For the first time, energy transition investment is on the brink of overtaking fossil fuel investment. Looking ahead to the next 12 months, rising energy demand, expanding policy aid and healthy balance sheets will incentivize the industry to continue aggressively investing in the energy transition. This shift will reshape the way organizations power their businesses.

Let’s consider the data around the rise in energy transition investment. In 2022, global energy transition investment—defined as investment in long-term structural change across industries—totaled $1.1 trillion, up 31% from the prior year. In particular, investment in electrified transport and renewable energy (wind, solar, biofuels, biomass and waste, marine, geothermal, and small hydro) is leading the pack. Renewables are still the largest segment of investment, but electrified transport is the fastest-growing (up 54% in 2022 as compared to 17% for renewables).

Global energy transition investment

Numerous factors are driving this investment at a time when inflation is high and recession fears are prevalent. The recent energy crisis spurred by the Russia-Ukraine war and resulting focus on energy security have accelerated the push to invest in fossil fuel alternatives. The need for reliable, affordable, and clean energy sources became glaringly evident as geopolitical tension and longtime underinvestment in production wreaked havoc on energy markets over the past year.

The industrial manufacturing sector plays a crucial role in the success of the energy transition and meeting U.S. net-zero goals, as it accounts for 24% of greenhouse emissions in the United States, according to Bloomberg. This is one of the most challenging sectors to decarbonize given its heavy use of fossil fuel, expensive equipment and complex processes that cannot be reconfigured overnight. However, more possibilities exist now than ever before for industrial organizations to reduce the carbon footprint of their operations.

Decarbonization opportunities, both direct and indirect, will be at the top of the priority list for industrial manufacturers over the next decade. Here are some specific actions companies might take toward meeting the broader goal of decarbonization:

While investment in renewable energy is clearly increasing, it still may not be enough to achieve the 2050 net-zero goal. Policy changes and private investment will be crucial for this investment to continue to grow and, ultimately, accelerate. One program for industrial manufacturing organizations to watch closely is the U.S. Department of Energy’s new Industrial Demonstrations Program. This program, funded partially by the Inflation Reduction Act, will mark the largest investment in industrial decarbonization in American history, at $6 billion of funding. 

Eligible uses of the funding include smart manufacturing technologies, sustainable manufacturing measures, and efforts to make manufacturing processes more energy efficient. Industrial organizations of all sizes should determine whether they may be able to take advantage of any funding available from this program.

It is important for middle market organizations to understand how the landscape of the energy market will change over the next decade and what the new energy mix and related technologies will mean for their business. To meet emission reduction goals, organizations of all sizes will need to invest in clean energy technology and diversify the sources of energy they use day to day. Leadership teams will need to stay abreast of emerging policies that can assist organizations in the quest for a cleaner future. 

This article was originally published on RSM US LLP.