Powering Through Crisis: Energy Investment in an Era of Geopolitical Fragmentation

Episode Summary

In this episode, host Jason Hewitt is joined by Efraim Chalamish — NYU professor, senior advisor at Kroll and international media commentator — to explore the complex intersection of energy markets and foreign investment screening. They unpack how the Iran crisis has reshaped global energy supply, why investment in renewables and nuclear is surging despite geopolitical fragmentation, and how supply chain dependencies and China adjacency are creating new risks. The conversation also covers sovereign wealth funds, private capital, the data center–driven nuclear boom, battery storage challenges and how evolving FDI regimes are navigating the race to secure tomorrow's energy infrastructure.

Voiceover (00:01):
From Skadden, you’re listening to Foreign Correspondent, an FDI podcast where we discuss foreign direct investment reviews and the foreign policy, national security, and political issues that drive them. The cross-border investment screening insights you need start now.

Jason Hewitt (00:22):
Hi, and welcome to Foreign Correspondent, Skadden’s FDI podcast. We explore foreign investment control regimes and the complex intersection of transactions and national security policy behind them. Today, I’m really pleased to be joined by Efraim Chalamish. Efraim is a professor at New York University, senior advisor at Kroll, an international media commentator. He has a vast range of expertise, including global governance of corporations and multilateral institutions, the intersection of business and national security, sovereign wealth fund, economics and policy, energy markets and investment, international investment arbitration, and that’s just to name a few. Welcome, Efraim.

Efraim Chalamish (01:03):
Thank you very much for having me. I’m excited to be here with you, Jason.

Jason Hewitt (01:05):
Excellent. I’m Jason Hewitt. I’m a national security partner at Skadden in London, where I lead our global FDI screening work. Today’s episode is going to be all about unpacking the global energy sector and some of the unique national security challenges for investors in the energy space.

Efraim Chalamish (01:22):
Absolutely.

Jason Hewitt (01:23):
Efraim, let’s start with some scene setting. I think today we’re recording this. I know this will probably go out in a month, so we’ll be tested on some of our predictions, but as things stand, we’re awaiting the signing of President Trump’s deal with Iran, that hopes among other things to unlock the flow of oil and LNG through the Strait of Hormuz. I think we’ve seen supply challenges and upward pressure of pricing in the energy markets created by Iran as quite an acute short-term challenge, but it’s one that I suppose will take some time to normalize. Projecting a bit beyond the short term, what effect do you anticipate Iran to have had on the global energy markets?

Efraim Chalamish (02:04):
Sure, Jason, and thank you again for having me. It’s truly exciting times for the industry. I think you raised a couple of key points that we should all think about when we think about long-term impact on energy market and investment in energy markets in light of the foreign negotiations with Iran and the agreement that is just about to be signed. One is most analysts, regardless of the agreement, assume that it’s going to take at least a couple of months for markets to go back to normality. In other words, even if you open up the Strait, pretty much in most parts of the world, the overdependence on oil and gas from the other side of the world. Even in areas where the regional success has been quite effective, it’s going to take time. And I think we’re going to see it in pricing, in the sense that over the next couple of months, the pricing’s still going to be quite high.

(02:57):
So, quite important for policymakers in monetary policy and also fiscal issues in places like the Gulf. Still, we won’t see the changes that we are hoping for on things like inflation, et cetera, et cetera. The other thing we should keep in mind is that once we saw in reality that a country like Iran can actually block the Strait, it can happen again because it already did happen in the past. So it’s going to put a lot of pressure on different parties to of course perform based on the agreement, but also to react quickly and do things differently if things are not as planned.

(03:35):
I think many people now around the world, including the people around me, are thinking, “What’s going to happen next if Iran will block the Strait again?” And that of course forces decision makers, executives in energy companies, people who buy these commodities to be prepared in various scenarios, what’s going to happen if we won’t see kind of a full opening right away. These are just a couple of things to think about as we think about the next couple of months.

