Best way to play the Energy Transition from a career standpoint?
Title.
I'm a student who finds the energy space very interesting and thinks the energy transition is a major opportunity at the moment. What do you think is the best way to position myself careerwise to gain from the upside and develop the necessary skills to succeed without taking on too much risk (i.e. going all in on entrepreneurship etc).
Interested to hear your thoughts and hear where you think the opportunity is today
Energy transition is a meme, nuclear is the way.
Doesn't energy transition include nuclear?
many decades and trillions of dollars away from this
Has a lot more to do with global governmental/societal pressure than actual financial or technological capabilities — but I agree it’s really not certain if nuclear is truly the chosen path forward (in our lifetimes at least)
Energy banking in renewables group -> infra or renewables PE.
Thanks SB'd.
Do you think it's worth doing an internship with an Energy (Battery energy storage systems) investment company or keep trying to get an internship at an Energy IB boutique?
Both are cool and have pros and cons, you can’t limit yourself to picking one or the other when you have neither though. If it comes up that you have two offers, then you’ll be able to pick and decide but until then you just have to try for anything you like.
Following
I’d work in regular energy IB then transition, not a ton of investment banking deals vs regular energy so you’ll learn a lot more in regular energy. This all assuming you want to start in IB
Power trading - very hot space atm (no pun intended)
Commodities trading (specifically carbon/power/Biofuel markets) or Infra PE. Infra PE especially is growing like crazy right now with so many firms rushing to raise capital. Some SWF’s too might be ok.
Commodities trading is a harder to get into and requires a more technical skillset especially these products where you have to be a quasi quant to even get in (Usually prefer math/physics/engineering backgrounds with strong programming skills).
Thanks,
Are there any good resources you can point me to re power/biofuel trading?
Also, how does the skillset in trading compare to the investing skillset in terms of opportunities to create real value and wealth over time for yourself?
I’m no expert but I’ll give it a shot. I’d start of with reading Trafigura’s commodities demystified guide, very good for understanding the basics on how the industry works. When it comes to trading it’s really more about understanding the supply chain. Everything from how the product is sourced, transported, stored & who the end users typically are as well as the different subsets of products (which can have different characteristics). Just for your benefit this trading isn’t like an S&T desk where you’re just trading behind a screen, your physically moving product so it’s fundamentally different than trading paper markets.
I can’t really speak to the dynamics of specific products as I’m no expert but each product will have it’s own nuances. For instance power markets can be very very technical because of the amount of data you have access too so programming would be essential while something like Oil or Agricultural commodities will be less technical and more relationships driven. It’s hard for me to say the skillset you’d develop because each sub-market in the commodities sector is different and niche but in general I’d assume you’d have a strong understanding of logistics, macroeconomics, geopolitics, relationship building, paper markets trading (more specifically derivatives) & depending on the product programming.
It’s a very different skillset to finance whereby what you’re building is fundamental analysis skills i.e. how to analyse a business and structure deals, and look at things on a much longer time horizon (given traditional IB/PE is not as fast paced as a trading floor). If you’re looking at adding real value it’s tough to say as a merchant you play a very big role in supplying your product so you definitely have an impact but if you’re looking to get a sense of accomplishment from a moral perspective I’d say something like renewable PE takes the cake.
One thing to add is that to land a trading seat is quite difficult and you usually have to spend a few years in MO/BO roles to eventually land one. Again it’s very different to finance because these BO roles are critical to developing a deep understanding of the market you’re trading (usually you do rotations in hedging, operations, ship chartering etc before you get a seat at the table).
For building wealth both careers are very lucrative. A top trader at one of the giants in the space can make silly money 100’s of millions of dollars in fact. There’s a few articles out there of commodity traders who in 2022 made multi-million dollar bonuses. The same can be said for finance but the question is which industry suits you better. Both industries pay top notch and if you’re successful will make you quite wealthy. I will say that as a trader your career will be more volatile and your exit ops will be limited compared to a more traditional finance seat so if you don’t love it I’d advise against it.
I’m at the edge of my knowledge on this so if someone else could chime in would be helpful.
Energy Transition IB is largely a buzzword for now. The real deal flow is still in traditional energy
Do you guys see this sector lasting well into the future? I cover this space and deals are being pulled back, and now especially with Trump in power will escalate away from renewables and maybe even a revision/slashing of the IRA but I guess time will tell.
For now, my seniors and sponsors/pe are definitely worried that this space will die. The technology is still not fully proven, and storage continues to be an issue and the cost factor is very high to build run and maintain these assets.
