The energy transition capital of the world: Houston’s opportunity to win by catalyzing capital formation

| Report

Houston’s community, companies, and energy financiers can leverage the strengths of the region to create an energy transition financing ecosystem that could become a benchmark for other cities in the United States and around the world. To achieve this, the region can ensure both broad and deep participation from the financing community—venture capital (VC), private equity (PE), capital advisers, etcetera—to help mobilize capital along Houston’s journey from its current state to reach its ambition of being a leader in energy transition finance.

“Houston’s opportunity to win by catalyzing capital formation” is the subject of a new report1 produced by the Greater Houston Partnership (GHP)2 with insights and analyses provided by McKinsey.

What qualities will enable Houston to become the energy transition capital of the world?

Houston has many strengths that could help it transition from being the energy capital of the world today to the energy transition capital of the world by 2040. For Houston to be as pivotal for energy transition as Silicon Valley has been for technology, it likely would benefit from strengthening the end-to-end ecosystem encompassing new technologies, entrepreneurs driving innovative projects, diverse talent, financing across the entire capital stack, and favorable policies and regulations.

Houston has numerous natural and competitive advantages, including the following:

  • established industry expertise, including a large group of capital allocation decision makers in integrated energy companies
  • a successful record of traditional energy financing
  • established energy industry financiers and a strong base of PE talent
  • access to low-cost power
  • a diverse talent pool with a varied skill set, including engineering and project management
  • academic institutions that focus on developing and scaling energy transition technologies
  • direct access to large ports and other critical infrastructure for certain energy transition technologies
  • energy industry infrastructure such as refineries and pipelines
  • integrated energy incumbents with net-zero commitments to fund, develop, and scale projects
  • access to permitting

These advantages can catalyze Houston’s energy transition leadership, particularly in technologies such as clean hydrogen; carbon capture, utilization, and storage (CCUS); chemicals and plastics; and renewable fuels. With the passage of the Inflation Reduction Act (IRA), even greater economic incentives potentially exist for investors to allocate capital to many energy transition technologies.

The region is already attracting energy transition capital today: it is estimated that around $15 billion of energy transition-related investments flowed into Houston in 2021.3 Bringing investment decision makers to Houston, and further strengthening the city’s capabilities, would be critical to increasing its global reach and impact on energy transition.

How can Houston become the energy transition capital of the world?

From this report’s analysis, for Houston to realize its ambition to become the energy transition capital of the world, capital flows for energy transition would need to scale to approximately $150 billion per year in the region by 2040 (increasing by a factor of ten compared to 2021 estimated energy transition capital flows), which is equivalent to about 80 percent of capital expenditures outlaid by all US-based oil and gas companies in 2021.4The net-zero transition: What it would cost, what it could bring, McKinsey Global Institute, January 2022; Transition risk report capex data set. More than half of this (about $85 billion of the approximate $150 billion) would come from energy transition technology spaces where Houston is potentially well placed to have success, such as industrial CCUS, hydrogen, renewable fuels, chemicals and plastics, and power.5The net-zero transition: What it would cost, what it could bring, McKinsey Global Institute, January 2022; Transition risk report capex data set.

For this to happen, Houston would likely need to exponentially increase engagement by the financing community, specifically debt capital and PE funding, to accelerate commissioning and scaling of clean energy projects in the region. Houston would also require the support of VCs to emerge as a leader in the start-up ecosystem with a focus on emerging cleantech.

How can Houston enable more energy transition capital?

The Houston business community can continue to make the city an attractive business destination that is bustling with high-quality talent, incumbent capabilities, infrastructure and geology, and a favorable business and regulatory environment.

For Houston to become the energy transition capital, it would need to become a talent and innovation, project, and financing hub for the energy transition. Some potential key actions across these dimensions are as follows:

Talent and innovation hub. Serve as a center for diverse, high-caliber skill sets that foster greater entrepreneurship in Houston:

  • continue to attract incubator programs and accelerators to support entrepreneurs and budding ventures; these entities support entrepreneurs through mentorship, a sense of community, and access to resources
  • improve recruiting from local universities to retain top talent; encourage entrepreneurs to explore energy technologies and locate their start-up operations in Houston; and attract talent from top universities
  • consider incentives for rapid execution of pilot projects and encourage investment in joint ventures and other strategic partnerships to improve confidence in the viability of new and innovative energy transition technologies
  • encourage Houston incumbents to further engage in energy transition and innovation by partnering with local universities to advance clean energy research and programs
  • consider incentives for energy transition projects that move to Houston, employ local Houston talent, and make significant investment in reskilling the workforce
  • attract major energy companies that are headquartered outside of Houston to locate their energy transition headquarters in Houston, and encourage developers to build their plants or infrastructure in Houston
  • continue to seek out innovation-driven programs to increase talent, research, and funding dedicated to energy transition

Project hub. Provide a supportive business and regulatory environment to enable project development, implementation, and scaling:

  • enable interconnectedness between ecosystem participants (for example, technology developers, suppliers, and offtake counterparties), and foster an interconnected energy transition innovation ecosystem to attract more start-ups and VC flows
  • leverage learnings from other regions (for instance, California, Singapore, and New York)

Financing hub. Enable capital formation by creating a robust ecosystem of capital providers and advisers (including financial and industrial players), policy makers, and ventures to connect energy financiers to projects:

  • encourage financiers (debt capital providers such as banks, bond markets, and funds), specifically those focused on core Houston energy transition technologies such as CCUS and clean hydrogen, to establish and expand the energy transition presence in Houston
  • evaluate the opportunity to develop a financing mechanism, such as a “low carbon” bank, that could, first, help to support common energy transition infrastructure investment required by both public and private parties, such as CO2 pipelines, hydrogen pipelines, and grid improvements, and second, provide credit support and innovative financial products to assist new energy transition projects and technologies that are experiencing issues in scaling through traditional energy financing; some of these innovative products could include providing extended terms, loan guarantees, aggregation and warehousing, loan-loss reserves, and lower costs of capital
  • market Houston and its potential to become an energy transition financing hub through efforts like roadshows to educate financiers outside of Houston (such as in New York, San Francisco, Boston, the Middle East, London, and Singapore) as well as policy makers and industry executives; conduct energy transition financing conferences with participation from both financiers and energy transition project owners
  • develop potentially critical skills necessary in the region to effectively access new funding avenues or opportunities
  • encourage start-ups, corporates, and financiers leading the energy transition to choose Houston as their decision-making headquarters for piloting and scaling new energy transition projects
  • assess the implications of the recently enacted IRA to identify new opportunities to attract capital and encourage the development of energy transition projects, as well as new challenges businesses may need to mitigate

Immediate potential next steps for Houston’s finance community to support the region’s capital formation efforts

  • work closely with key stakeholders in the region to jointly provide mechanisms to incentivize energy transition projects to take place in Houston
  • further explore the concept of a financing mechanism, such as a low-carbon bank, that could focus on structural enablers such as bolstering low-carbon infrastructure such as CO2 and H2 pipelines, helping early-stage low-carbon technology ventures and projects to achieve final investment decision, and strengthening the resilience and reliability of the Texas electricity grid
  • promote Houston’s economic development and increase energy transition financing by marketing the city’s capabilities and comparative advantages to financiers and decision makers that are currently located outside of Texas
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