Jason Hewitt (04:02):
I mean, you talk about overdependence and so much of the global base load has been oil and LNG heavy, with some exceptions around nuclear. I mean, over the long term, does this continue to propel forward that trend of developing in-country generation? Things like solar, things like wind where they’re in your jurisdiction, there’s sovereign control. Are we going to see more openness to that from an investment perspective?

Efraim Chalamish (04:30):
That’s a great question, Jason. And here, I would like to approach it from different perspective. One is when President Trump took over, we saw the impact on renewable energy companies right away, especially public companies. Valuation went down quite quickly and dramatically, not only in the US market, we saw it in Europe and some other parts of the world because of couple of factors. A, we saw the big push towards oil and gas under the leadership of President Trump. We also realized that in light of the kind of pushback against [inaudible 00:05:03], more and more new and traditional buyers of renewable energy assets will go a different direction. And just in general, there was a feeling of over-investment in renewable energy over the last couple of years. Fast-forward more than a year after that, we see the trend changing in light of the war that we’re experiencing now.

(05:24):
Why is that, Jason? Because people realize that governments come and go, in Europe, in United States, in Australia, where you’re from, and they can change policies on renewable energy and oil and gas. But the reality is that conflicts, the fragmentation of geopolitics and geo-economics call for a better diversification of energy resources and investing in energy resources. And then quite quickly, what we’ve seen over the last couple of months that A, valuation of renewable energy is back. We see more and more investment in renewable energy, companies and assets like you mentioned, wind and solar and I know we’re going to speak about nuclear energy, which is a very hot topic right now, and it will accelerate.

(06:06):
And just in general, I think the feeling is that we didn’t do enough on the renewable energy side and now we see the result of that because it’s like stress testing in banking, financial institutions. When you take systems to the extreme, you realize what you need to change before that. I’ll just finish by saying that what we see now, kind of the comeback of investment, especially in Europe in renewable energy, we’re going to see the results down the road. And if we have another conflict like the one we experienced now, I think we’re going to be in a different reality.

(06:37):
Like everything in life, people always ask me, “Why all these countries have big renewable energy targets by 2030, by 2040, by 2050?” Jason, but they never achieve that. That’s not the point. The point is that you need big, lofty goals in this business in order to achieve something in between. And as long as we get closer to these targets on the renewable energy side, it’s going to be much easier for us to deal with supply chain challenges like the one we experience now.

Jason Hewitt (07:04):
I think energy security presents a really interesting tension with foreign investment screening. A lot of traditional foreign investment screening is about are we open to foreign investors? What’s the vulnerability if they own this asset? How can they influence operation of that asset? I think what you’re talking about is an environment where governments are open to and looking for investment, whether it’s foreign or otherwise in, let’s say, renewables.

(07:30):
But at the same time, there’s the benefit of a renewable asset is sitting... It is a physical asset that’s sitting there, right? Even if you’ve got a foreign investor, their ability to withdraw it from the market, which is the worry in some FDI screening, is very limited. Does that mean that we can expect, say, the Europeans to be relatively open to foreign capital funding this development?

Efraim Chalamish (07:52):
That’s a great question. I mean, look, people like yourself dedicated their lives to explain the world how we find the right balance between open markets and restrictions on foreign investment in assets, that we perceive as national security asset. And as you know better than I do, over the last couple of years, the biggest trend was an extension, an expansion of what national security is. And we see that in everything, from renewable energy to nuclear assets to even crypto, financial markets-related assets, and I can go on and on and on.

(08:26):
In a world where basically we are expanding so much the definitions of what security is all about and the nexus with economics and of course financial assets, the question is, what to do with scenarios like we just discussed where on one hand we are rushing to diversify, for example, energy resources, and we need capital for that because quite often you don’t necessarily have the capital locally. Europe is a great example. On one hand, it’s one of the world’s leading areas in renewable energy development, but at the same time, the capital quite often comes from America, from the Middle East, from Asia, many of your colleagues and friends. So where are we heading?

