Trevor Gardner
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value in an ever changing world. I'm Trevor Gardner, Head of Global Investment Banking coverage at RBC Capital Markets, and I'm really pleased to be here with Ralph Ibendahl to provide our Energy Transition Capital Markets Outlook for 2025.Ralph is Global Head of Energy Transition Investment Banking, and is also a senior member of RBCs European management team. Throughout his 20 year career, Ralph has been involved in significant transactions across the utilities, renewables and energy transition space. A true expert. Ralph, it's great to have you with us here today.
Ralph Ibendahl
Thanks, Trevor. It’s great to speak with you today.
Trevor Gardner
I'm excited about this discussion, where we are today and how we see this global trend evolve this year and beyond. As a note to our audience, this episode kicks off a series of podcasts we have planned for 2025, focusing on key energy transition topics. As part of our Powering Sustainable Ideas podcast series, we'll be diving deep into the areas that matter most in the evolving energy landscape. Please keep an eye out for upcoming episodes on these important topics. To set the stage, 2024 was a pivotal election year with more than 70 countries, representing over half the world's population, holding national elections. With roughly 2 billion eligible voters, it was the largest election year in history, shaping political landscapes and influencing policy approaches to energy and energy transition. Now just weeks into the new US administration, we're already seeing the first decisions on energy and climate policy take shape, and all this against an active backdrop for all forms of energy. Ralph, as we stand here today, how are you thinking about energy transition in this new political and economic environment?
Ralph Ibendahl
Yeah, thanks, Trevor. If I think about energy transition, it's obviously been a macro trend that's been going on for some time. But, it's fair to say that 2024 was pivotal, when it comes to the regulatory and political environment. And of course, you know, the US election, not being the only one, but being clearly very impactful. A lot of capital focused on the US market. So any change in US policy clearly has an impact also on energy transition. Now, in the first couple of weeks, President Trump has obviously made a couple of announcements. He's pulled out of the Paris Climate Accord. Not unsurprising. So, not expecting material changes as a result of that. More specifically, of course, there's been some announcements and executive orders around wind and reviewing the permitting process, particularly when it comes to federal land, around onshore wind, and, more importantly, offshore wind, and pausing some of the permits there. And that's had impact on, share prices, and also on the EV side, he's stopped the target of having 50% sales of EVs by 2030. So some announcements that have an impact on the energy transition, but they probably haven't gone quite as far as maybe people had expected, certainly it hasn't been a stop on new permits for renewables. There's still support. Inflation Reduction Act clearly is still live, and so we'll have to see how it evolves and exactly what policy changes are made. Certainly the investor landscape and investor universe is following decisions there very closely at this point.
Trevor Gardner
So like most moves in finance and in politics, you know energy transition is a really massive one that's moving, but it doesn't always go in in a straight path. So external events come into play. You've alluded to that a little bit, but the overall direction is, is clear. The world needs a lot of energy. They need all forms of it, and demand is growing. You want to take us through some of your thoughts on what's happening around the world and how that all fits together.
Ralph Ibendahl
Yeah. I mean, you're spot on. It's not a straight line. Even in the renewable space, which has been around for, you know, two decades and more. Build out has been in waves. And I think that will be the same going forward. I think we have entered into a new phase of energy transition, one that is characterized in parts by clearly demand growth and, data center demand is the obvious one impacting power demand, which requires additional capacity, both renewable and firm, but also in terms of capital costs. You know, the interest rate cycle has changed. Interest rates have gone up significantly. That has impacted capital flows and where people are looking for attractive opportunities that apply their capital. And so both of those, I think, means we're in a new world when it comes to transition. Yes, the end point is clear. We're trying to get to net zero. We need established technologies. We need new technologies. We need a lot of capital to be deployed to be able to achieve that. Now, how quickly do we get there? I think remains to be seen. It’s ultimately a policy choice. But overall, as I look at it now, we still see very significant capital going into energy transition across a whole range of sectors. And you know, there's a strong rationale for decarbonizing, and there are attractive opportunities for decarbonizing, especially as we're trying to grow electricity demand through the data center boom.
Trevor Gardner
It's interesting, and picking up on one of the things that you said, energy transition isn't brand new. You know, it's something that's been around for decades. And renewables, which we think of as a newer form of energy of are in some ways, actually quite mature. Do you want to talk a little bit about that? And kind of how, when we talk about energy transition, it really spans, you know, multiple, multiple technologies, multiple parts of the energy ecosystem.
