Taking the Pareto Principle to the energy transition
Infrastructure Investor 07/08/2024
"There's no reason why the 80-20 rule shouldn't apply to the energy transition, and those interesting 20% may be found far from home.
It is well known that whatever problem you attack, you can usually get a lot done in comparatively little time, while the last bits, the finishing touches, will keep you occupied for ages. Known as the Pareto Principle, it is to be expected that a mere 20 percent of your input will provide 80 percent of your output.
This 80/20 rule is not entirely accurate. But it's a useful notion and, when considering the energy transition, it may be worth paying a little more attention to this rule at every level, economically as well as politically.
Crucially, CO2 does not care about borders, so conceptually, it would make sense to first decarbonise where the effect would be greatest, and most immediate, regardless of jurisdiction. We ought to replace lignite or oil-fuelled power plants wherever they are first, and worry about out-phasing up-to-date natural gas plants later.
Or just follow the money: with grid connections hard to come by in most developed countries, most low-hanging fruits have been picked and those first and best 20 percent of assets may no longer be in play. Why not go where there are still easy pickings?
Objections usually center around 'risk', but the idea that risk is always higher further from home is beginning to look a little antiquated as the political scene is polarising in core OECD countries. Indeed, Amber Infrastructure argues that "now is the time to go into countries like Romania and Bulgaria because you can still achieve attractive risk-returns profiles.
They are not alone.
Opportunities in Nepalese hydro are getting a look-in, and Augment infrastructure is going for Asia and Latin America. Newly launched Tower Peak Partners sees opportunities in all Americas as well as in Caribbeans, while Brookfield Asset Management, Macquarie Asset Management and Copenhagen Infrastructure Partners are all involved in India.
Interestingly, General Atlantic decided not to go for a run-of-a-mill OECD-focused manager but chose emerging markets specialist Actis when looking for an infrastructure take-over target, while at CIP, Taiwanese offshore wind is a major play. According to incoming pension Danmark, COE Peter Stensgaard Mørch, representing one of the CIP's anchor LP's, investors can make a more significant difference to the energy transition in places like Taiwan compared to countries that are further along their energy transition journey, such as Danmark.
Precisely.
The goal is not net zero at home, but net zero overall, so while working on decarbonising the last 80 percent at the usual locations, maybe keep in mind that there may be better premiums and more immediate reductions in CO2 to be had elsewhere.
ICYMI
(...) More is needed to preserve equity value in the face of climate change, according to new EDHEC-Risk Climate Impact Institution research. to keep losses below 10 percent will require prompt and robust abatement action while over 40 percent of global equity value is at risk if decarbonisation efforts do not accelerate. One for the beach, perhaps. If it's not too hot."
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