(09:05):
On one hand, we do need the capital. At the same time, we keep defining those assets as critical to national resiliency, supply chain, and national security. There is no right or wrong. I think one way to think about it is where we are in the cycle, the same way we think about commodity cycle. I think we’re getting to a point now, we need the diversification so much and we’re in such a crisis in the energy market that more and more governments will be open for foreign capital in certain assets. And again, in couple of years, it’s going to change.

(09:35):
In other words, this is a very dynamic reality. There is no right or wrong. I think governments making those decisions to really try to find the right balance between addressing the crisis and bringing more foreign capital, while preserving national security interest.

Jason Hewitt (09:50):
So for private capital, I suppose it’s a little bit of picking their moment and a timing exercise right now.

Efraim Chalamish (09:57):
Absolutely. For a really long time, I heard from so many private equity funds, infrastructure funds from the Middle East, from Europe, people saying, “Hey, we kind of max out the markets. There aren’t new interesting investment ideas or investment assets.” What we see now is the crisis actually re-energize the energy and infrastructure funds environment or community, that people are willing to go through this Via Dolorosa of getting approvals or convincing governments that they should be the foreign capital investing in these kind of assets. So one of the side effects or consequences of the current environment, Jason, what I see is re-energizing the funds community, hoping to invest in some of the things we cover today.

Jason Hewitt (10:43):
I want to come back to that and re-energizing the funds community. And you mentioned nuclear a couple of times. I want to come back to that, but before we do, I wanted to drill down on one thing you just said. You talked about convincing governments to accept their investment.

(10:58):
I think one topic of actual substance that we’ve seen in Europe is pressure around China adjacency, this concern that Chinese involvement in critical national infrastructure presents a risk, and there’s a pretty unique risk when you talk about solar PV production being basically only Chinese. And then when you look at the availability of Chinese wind turbines and how attractive they are from a cost perspective in the European market. I mean, is that a real risk for energy investors in Europe? Can they expect conditions around not using Chinese equipment in generating assets when they come knock on the door asking to invest?

Efraim Chalamish (11:41):
Sure. I think the story that you shared with us today has two main aspects to it. One is capital markets and the access to capital, Jason. The other one is supply chains and the components of the various projects. Let’s start with capital markets because specifically in the renewable energy space, we’ve seen mostly capital markets exit strategies, less M&A. We see more and more developers trying to accumulate portfolio of assets and then going back, going to public markets in the UK, in some other European market, of course, New York Stock Exchange and NASDAQ, especially if we’re talking about technology-oriented developers.

(12:25):
The implication is that quite often their advisors and the governments tell them, “If you guys get capital from China, which is totally okay, you can definitely diversify your pool of capital, it may impact the decision which markets you’re going to target, and it’s going to limit certain opportunities if you’re trying to list your combined aggregated assets in the US market, for example.”

(12:49):
So that’s a big part of the story and I’ve seen it many, many times that people are very close on financing [inaudible 00:12:57] with one fund or another foreign capital source and then they say, “Hey, if we plan to go public in a year or two years, maybe we should reassess and look for another source of capital.” Certain project even got encouraged by governments to actually sell existing stakes owned by other foreign buyers, as you referred to China, but it could be other nations as well.

(13:20):
The second part of the story is the components. When you build such a project, when we talk about panels, when you talk about connectivity to the grid and grid-related components, then your other point is super critical because these companies already saw it coming and started diversifying their sources because they know that if they’re really dependent on one nations, two nations, and now because of the fragmentation in global politics, they may wake up one day and they realize that they were betting on the wrong nations, they could be in trouble.

(13:54):
So the trends that you’re talking about, I already see it happening with many, many renewable energy companies. Oil and gas, as you know, it’s a different universe because that tends to be a little bit more local or regional by nature when it comes to the components involving the production process.

