The path to green energy is getting messier

The shift away from oil and gas looks increasingly more expensive and further out

The energy transition is getting a dose of reality.

Offshore wind projects are being scrapped, and renewable-energy companies’ share prices are tanking. In the U.S., automakers are reining in electric-vehicle plans as demand falters.  

Meanwhile, the oil-and-gas industry is embarking on a round of megadeals enabled by soaring profits and is pushing more forcefully the idea that fossil fuels will be around for a long time yet. Climate-warming carbon emissions are expected to climb to a record this year, some researchers say. 

“There will be no easy solution or quick fix to the energy transition,” James Yardley, an executive at pipeline operator TC Energy TRP 0.97%increase; green up pointing triangle, told an audience at an energy-transition conference in Houston this past week. Energy-mix forecasts show that natural gas, oil and renewables “all play significant roles out to 2050,” he said.

The shift away from oil and gas is still happening. Solar and wind capacity is growing fast, governments are rolling out policies to support low-carbon technologies and billions of dollars are flowing into projects ranging from hydrogen production to electric-vehicle charging stations.

Investment giant Brookfield Asset Management last year collected $15 billion in capital for an energy-transition fund and is now raising a second fund that it expects to be even bigger.

But Brookfield is also seeing increased amounts of money flowing into more traditional types of energy assets, such as liquefied-natural-gas facilities and natural-gas pipelines, which are included in its infrastructure business. The asset manager is now raising its biggest-ever infrastructure fund and has already exceeded its target of $25 billion.

“The need for energy is not declining on a global basis,” says Matthew Hutton, managing director responsible for energy investments in the infrastructure group at Brookfield.

With headwinds ranging from high interest rates and inflation to geopolitical tensions driving an increased focus on energy security, the path to a low-carbon future now looks less straightforward, rockier and more expensive than it did just a few years ago.

“I think the transition to a more ESG, solar, wind et cetera world is going to take a lot longer,” said Jeffrey DiModica, president of Starwood Property Trust, during an earnings call this past week.

A big chunk of the clean-energy industry’s woes are macroeconomic. Some of the worst-hit companies started big, expensive projects before pandemic supply-chain bottlenecks helped send the cost of materials such as steel soaring, and interest-rate increases made financing more expensive.

In the U.S., dozens of renewable-power developers have increased prices they are charging for electricity and rewritten contracts to try to recoup costs. 

French power company Engie ENGI -0.23%decrease; red down pointing triangle has raised many of its wind- and solar-power contract prices in the U.S. around 50% compared with before the pandemic, as financing partners demand steeper margins for the high and uncertain interest-rate environment, says David Carroll, the company’s North American business head.

Although Engie has seen some customers recoil from those higher power prices, the demand for green energy has been so strong that the company is still on track to hit its aggressive goal of installing an additional 12 gigawatts of renewables in the U.S. by 2030, Carroll says.

Still, other companies have pulled out of deals completely, such as Danish renewable-power developer Orsted, which this month said it would abandon two wind projects that it was building off the coast of New Jersey, booking a $4 billion loss to do so. It cited factors including supply-chain issues and interest rates.

Many other wind developers have taken hundreds of millions of dollars in losses on U.S. offshore projects this year, throwing into doubt the Biden administration’s goal of deploying 30 gigawatts of such power by 2030.

“A lot of these contracts were entered into when the world was just awash in cheap capital,” says Abraham Silverman, who until earlier this year was working with New Jersey’s public-utilities board on its offshore wind and solar projects.

Silverman says he was disappointed to see Orsted walk away from the New Jersey projects, since “it was something I spent the last four years of my life working on.” Still, “the financial situation on a global basis has fundamentally changed—at least for the foreseeable future,” he says.

Such troubles have helped push down share prices for many renewable-power companies, with Orsted’s shares more than halving in value since the beginning of the year, and a big exchange-traded fund that invests in clean-energy stocks, the iShares Global Clean Energy ETF, down 35%. 

As clean-power development faces hurdles, many fossil-fuel companies are encountering less pressure to rush away from oil and gas than they had a few years ago. A big reason is geopolitics, combined with a growing pragmatism as companies and governments find decarbonizing tougher than expected.

The Ukraine war focused governments on energy security after a sharp drop in Russian oil and gas supplies sent fossil fuel prices soaring and led to energy shortages around the world. The disruptions added force to arguments that the energy transition needed to move more slowly, and that it was dangerous to call for sharply trimming investment in fossil fuels, as energy watchdog International Energy Agency has done in reports on steps needed to curb climate change.

The U.S. in particular has also seen a political backlash against climate change-focused investing, with a number of Republican-led states and conservative lawmakers pushing for curbs on ESG—or environmental, social and corporate-governance—investments. Investors pulled a net $2.7 billion out of U.S. sustainable-investment funds during the three months through September, while a growing number of U.S. funds dropped ESG-related terms from their names, according to Morningstar.

Energy executives also point out that economies such as those in the U.S. or Europe will be able to shift to cleaner power sources and electric cars much faster than the rapidly growing and modernizing economies of Asia and Africa, which will need increasing amounts of energy for decades to come. 

“There’s this notion that it is going to be a linear energy transition,” said Daniel Yergin, vice chairman of S&P Global and a veteran chronicler of energy trends. “It’s going to unfold in different ways in different parts of the world.”

Energy giants Exxon Mobil and Chevron CVX 0.41%increase; green up pointing triangle, which made windfall profits as prices rose during the past few years, are now using billions of dollars of that cash to snap up more oil and gas assets, arguing that the fuels will be needed for a long time to come.

Some analysts say such consolidation isn’t necessarily a step back for the energy transition, since the companies have bought existing players that have oil and gas holdings that can be harvested quickly—rather than pumping money into looking for resources that could take decades and billions more dollars to develop.

But investors are also more welcoming to such moves than they were just two years ago, when activist Engine No. 1 won a proxy fight to get three of its director candidates appointed at Exxon, arguing that the company didn’t have a good enough energy-transition and climate strategy.

These days, energy companies are more likely to be challenged by investors for putting money in clean-energy businesses with lower returns, says George Bilicic, a Lazard managing director in charge of power, energy and infrastructure.