Perhaps history will remember 2022 as the year marking an inflection point for the global energy sector. 

Russia’s invasion of Ukraine, and the latter’s dogged resistance, became the most transcendental geopolitical event of recent years, with a direct impact on how countries perceive the risks to their energy security. Europe, as the epicentre of the event, is where the impact has been most evident. But in North America, the conflict put a sharp focus on the role of government and industry players as global suppliers of energy resources. 

In the US, nowhere is the swing in the zeitgeist more evident than in the shifting stance of the current administration. Where officials from the Biden-Harris camp began their term in 2021 by locking horns with the oil and gas industry, 2022 brought a change in attitudes. And the Inflation Reduction Act – climate legislation that has become the envy of the world – crystalized the urgency of the moment by including generous incentives for a range of mature and nascent clean energy technologies as well as concessions for traditional energy interests and the oil and gas industry. 

“Moving too fast could end up creating unintended consequences that will hurt people and cause backlash,” Secretary of Energy Jennifer Granholm said in recent remarks, recognizing that despite the initial “butting heads between the oil and gas industry and the administration,” both parties were still able to find ways to work together for the public good. Granholm pointed to a commitment from the administration to a “managed transition” that would not eliminate the use of fossil fuels by 2050, as the net-zero approach implies. 

The growth of LNG exports from the US is among the most visible trends in 2022. While Asian offtakers remain the larger destination of LNG trade globally, as reflected in a report by Columbia’s Center on Global Energy Policy, European offtake of US LNG dramatically increased this year, according to S&P Global Commodity Insights. 

In November, in a meeting of the US-EU Task Force on Energy Security, participants welcomed having surpassed a commitment to increase supply by 15 bcm of LNG to Europe in 2022. Between January through October, approximately 48 bcm of LNG was exported from the US to the EU, which represents 26 bcm more than for the full year of 2021. Plans for 2023 foresee maintaining a high level of LNG supply to Europe of an additional approximately 50 bcm as compared to 2021. 

But in the same meeting, participants acknowledged the environmental impact of LNG production and consumption and the need to boost efforts to reduce emissions. 

Decarbonizing the economy 

“North America seems to have more of a dual focus on both energy security and energy transition rather than a full shift from one to the other,” says Jason Berg, managing director in Macquarie Capital’s Infrastructure and Energy Capital Group, the owner of companies like LNG platform Wavecrest Energy and RNG developer Aerogy. 

Berg points out that despite a growth in demand for conventional energy in North America, the passing of the Inflation Reduction Act IRA created incentives that made North America the focal point of the energy transition. For example, the IRA features a 10-year tax credit for RNG projects; and both the 45Q tax credit for carbon capture and incentives around hydrogen hubs are significant. Geothermal tax credits reach in some cases 60%, and nuclear energy is now entitled to a production tax credit. 

“From our perspective, the transition continues unabated despite a resurgence of growth in conventional energy as well,” Berg adds. “If anything, we are seeing more excitement and belief in the economic viability of things such as carbon capture and hydrogen than before, due to the massive incentives provided by the IRA that, in many cases, take these sectors from marginal to economically attractive.” 

Data from Infralogic suggests that, even prior to 2022, equity investors and large industry players started to create joint ventures and other partnerships backing the development of greenfield projects in the sectors of green and blue hydrogen. The early players saw their bets rewarded with the passing of the IRA. 

Between 2020 and 2022, equity investments in the hydrogen sector nearly doubled – from USD 530m in 2020 to USD 1.11bn in 2022. Meanwhile, carbon capture investments begin to appear in the data in 2022, with a value of USD 1.06bn. 

However, Berg notes that the total capital required to construct carbon capture or hydrogen projects can be quite large. “Those projects are generally still in development, with most of the capital associated with them being required in the coming years,” he says. 

Moreover, the IRA provides incentives for innovation. In early November, the White House announced that USD 1.5bn would be used to build and upgrade America’s national laboratories to help cut greenhouse gases by 50-52% in 2030 and get to net-zero emissions by no later than 2050. 