Yes and no, the long term mega trends are still there but it’ll vary depending on region. Subsidies & regulation play a huge role in this market but you have to think about this over a longer term time frame. There’s peaks and troughs valuations will come down under trump making it cheaper to acquire these assets and the high costs usually aren’t a major issue because revenues are largely contracted (hence you can see LTV’s on these assets of 80/90% sometimes). Demand will also come down for these assets ofcourse but I think the long term drivers of the industry are still there (climate change, aging populations, depletion of natural resources and a desire by countries to be more energy independent). Trumps election in my opinion is a short term headwind to this market and whilst CAPEX requirements are extremely high for these projects, I believe that firms will buy up a lot of these assets at a discount (personally I’m expecting to see some consolidation in this market now). Margins are paper thin in this market so your valuation has to really be on point (hence all the horror stories about infra PE modelling). It’s a very stable business too so when you’re underwriting these assets you usually try to price all the risks via your discount rate. I remember at my previous firm I had to create a paper quantifying every single risk premium we identified for acquisitions in a sub sector of the infrastructure market with justification on why XYZ risk premium was suited for that component. Took forever but goes to show that these assets will likely always be bought up. Valuations will compress , but I think the market will still be solid over the longer term.
Also think about where these assets sits on the risk/return spectrum. Investors aren’t buying these assets to exit after 5 years at XYZ multiple or for capital gain like with real estate. They’re buying it for long term stable cash flow. So from an LP perspective it’s a good diversifier acting as a proxy to bonds: boring & stable. Hence for pension funds & insurance firms these assets are very attractive because they’re generally quite resilient to changes in the macro environment and are largely uncorrelated to other asset classes in both the listed & unlisted space. That diversification benefit is driving that huge demand. Again we can argue on different things Core & Core+ will likely be completely fine whilst deals in the value add region might suffer.
In regards to the technology you’re right but i think it’s a lot more nuanced. Sectors like hydrogen for instance is definitely very early stage but other forms of renewables are proven technologies that work very well. The issue with renewable energy is that it extends beyond the technology of the assets themselves to the state of the grid, and modern technology equipped in houses etc. For instance look at Germany they’ve invested heavily in wind & solar but their grid technology is extremely outdated which ofcourse is leading to capacity issues. There’s still a lot of opportunity in this market for investment and I see it growing exponentially over the next 20/30 years. Geographically though I think Europe is probably the best place to be for this space and the US will likely lag behind for a while unless some sort of demand regulation comes into play (not likely anytime soon).
This is a lot of words for somebody who looked at infrastructure / renewables once or twice and is pretending they know the industry.
1. renewables are not boring, stable or predictable (you’re thinking of utilities - an entirely different business and asset class)
2. Renewables assets are not “always going to be bought up” - there’s a huge crash and cash flow crunch already in Q4 2024 that is preventing transactions from happening
3. hard to believe you work in fixed income when you write “thin margins” and “stable / boring business” - about the industry.
Good answer
I think this sector will continue to advance because there are major political tailwinds / interest in decarbonization / electrification / transition.
however I think with Trump admin and also quite frankly a lot of these things being total shitco, companies will need to actually execute on technology / development milestones to raise further capital vs the environment in 2021/2022
i am adjacent to the space, I hope this shit dies out so I can stop working on dumbass pitches to fake companies
This I think is the "real" short-term impact of Trump to the energy transition. Companies will need to start demonstrating they can actually execute. The current/past-few-years-of IBGYBG ethos that has permeated many of these investments/deals will be gone
Yes, it will undoubtedly last. America isn't the only country, China and India alongside European countries are pouring billions into subsidizing and funding the industry. As long as enough global governments want to grow the industry, there will be activity. Also, you must remember technological progress is non-linear and that solar and wind is significantly cheaper today than it was 5 or 10 years ago meaning there has by all accounts been meaningful progress. The chances of the space truly dying are near zero unless political will worldwide completely shifts to being against renewables and more supportive of fossil fuels.
wind solar and BESS are 100% proven, zero technology risk there
Agreed, technology risk only comes into play for niche carbon capture/ green hydrogen type stuff
Agreed, technology risk only comes into play for niche carbon capture/ green hydrogen type stuff
By going into oil and gas PE. Valuations are incredibly attractive right now in O&G, and once the market realizes the transition is much longer dated than originally thought, O&G will trade significantly higher.
Caveats below, but two cents: Start in a power/utilities group at a bank; failing that, I don't know what kind of entry level positions exist, but go directly to a utility if you can get exposure to how the utility sources power (does it own any generation resources, and are they coal/gas/solar/wind/hydro/nuclear; how much does it buy on wholesale markets, and what generation resources are behind the purchased power).