Jason Hewitt (14:15):
And thinking beyond renewables, let’s talk a little bit about nuclear. I mean, what do you see? I think in the UK, for example, there’s been a complex history with Chinese investment in nuclear, with French investment in nuclear. They are always extremely long-term, high-cost projects that require a lot of domestic government buy-in, but highly proprietary knowhow from a pretty finite range of sources. How do investors play safely in the nuclear space? How do they take advantage of that conversion to nuclear base loads?

Efraim Chalamish (14:47):
So first of all, just to see the buzz around nuclear, it’s just crazy. A friend of mine, an attorney, told me, a senior partner at the law firm, he said, “I’ve been trying to convince my firm for 20, 30 years to invest in building nuclear capabilities.” So we have attorneys representing nuclear companies, nuclear investor. “I succeeded, and we invested a lot in capabilities,” he said, but again, very few nuclear projects out there. Fast-forward to ‘25, ‘26, we see a boom in investments in nuclear projects. By the way, it’s not only the actual power plants and the site itself, it’s the whole ecosystem around it. I’ve seen many great startups and new technologies in the world of nuclear energy because it takes years and years for permitting and constructions and then of course disputes related to the constructions, which you guys are very involved with.

(15:39):
So the reality is you try to be efficient and you try to be entrepreneurial and creative, and many technologies in this space running very, very fast, for example, for small plants, that’s one strategy. Another strategy is to change the way the existing big plants are operating. So what I see now in the world is truly a new buzz around nuclear.

(16:02):
Now, obviously you mentioned France, you mentioned China. These nation have been in the nuclear story for a really long time. The really interesting story now is places that either try to run away from nuclear and even change policies around nuclear, for example, Germany and some other parts of the world where people woke up and realized that they can deal with the energy crisis through nuclear energy. Practically, it means that infrastructure funds are looking at nuclear projects. It means that governments are a little bit more... Despite of the national security component of it, they’re willing to accept foreign capital because they realize that certain projects are so big that without foreign capital, you won’t be able to actually execute and deliver the project.

(16:48):
|I think nuclear is a very exciting project. I think we’re going to see more and more cases where governments will have to make tough choices. Again, how you balance the need to find the capital for such capital-intensive many years of projects and protecting the sensitivities around the nuclear projects.

Jason Hewitt (17:06):
We were talking about how trends shape these things earlier. When it comes to nuclear, two things come to my mind, and one is what role will small modular reactors play in changing that investment outlook to slightly shorter term horizons, maybe more rapidly deployable projects. And two, will the sheer power demand created from the ever-growing number of data center projects really propel some of that, especially at a more local and regional level?

Efraim Chalamish (17:38):
We have a very diverse pool of listeners here today. So I just want to explain our listeners what we’re actually talking about. Everybody hears so much about the data centers boom. Of course, it calls for more efficient capital. Of course, the construction process can take a few years. So as part of these kind of new data centers renaissance, many people who are involved in these projects realize that if they create small versions of the big nuclear site, we can provide clean, cheaper energy to these data centers because they’re so much electricity driven. And as you know well, there is a lot of criticism now all over the world, pushback from citizens against their governments because people say if we pay so much for energy, if electricity is so expensive, and at the end of the day, part of it is actually attached to data centers, and eventually at the end of the day, only small percentage of our society actually enjoys it. And we see the performance of some of these stocks in public markets, which as we know, not everyone is part of the story, that’s a big challenge.

(18:46):
So again, one way to deal with that is to find more creative ways to supply the energy. And again, as you said, one way is to build these small reactors, you attach them to the data center and you create a new source of energy. I can just say there is kind of, as I said before, a real renaissance around it and all types of interesting companies building these. We also have to remember that at the end of the day, we will have one, two dominant technologies in this space. You cannot have a reality where these global data centers companies use many different technologies to provide the energy.

(19:22):
So I think one of the interesting things to follow is which technology is going to be the dominant ones and the more successful ones in providing these more efficient, cheaper, smart energy to these data centers.