“If we recognize that we will still be using fossil fuels by 2050, then a lot of effort needs to go to devising and implementing decarbonization solutions,” says an officer at the Department of Energy. Innovation can be key in finding more efficient ways to manage carbon emissions. “Capturing carbon from the emission site is one alternative, but we could also implement solutions that would suck it more widely from the atmosphere, in which case we need an answer for what to do with it,” the officer adds. 

A very clear use right now is by the oil and gas industry, where companies can use it for enhanced oil recovery. Right now, carbon management is rather a waste management issue: difficult to monetize. However, if a technology was found and implemented to put carbon into use, for example for construction, for plastic, and other applications, then in the medium to long term CO2 could go from a useless waste to a useful commodity. Companies in the venture capital sector are working and investing in carbon capture and uses, the officer points out. 

Lenders will join later 

While equity is likely to be drawn to technologies that so far were considered less attractive due to cost, novelty, or higher risks, lenders tend to move at a slower pace. 

Certainty, reliability, and quality of cash flows to securitize CCS or hydrogen projects remains a challenge, and project finance lenders are traditionally not keen on backing merchant transactions. 

“I expect banks to keep supporting the already traditional renewables, covering construction risk as well as acquisition financings and refinancings,” says Ralph Cho, co-head of Power & Infrastructure Finance (PIF) client group at Investec. “Although the new infrastructure law and the IRA legislation will encourage equity investment in technologies such as green or blue hydrogen or carbon management, banks still need more clarity on cash flows and a better understanding of risks to find the pricing and adequate structures before participating in project finance solutions.” 

The government, on its side, understands it, says the DOE officer. The officer concedes that even the DOE Loans Program Office, which is commanded and encouraged by the administration and Congress to deploy capital, finds challenges, because they are also under the mandate to be the stewards of taxpayers’ money. “For many of these projects, there is no track record, no precedent. We must come up with the evaluation of risks and price it. The insurance industry needs to be involved, the rating agencies too.” 

As for the wider power and renewables sector, Infralogic data points to a drop from 2021 to 2022 in debt raised for greenfield projects and refinancings, symptomatic of a period when developers were grappling with lingering issues with supply chains, regulatory changes, labour shortages, higher costs of funding and inflation. 

For creditors, 2022 was a year of volatile markets. Debt capital markets remained inhospitable terrain for most of the period, particularly with DCM transactions in the energy sector falling precipitously to USD 4.1bn in 2022 from USD 16.57bn in 2021, according to Infralogic. 

Lenders and borrowers prolonged negotiations as the cost of funding went up. The spread for a flagship deal like the financing of the Champlain Hudson Power Express project (CHPE) hiked to 175bps from 150bps over the benchmark. 

Headwinds are anticipated to keep blowing. 

“We are going to face 2023 in an environment of volatile markets, where pricing is diverging between the A loan market and the B loan market,” says Cho. “In addition to the usual hurdles of project development, infrastructure and energy developers will have to negotiate financial transactions in a less liquid landscape,” he adds. 

Those ESG-focused investors, after raising a considerable volume of capital, are likely to find difficulties in deploying it all. Outside ESG-targeted sectors, liquidity is perceived to be limited. 

“We all feel that liquidity is shrinking, and it is very selective outside the ESG universe. Meanwhile, the cost of funding has crept up for all. We did not see many thermal generation projects closing funding in 2022, and we do not expect them in 2023. However, we anticipate more late-stage development financings for renewables, credit available for RNG projects and more activity in digital infrastructure,” Cho adds. 

Berg, from Macquarie, agrees that RNG could be a winning sector in 2023. “The sectors drawing most capital are conventional renewables, but increasingly also RNG given its versatility as a drop-in fuel that could be used for transportation, heating, hydrogen production, etc. The foundation for biogas production has been laid with multiple prior subsidies in varying forms, which will help to accelerate its adoption going forward.”