This broader perspective makes the energy transition even more relevant for pension funds, according to De Ruiter. Climate remains an important reason to invest. But in recent years, other reasons have emerged alongside it. “The energy crisis following Russia’s invasion of Ukraine, rising geopolitical tensions and concerns about Europe’s competitiveness have shown that energy is not only a climate issue,” says De Ruiter, “but also an economic and strategic issue.”
This realisation has turned the energy transition into a broader investment theme that will shape Europe’s economy for decades to come. It also comes with many investment opportunities for long-term investors that want to create societal impact.
Major investment required
“The energy transition in Europe needs around EUR 800 billion in investment every year,” says De Ruiter. “A huge amount, but the cost of doing nothing is also rising.” She points to the EUR 600 billion that went to consumers and businesses in Europe in 2022 alone to soften high energy prices.
“Instead of continuing with these expensive short-term fixes, we would do better to invest in an energy system that is ready for the future.” Would such high investment needs put investors off? De Ruiter does not think so. “We are talking about physical infrastructure with a long lifespan, stable cash flows and a solid return,” she says. “This fits well with the long-term obligations and social role of pension funds. In that sense, pension funds are a natural source of long-term capital for this kind of infrastructure.”
A major overhaul of the energy system
According to De Ruiter, most people still see the energy transition as simply replacing fossil fuels with renewable energy. In practice, the change goes much further. “Although we are not building a completely new system from scratch,” she says, “we are, step by step, turning the current energy system into one that is far more decentralised and flexible.”
The old system relied on a small number of large producers generating energy centrally and distributing it to end users. The system now taking shape looks very different. “Soon, market and energy prices will no longer be shaped by just a few big players,” says De Ruiter. “Instead, there will be many smaller players. The new system will be layered and decentralised, with local generation and energy storage. This requires different solutions and a different way of financing.”
Grid congestion increases the need for flexibility
Europe is now in the middle of this change. In recent years, a lot of renewable energy generation capacity has been added to a grid that was not built for such large amounts of variable electricity. This has led to bottlenecks, including grid congestion. “That’s why the focus is now shifting to creating more flexibility”, says De Ruiter.
More and more funding is becoming available to improve and enhance this flexibility. For example, more initiatives are linking businesses directly to local energy sources. Battery storage is also becoming more important. It helps to better match supply and demand and makes the whole energy system more flexible. The first phase of the energy transition focused mainly on building wind and solar parks. Now the focus is shifting to how renewable energy can be stored, distributed and used efficiently.
Batteries
Battery storage is one area where huge progress is being made. “Five years ago, we started investing in battery systems with a capacity of 10 megawatts,” says De Ruiter. “Today we are talking about 300-megawatt batteries. Institutional investors are also joining in as financing structures are becoming more mature. These technologies have proven themselves and can be easily scaled up.”
New opportunities are also emerging in local energy hubs, behind-the-meter solutions and systems that connect different energy technologies. De Ruiter believes these developments are interesting for pension funds as well, because many of these projects need long-term investment and are based on infrastructure with a long lifespan.
The next phase: heat
After generation and flexibility, De Ruiter sees a third area emerging: cleaner industrial heat. A lot of attention now goes to the electrification of industrial processes. But the bulk of industrial emissions is linked to the use of heat. De Ruiter sees investment opportunities in technologies like heat storage, thermal batteries and power-to-heat, which can help decrease industry’s reliance on fossil fuels.
“The technology already exists,” she says. “The next step is developing scalable business models and gaining insight into long-term income streams. Only then can these solutions be financed on a larger scale.”
Resilience as a new reason to invest
De Ruiter is not overly concerned about the political resistance in the US. The energy transition may not move in a straight line, but she believes it cannot be reversed. Renewable energy makes economic sense, also on the other side of the ocean.
In Europe, the case for the energy transition now seems stronger than ever. Large economic and political developments are pushing it forward. The energy crisis that followed Russia’s invasion of Ukraine exposed the strategic risk of Europe’s dependence on energy imports from outside the region. More recent tensions in energy markets, linked to the war in the Middle East, have made this even clearer.
According to De Ruiter, the discussion is now increasingly about economic resilience, stable energy prices and strategic autonomy. This also brings the role of pension funds as long-term investors more sharply into focus, as these themes are a natural fit with their societal role and the social impact they want to make. After all, energy is the foundation of almost all economic activity. An affordable, reliable and largely independent energy supply is a key requirement for Europe’s democracies to thrive.
“That’s the crucial question, concludes De Ruiter: “How do we make sure Europe remains prosperous and keeps control over a key part of that prosperity: the price of energy?”
This article was previously published in Dutch on PensioenPro.