I think it's fair to say the following about the energy transition: (1) people will always need power; (2) there are great debates about what generation sources power will *and should* come from, now and into the future; (3) power is a commodity so in theory the lowest-cost source should win, but generation/production is local, hence you have all manner of power and commodity markets to iron out differences caused by geography and other factors; (4) the addition of non-fossil fuel resources into the generation mix depends on technical feasibility (e.g., storage), market prices, and regulations - changes to any of these factors can ramp up or cut off the spigot of interest and financing for any particular energy source based on what such changes mean for the economic viability of a particular business model; (5) resource extraction, renewables and grid infrastructure - these are all capital-intensive activities, so there will always be financing needs. Personal opinion, I would add (6) the energy transition will take longer than expected to 'fully' manifest because of inertia / local preferences and the long-lived nature of generation assets - e.g., where there's a choice between replacing capacity from a coal-fired power plant with new solar arrays or a gas-fired plant, there's political pressure to preserve jobs so you can squeeze a few more years out of the coal plant, and then if you've broken ground on a new gas-fired plant which can be called into service when needed so it gets the nod over solar, well then your decision on decarbonization gets pushed further and further out; (7) supply and demand conditions will change faster in the real world than long-term projections called for (e.g., one counterparty wants to get out of a long-term power purchase agreement because market prices have changed drastically since deal signing), and things will break, whether assets or markets; and (8) because of 4 + 5 + 6 + 7, there will be a ton of money spent on the energy transition, but instead of a smooth line of progress, a lot of that money is going to be burned in unproductive capacities, or for those who time smaller cycles well, result in outsize returns.
So how do you capitalize on 1 and 5, while avoiding subsector career risk implied by 4 (e.g., X sector subsidies change, so a particular type of activity is no longer economic, so dealflow dries up)? I think you stick as close to utilities as possible because they're the ones who are ultimately on the hook for providing power to consumers / have to navigate all these different sources, and have the scale such that they're not blown up by taking a risk on any given project. You can keep an eye on the various themes and trends over time, subsectors of personal interest, and if something changes to the state of play in one of your preferred subsectors, you can then try to get in if you're not already there. E.g., the concerns about renewables as intermittent power sources should decrease if/as storage technologies/capabilities get better, so if you're a big solar fan and you see storage becoming more economic, then perhaps there's less regulatory risk to solar's viability and you say 'ok, now's the time to go all-in on solar + storage.' Also, because of 3, even if you start out covering a subsector you don't like, because all sources are in competition, you can compare the costs/viability of different generation sources against each other, to for example, keep tabs on 'what needs to change for my preferred generation sources to be competitive.'
Caveat - this is all coming from someone who was never a power banker, is not a sector specialist, but focuses on energy generally when things get distressed, and has seen poor capital allocation and/or bankruptcies across all different subsectors (utility-scale solar; providers of parts for utility-scale solar; concentrated solar power tower with molten salt storage; residential solar installers; thermal coal producers; upstream and midstream O&G; all the chaos coming out of Winter Storm Uri in Texas (wind farm bankruptcies caused by terms in the contracts through which they sold their production; power co-op bankruptcy; all sorts of market reconciliation issues); a hydroelectric dam where climate change caused production estimates to drop by 50%+ from the time of project design to completion, leaving too much debt to support; merchant power producers, single- and diversified asset bases; nuclear plants).
There’s a commodities trader at nextera that’s making almost 1MM annually in his 30s
Same with Macquarie in their Houston office
Guy even younger than that did 2.5 @ vitol doing veg oil
Look all this debate over whether this energy will still exist in the future ignores the most important fact: the political will in many of the world to subsidize and continue to innovate in this industry. China has poured billions into this as has India, and even America under Biden (sure it might not get more investment in the next 4 years, but America will eventually go back to Dem rule as the parties switch power and renewables funding will be a priority again). As long as there is political will, it will always be an interesting space to invest in solely because there will (as currently exists) billions of incentives into the space. Don't invest against government actions, a ton of money is to be made by following governmental spending, and renewables worldwide is a key government spending area.
TLDR: Follow government capital outflows, stupid.
The three best ways to get energy transition experience as an early-career professional are, in no particular order:
- Investment banking. If you can get on an energy transition team, you can get very wide exposure to the space and get a lot of experience real quick. Project finance isn't a bad route to go if there isn't an energy transition coverage group, but that would likely mean working on more than just energy transition deals. Being a utility banker isn't a bad alternative either that's within IB (see below).
- Infra PE. Most PE firms with an infra strat that has any kind of meaningful exposure to America will be involved in the energy transition (ie - Ares investment in X-Energy, Stonepeak's investment in Dominion Energy's CVOW project, etc).
- Large utility corp dev. Utilities like Dominion Energy, AEP, Duke, etc, all have corp dev teams. They all are doing deals in the energy transition space. This will not change regardless of administration. A change in administration is only really going to impact the way in which these deals are done, not so much if they get done.
There are multiple solid paths you can go down. It really depends on what your preferences are
how feasible is project finance to energy transition IB?
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