the money, or would have to wait another four to five years to be in the money, receive a grant or a loan or there's a tax credit in that value chain – all this really helps. And of course, the quid pro quo for the government is that in exchange you create jobs locally.

And the IRA In its first year created something like 200,000 jobs. That initiative will probably stay irrespective of the US election outcome because it’s creating jobs in the heartland of the US and if the investment is not initiated and the jobs are not realised the taxpayer isn’t paying anything.

Oil and Gas Companies

Emanuel thinks it’s unrealistic to expect oil and gas companies to be tomorrow’s champions in electrification. Their skills developed on long term capital expenditure projects are better suited to supporting the transition from a carbon molecule based system to a metals based system. So he thinks that it’s more natural for them to build up the raw material supply chain in the new electrified economy.

The Opportunity

Emmanuel makes the point that decarbonisation is a good business. Starting from scratch, solar is the cheapest form of energy, EVs are inherently better than ICE cars. It’s the transition that is difficult.

Conclusion

For me, this was a really illuminating conversation. Emmanuel’s perspective on the energy transition is quite different from many commentators.

Huw who is really well informed in this space, also foudn it really interesting. He highlighted two takeaways which he thought many people, even those knowledgeable about this space, would find thought-provoking – the difficulty of transition in public markets and how private equity can bridge the gap in funding.

I hope you enjoy the discussion and the newsletter. This is all something of an experiment so let us know what you think, any people we should interview and what topics you would like to hear more about.