$18 Trillion Capital Gap Is Threatening the Green Energy Transition

• A Staggering 90% of the Shortfall is Traceable to Electricity and End Use Investments
• Inflation, High Capital Costs, and Supply Chain Pressures Are Slowing the Energy Transition
• Companies Are Optimizing Capital Structures for Energy Transition Investment with Deals Surpassing $320 billion in 2023 

BOSTON—Closing the $18 trillion gap to fund the green energy transition through 2030 is being slowed by negative investment conditions. Challenges include inflation, supply chain constraints and pressures, and higher costs of capital. However, the energy sector has responded proactively. Total energy sector transactions exceeding $320 billion so far in 2023 show that the industry is fine-tuning capital frameworks for the energy transition, according to a publication released today by the Boston Consulting Group (BCG) Center for Energy Impact. Titled Bridging the $18 Trillion Gap in Net Zero Capital, the report is based on an analysis of 260 of the world’s largest energy companies across power and utilities, oil and gas, and private equity.

The publication builds on the recent BCG Center for Energy Impact report The Energy Transition Blueprint, which showed that an investment of $37 trillion is needed by 2030 to finance the energy transition. Of this, $19 trillion is already committed over the next seven years, with 20% forecast to come from government spending, and 80% from private capital. A broad mix of investors is expected to contribute to the latter, including a $2 trillion share from private equity, $3 trillion from the oil and gas industry, $4 trillion from national oil companies, and $6 trillion from utilities companies.

Committed investment includes nearly $2 trillion in new government spending, while company targets suggest a 15% increase in energy expenditures between 2023 and 2027, with an increasing share allocated to low-carbon investments. Approximately 70% of the capital flows expected through 2030 are forecast to originate in the US (30%), China (19%), and Europe (18%).

“The green energy transition requires a true partnership between the private sector, policymakers and regulators, and end users,” said Rebecca Fitz, a BCG Center for Energy Impact partner and associate director, and coauthor of the report. “This critically important process will happen only if all stakeholders commit to overcoming the growing headwinds and finding strong incentives for green investments.”

Electricity and End Use Remain the Most Challenging Areas

The vast majority of the $18 trillion shortfall, almost 90%, is traceable to two areas: electricity, including renewable power investments, and end use, such as consumer and industrial spending to bring down energy demand and emissions. The investment environment for renewables has been adversely impacted by the higher cost of capital, especially in the wind sector and, geographically, in North America. However, early signs point toward consolidation in renewables to support continued investment, and power and utility companies are divesting assets to reduce debt and meet financing requirements in the face of these challenges. For end users, a massive $9 trillion investment shortfall is expected through 2030. Challenges include bureaucratic hurdles, insufficient infrastructure, and weak business cases. In addition, most prospective investments, including 93% of proposed carbon capture projects, remain in the early—planning—stages. 

“The energy sector accounts for almost a third of the world’s annual capex, and its capital intensity rate is more than double that of others,” said Maurice Berns, a BCG managing director and senior partner who chairs the Center for Energy Impact and coauthored the report. “’The massive challenge we are seeing in green energy investment today is that upfront capex investment is much higher as a share of total energy production cost than in traditional hydrocarbons. The high cost of financing we are seeing now matters more than ever.”

Download the publication here.

Media Contact:
Eric Gregoire
gregoire.eric@bcg.com

About the Center for Energy Impact

The Center for Energy Impact (CEI) aims to engage a changing industry in new and different ways by providing challenging ideas to navigate—and accelerate—the energy transition. We shape thinking about the future availability, economics, and sustainability of the world’s energy sources—and the implications for energy companies and energy consumers.