5 Ways to Mitigate Risks in Energy Investments

Introduction

In an era where the demand for sustainable and efficient energy sources is at an all-time high, investors are actively seeking opportunities within the energy sector. However, navigating the complexities of energy investments goes beyond mere financial contributions. It requires a deep understanding of the risks, technological advancements, and market dynamics that can significantly impact the outcomes of such investments. Recognizing the importance of these factors, the Global Investment Leaders Club organized a special energy forum. This forum provided a unique opportunity for investors to engage in in-depth discussions and share insights on the latest trends, challenges, and opportunities in the energy sector. Serving as a hub for collaboration and knowledge exchange, the event allowed experts to disseminate their wisdom on a wide array of topics. Following this backdrop of collaborative exchange, this article delves into five critical strategies to mitigate risks in energy investments. These strategies aim to ensure that stakeholders are well-equipped to make informed decisions, effectively capitalize on emerging opportunities, and minimize potential drawbacks.

1 — Understanding Industry Risks and Knowledge Gaps

The energy sector is notorious for its complexity and unpredictability. A staggering 83% of power and utility leaders have expressed concerns over their ability to keep pace with the rapid digital transformation sweeping the industry. This digital shift, while promising, introduces a myriad of challenges that can complicate investment decisions and outcomes. Mina Nozari, Chief of Staff at LVC Global Holdings in the UK, encapsulates this sentiment perfectly. She cautions that the energy industry often defies the expectation of low-risk, high-yield returns. According to Mina, the common investor’s hope for a safe bet with substantial rewards is more myth than reality within the energy domain. This stark reminder highlights the importance of acknowledging and addressing the inherent risks and knowledge gaps that come with energy investments, setting the stage for a more strategic and informed approach to navigating this volatile sector.

2 — Doing Due Diligence and Homework

In the realm of energy investments, due diligence is not just a step but a critical necessity. With cybersecurity breaches, complex systems implementations and geopolitical tensions posing significant threats, they account for the top concerns among power and utilities leaders, with percentages standing at 25%, 19% and 17%, respectively. Craig Astill, CEO at The Caason Group in Australia, stresses the importance of understanding the diverse energy sources available globally. He points out that a major challenge lies not just in choosing a sustainable energy source but also in addressing the environmental impact, highlighting how much of what is produced as renewable energy eventually contributes to landfill problems. Echoing this sentiment, Mina Nozari of LVC Global Holdings emphasizes the need for thorough research. She argues that investors often let their perceptions of risk overshadow actual risks, especially in sectors like oil and gas. Both leaders advocate for rigorous homework and due diligence as indispensable tools in dispelling misconceptions and navigating the intricate landscape of energy investments.

3 — Investing in Reliable and Necessary Assets

In the evolving energy sector, the necessity for strategic investments in reliable assets is paramount, driven by an optimistic outlook where 79% of power and utilities anticipate revenue growth. This reflects the sector’s resilience and the crucial role of innovation and technological investment in navigating the energy transition. Barry Gold, Managing Partner at NEXUS Infrastructure Capital Management, emphasizes investing in assets with long-term value and necessity — whether base load, conventional, or renewable — as these are expected to remain indispensable over the next 20 to 30 years. Such investments, Gold suggests, not only offer better returns but also align with the sustainable and resilient energy future, underscoring the importance of foresight and strategic planning in mitigating risks and seizing growth opportunities in the energy sector.

4 — Investing with Long-Term Vision

The essence of investing in the energy sector lies not just in navigating its current complexities but in adopting a long-term vision that anticipates the sector’s evolution. This vision is particularly relevant as the industry gradually shifts towards cleaner, more sustainable energy sources. Moreover, ambitious projections in the oil and gas sector, where many anticipate revenue increases between 6% and 15%, reflect a strategic optimism that underpins long-term investment strategies. Guneet Banga, Co-Founder at Parinama in Hong Kong, encapsulates this forward-looking approach. He emphasizes the importance of looking 15 to 20 years into the future, acknowledging the inevitable ups and downs that will occur. Banga’s perspective is a reminder that in the vast and varied landscape of energy investments, expecting a single winner is unrealistic. Instead, the focus should be on diversifying and investing in areas that hold long-term promise and resilience, reflecting a comprehensive understanding of the sector’s dynamic nature and its trajectory towards more sustainable practices. This approach ensures that investments are not only aligned with future energy needs but also contribute to a more sustainable and diversified energy portfolio.

Adapting to Legal, Political and Social Changes

The energy sector is currently navigating through a sea of heightened regulatory pressures, with 41% of energy companies expressing extreme concern about environmental protection regulation. This statistic underscores the critical need for adaptability in the face of evolving legal and political landscapes. Barry Gold, Managing Partner at NEXUS Infrastructure Capital Management in the US, prompts investors to consider the long-term implications of today’s supply and demand fundamentals, alongside the potential shifts in legal, political and social environments. He questions whether investments would retain their value amidst these changes, highlighting the importance of foresight and flexibility. Guneet Banga, Co-Founder at Parinama in Hong Kong, brings a practical perspective to this discussion, noting the fluctuating nature of government regulations and their impact on investment strategies. He points out the cyclical pattern in India, where regulatory environments can dramatically change with the arrival of a new government, likening it to a “yo-yo” effect. This observation speaks volumes about the necessity for energy investors to remain vigilant and adaptable. The ability to navigate through and anticipate changes in regulations, political climates and social attitudes is indispensable for sustaining and growing investments in an ever-changing energy sector.

Conclusion.

In conclusion, navigating the complex landscape of energy investments demands a comprehensive strategy that includes understanding industry risks, conducting thorough due diligence, investing in reliable assets, maintaining a long-term vision, and adapting to legal, political, and social changes. Access to insights from industry leaders is crucial, offering valuable perspectives on emerging trends. The insights discussed in this article were shared during a recent G.I.L.C. event where investors shared precious insights on the future of energy investments. By embracing these principles and the insights provided, investors can effectively mitigate risks and position themselves for success in a sector pivotal to the global economy’s future. To learn more about the Club and to connect with industry experts, click here.