NEW YORK – September 7, 2023 –Although the world’s committed investments fall far short of the annual capital required to reach net zero by 2050, capital itself isn’t necessarily the constraining factor in the energy transition. It’s available in most energy and natural resource industries, but instead of being reinvested into low-carbon growth areas, an increasing percentage is being returned to shareholders. In the oil & gas sector, for example, only 43% of capital was reinvested for growth in 2022, down from 58% in 2018. The mining sector reinvested 44% in 2022, down from 56%. These are among the findings of Bain & Company’s Global Energy and Natural Resources report.

In utilities, the share of capital being reinvested for growth is steady and capital expenditures are increasing, but it’s not yet enough to fully modernize and expand the grid for the target levels of renewable energy and electrification.

The report reveals that only 19% of energy and natural resource executives surveyed see capital scarcity as a barrier to scaling up low-carbon businesses. Their primary concerns are return on investment and customer willingness to pay, with 78% of executives selecting this as a top barrier to decarbonization.

“Energy transition ambitions demand record-setting investment in many sectors, and so far, capital expenditure is significantly lagging,” said Joe Scalise, global head of Bain & Company’s Energy and Natural Resources practice. “Far from this being an issue of ‘dry powder’ or capital availability, it’s an issue of customer value, willingness to pay, and the ability of policymakers and regulators to set the rules of the game to generate sufficient returns.”

Making the math work for the energy transition

Bain's analysis says that assuming a 10% average cost of capital, every $1 billion in capital deployed requires about $160 million in revenue from customers each year. The trouble is that although consumers are concerned about climate change, they may not be willing to pay higher bills to help combat it. Recent Bain surveys found that less than half of US and EU consumers are willing to pay even a small increase in their residential electric bill or fuel price to reduce emissions. Instead, they prefer raising taxes on wealthy  households, suggesting that consumers believe government should intervene to bring down prices of new technologies on consumer bills.

How bottlenecks and scarcities shape energy transition pace and profits

Viewing the energy transition through the lens of bottlenecks and their resulting scarcities can help companies spot business opportunities and shape the pace of the transition. Scarcity governs access to resources, infrastructure, commodity flows, and profit pools. When demand exceeds supply, it creates economic rents that induce investment to ease the scarcity.

Scarcity will shape and inhibit investment decisions as companies seek access to skilled people, manufacturing and processing capacity, and raw materials and other inputs. For example, the world isn’t extracting enough metals and minerals critical to renewable energy technologies to meet net-zero targets. Bain’s analysis shows nickel and cobalt production need to double, while lithium must increase sevenfold. Bain’s upper-range supply forecasts anticipate significant shortfalls.

In the case of a scarcity of revenue - not having enough demand or customers willing to pay to generate returns to capital - the only other major source of funding would be governments (taxpayers). This could take the form of taxing alternatives, subsidies that alleviate the cost of production, or direct funding.

According to Bain research, 125 of the top energy and natural resource firms by market capitalization continue to modestly increase capital allocated to low-carbon growth areas. However, developing new energy systems and infrastructure at anything near the pace expected for the transition may push supply chain capacity beyond the breaking point, spurring transformation in some cases. Energy transition ambitions demand record-setting growth in many sectors.

The US would need to more than double its energy transmission capacity, from growing at about 1% per year for the past decade, to achieve the full potential of the US Inflation Reduction Act (IRA). And to stay on track for the end-of-century warming target of 1.5 degrees Celsius, annual transmission capacity growth will have to increase to between 5% and 6%.

Multiple forms of resilience crucial through the transition

Bain’s research shows energy and natural resources executives may be overconfident in their ability to manage the physical impacts of climate change. Nearly all of the executives Bain surveyed said they were very or somewhat confident in their ability to manage these risks, but with climate-related events increasing in severity, additional work and investments will be required.

Bain’s report indicates people often fail to accurately assess the magnitude and likelihood of rare events, such as the physical effects of climate change, since most have not experienced them firsthand. Ignoring high-risk scenarios is, increasingly, a short-sighted strategy. The tumult of recent years makes it clear that the energy and natural resource transition is likely to become more disorderly, even chaotic.

In other aspects of resilience, executives are more concerned. For example, fewer than one in five are very confident in their resilience to supply chain bottlenecks, which are likely to become even more acute as new businesses with new supply demands—such as new feedstocks for recycling or biofuel—attempt to scale. Some 40% stated that investing in supply chain resilience is a top priority for the next three years – a 10% increase compared to the last three years. The number of respondents aiming to invest more in supply chain sustainability also increased by 3%.  

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Editor's Note: For more information or interview requests please contact Katie Ware at katie.ware@bain.com or +1 646 562 8107.