Ralph Ibendahl
Yeah. I mean, our approach to energy transition—it's a global approach, because inevitably, all areas of the globe are facing this transition and are moving at different speeds. It also spans all of our sector groups, so whether that's in power / utilities, in energy, in technology, in terms of software solutions, in industrials and so on. So we see opportunities across the sector spectrum, and of course, also with that comes different solutions, whether it's equity, debt or other advice that we can provide to clients. And I think the speed at which the transition is impacting different areas varies. The challenges and the opportunities are slightly different. So, you know, renewables has been around for 20 years. But it still needs significant capital. And of course, you know, renewables require grid investments, requires battery storage and energy storage and investments in firm power. If you look away from the power sector and you look at decarbonization of transport, we have, of course, electric vehicles, which has been spurred on by the cost reductions in the battery feeding through – that is growing. If you look at the last quarter, record sales in the last quarter of EVs in the US, and actually 2024 was a record year, also globally in terms of capital deployment. So EVs are moving ahead. Much harder, of course, is aviation, is shipping, is rail, but, and those will move at a sort of slightly slower pace, because it's just hard to decarbonize. And then finally, when you come to industry, which is the third leg of energy transition. You know, industry covers a whole range of elements, whether it's the hard-to-abate sectors like cement or steel or other industries. And again, different solutions will be needed, and they will move at slightly different pace. So for us, we look across the whole spectrum. It's such a vast space. And I think the only way that you can be helpful to clients, and that's certainly what we're trying to do, is being across the value chain and being global in setup, and being able to draw on that expertise, you know, to the benefit of our clients.
Trevor Gardner
Yeah, definitely, definitely a focus to hit all aspects of the economy. And as you said, really important to touch each aspect of the energy value chain, and also interesting to see how new and emerging technologies can work together against the overall mix. So if we look at 2025 and we, against all that, we focus more on 2025 in particular, are there a couple themes you'd focus us on that you think are emerging are really especially relevant or important in the year ahead?
Ralph Ibendahl
Yeah, we have to focus and start with AI and data centers, just because it's everywhere. And why is it everywhere? It's because, you know, it requires significant computation power, and with that it needs electricity to power the data centers. And so we will see, you know, a need for build out of renewable capacity, but also firm power. And so, for example, one of the trends that we're observing is, how do we get power to those data centers? You know, there are different solutions with different timescales. So geothermal is one of the potential solutions, particularly in the US, being highlighted as an ability for clean renewable, firm, power. Nuclear, SMRs, also being thought about, but that's probably closer to 2030 than real deployment in 2025, but certainly something where we see capital raises coming, and certainly where there's an element of focus. Beyond the power side, and, of course, investments in capacity, there's also investments in the grid space that will continue. That really came to the fore in 2024, and I think is here to stay, because those investments need to scale up to keep pace. And then we see more sort of regional areas or particular areas of focus in in certain markets. So for example, carbon capture and storage in the UK being a particular level of interest for our clients. The UK government has committed £22 billion to support that and build up that industry. We've seen the first FID decision on a project; that will require project financing and equity raises, and we'll see more projects coming through during 2025. And then I think biofuels, particularly on the aviation side. When we look at the EU for a minute, there's significant support for blending mandates, which means that the airlines need to blend e-fuels and sustainable aviation fuel alongside traditional jet fuel, and that will spur on projects in that space. And then finally, everything around software that enables the energy transition. I think climate tech is certainly a theme that both our financial sponsor clients as well as, of course, our tech clients are very focused on.
Trevor Gardner
Definitely a theme we're seeing across our business is companies across all sectors thinking about this topic and thinking carefully about it. Could be lots of debate or discussion on which technologies will emerge. The one thing that's probably less debatable is it's going to take a lot of capital. And so when you think about the year ahead or the years ahead, you know that's obviously a key focus for us as a provider of capital and a facilitator of capital flows. If we think about capital and where it will come from for the sector, and who some of the major players would be, and what some of the opportunities are, maybe you can delve a little bit into that.
Ralph Ibendahl
Yeah. I mean, there's no doubt that this, this trend, will continue to require and attract significant investments. There was just a Bloomberg Energy Finance (BNEF) report out yesterday looking at capital invested in the sector in the energy transition in 2024 and total number is $2.1 trillion in 2024 up from 1.7 trillion the year before. Now you know, if you break that down into…where does it go exactly, and who's the provider of that capital. First, it's worth saying that China is the largest market, so attracts the most capital out of any market, and then the US and Europe follow that suit. And actually, China has been growing, the US has been stable, and Europe has slightly declined. And then the second piece of that is where is the capital going and coming from? So it's going into transportation, EVs, in particular, renewables and grids, those are the top three in terms of capital deployment, and then their range of new technologies. We see appetite from venture capital, from growth equity, from infrastructure funds, from sovereign wealth funds, all of which are looking to deploy into the sector and play different spaces and different sub sectors in different regions, but they're all seeing an investment opportunity. Of course, beyond the financial investor universe, you also have the strategic players who either have businesses that they're looking to decarbonize, or they have businesses that are playing and decarbonization and are looking to grow, and they are equally playing, not just through their corporate venture capital arms, but also in terms of the strategic decisions that they're making of where do they position their business, and where does the investment flow? And so our strategic clients, equally, are actually quite interested in in, how do I play this theme, both as a growth play and also as a decarbonization play and differentiating against the competition.
Trevor Gardner
Terrific insights. When we think about all those players and, clearly the volatility and the change that's inherent in the environment and maybe amplified by some of the political changes, what advice do you give people on how to navigate this complexity, and how do you advise clients as they think about the years ahead and either deploying capital or executing on strategies around energy and energy transition?
Ralph Ibendahl
Yeah, it's clearly a very evolving environment. The need for advice in truth is certainly there. And we're hearing it from our clients, looking to engage with us and trying to understand how best to position themselves. So if you're a company that's got some innovative technology, that is looking to raise capital to take your business to the next level. It's all about number one, preparing well. What does that capital that you're looking to raise get you, where does that take the company, what are the risks associated and, what are the returns that investors can expect? In this market, one has to be, you know, very, very clear on, on where the money goes and what it's used for. And then you have to go to the right people, you have to get have the right access. You have to be able to convince investment committees and demonstrate why your business is better, bringing out that USP is really important in in in attracting capital into the mix. Of course, I think having the right advisor that can help you that with that access is important. And of course, the capital is global, and it can choose where it can go. And so one of the reasons we have a global private capital group is that we can go to investors that are interested in different areas. So, you know, maybe the right investor is in Europe, or maybe in the US, or maybe in Canada, or maybe in Australia or in Asia. It may be a strategic, it may be a financial and so, I think what we find is that actually spending more time thinking about who's the right fit for your company pays dividends later on in terms lowering the execution risk. I think when it comes to strategic positions, that's much more about. ‘What am I really trying to achieve? Which businesses do I need in my portfolio? How much can I grow them? What's my capital position? How do I capital-recycle if I need to. So both of those deal with capital and strategic positioning, but they’re obviously slightly different.
Trevor Gardner
One of the things that I've seen a lot of working with you and your partners in the space, that maybe differentiates this from some other growth sectors, is lots of upfront capital for many of these businesses transitioning into infrastructure like cash flows over a period of time. And there's an interesting combination there, where in some other growth sectors, it's all about equity. Often at the start, it's all about equity, but setting things up right for debt in the future, whether that that be project finance, whether it be high yield markets, whether it be other forms of leverage, can be really important in the sector as well. That's something I think that you know, ties in well with what we can do, but also is a bit of a challenge sometimes for companies as they're balancing that initial raise versus capital to come.
Ralph Ibendahl
Yeah, I think you're spot on. And I think the biggest challenge at the moment in this market is, what people call, the missing middle or the valley of death, which is basically after the initial raise, you know, you've got your VC anchor investors in there. You now need to scale up. And in energy transition, it goes asset heavy quite quickly. And so it means you need to, you know, you need hundreds of millions, as opposed to, you know, tens of millions. And while you're still in that scale up phase, how do you attract that really sizable amount of capital into your business to grow the business? And I think that's where, you know, growth equity investors are needed. We are seeing more of that capital being raised. But if you can get through that missing middle and have the right investors on board, and you can get to your projects, you know, being sort of at FID stage, that's, of course, when the infrastructure capital, the project financing, the debt, when all of that can be mobilized. You're well placed to be able to raise the debt and the equity. And the good news is both of those markets are wide open.
Trevor Gardner
Ralph, it's been a great discussion today, bringing it all together. If you were to focus the audience on two or three things that are the most important to remember about energy transition, especially against both this backdrop in the year ahead, what would they be?
Ralph Ibendahl
Yeah, I think, great question. Number one has to be, capital is flowing into the transition. You know, 2.1 trillion, 2024 globally, that's a very significant amount. So, that's great to hear, but it also means that there's significant opportunities for all of our clients and everybody looking at transition to be a part of that. The second is the political environment will continue to change. We've got elections in Germany, we've got elections in Canada. We've got uncertainty in France. This will continue, and anybody playing in the energy transition will need to be alive to those changes. And just consider how that's impacting their capital raise, their deployment, their growth opportunities, their business set up, and we're very happy to work with anybody to think through how best to position themselves in that in that evolving landscape. And thirdly, let's not forget, this isn't just about decarbonization and going to net zero. This is also about growth. I think the data center boom is there. It will require significant capacity additions, and there will be new technologies and new things changing. That means that we this, this transition won't be linear, and technology will change, will evolve, and I think that growth opportunity exists, and we're well placed with our global setup and all of our bankers around the world to find interesting opportunities for anyone looking to play in the space.
Trevor Gardner
Definitely interesting times and, Ralph, great insights. Thanks very much.
Ralph Ibendahl
Thanks very much.
Trevor Gardner
You have been listening to Strategic Alternatives, the RBC Capital Markets podcast. This episode was recorded on January 31, 2025. Listen and subscribe to strategic alternatives on Apple podcasts, Spotify, or wherever you get your podcasts. If you enjoyed this episode, please leave us a review and share the podcast with others.