Jason Hewitt (19:37):
So thinking about picking those dominant and winning technologies, what are your thoughts on distributed grid? Do you think we’re going to see more of that distribution and localization of the grid? Do you think battery and battery energy storage systems are going to become more and more part of what we see in Europe?

Efraim Chalamish (19:57):
Absolutely. We already see it. We already see the focus on the smaller areas and the distribution that you refer to. Interestingly enough, because truly battery storage, the whole storage in energy is probably the most challenging one and the most important one because frankly, Jason, if we manage to store better, we have more to play with and more to serve and cheaper electricity, et cetera, et cetera. Interestingly enough, and we covered so many different topics in this short timeframe, we are very weak on storage. Even successful storage companies didn’t do that great, and we saw a decline in investment in storage solutions. I personally have held a company in this space, and unfortunately they didn’t manage to get to the market on time because they ran out of money. I think the market was very skeptical about storage solutions because we didn’t see the results we were hoping for.

(20:55):
So I think over the next couple of years, the question is who will be kind of betting on the smart storage solutions which are going to change the industry dramatically. And then going back to your own expertise, what it means for governments’ decisions on who are the players in storage? Because once you solve the storage challenge, many things we cover today will be solved automatically immediately after that.

Jason Hewitt (21:21):
Yeah, I mean, with my FDI hat on, battery storage is a really interesting sector because it’s one of those ones where the technology transfer concern is the opposite. We are looking for what is Chinese proprietary know-how on battery technology. It’s something that doesn’t exist to the same degree in Europe where the traditional FDI concern is the opposite. So I think a lot of the frameworks struggle to think about that, but there is an opportunity to get it right.

Efraim Chalamish (21:48):
Absolutely. I couldn’t agree with you more.

Jason Hewitt (21:51):
I think batteries and nuclear actually have a really interesting parallel, don’t they? They are both quite exposed to an underlying mineral supply chain and pretty complex and sometimes dirty refining issues associated with some of their input.

Efraim Chalamish (22:06):
People tend to think about the whole minerals, critical minerals, commodities as a separate subject, not only in terms of trading, but also from security and an FDI perspective. But the reality is that as you just said, I think these two markets are interconnected. So decisions that you make on what kind of capital actually targets nuclear and battery storage, it’s the same question, just kind of flip it on the commodities and critical mineral side, because again, without them, these assets cannot be developed.

Jason Hewitt (22:39):
You talked about re-energizing energy markets earlier and the role of funds. I think private capital is one thing, but sovereign wealth funds have a really interesting place in this market. We see a lot of sovereigns have made a lot of money from oil and LNG, and as the economy shifts, they are now deploying that outside of oil and LNG through sovereign wealth funds. I mean, are there special considerations for sovereign investors in the energy market?

Efraim Chalamish (23:06):
Sure. So I’ve worked on sovereign wealth funds and sovereign finance issues for almost 20 years now. I became interested in the field when I started seeing more and more new funds coming out as a result of the, back then, energy boom, one of the previous cycles. Now, you raise an interesting point, and I’m teaching in the field and I’ve worked with many sovereign funds, if you’re a sovereign funds based on revenues from oil and gas, you don’t want overexposure in oil and gas investing because then you really take from the fund the basic concept of diversification, intergenerational wealth preservation, et cetera, et cetera.

(23:44):
So you’re trying to think how I’m actually exposed to energy because that’s such an important part of the markets right now in terms of better returns, but at the same time, I don’t want overexposure to oil and gas. So one of the trends we’ve seen is that sovereign wealth funds, which are as a result of oil and gas discoveries, Latin America, the Gulf, what they do, they invest in cutting technologies in renewable and other energy resources both locally but mainly abroad.

(24:12):
They don’t want to do it locally because then it creates inflationary pressures, but they will invest abroad in all types of interesting existing companies that’s on the corporate side and through VC allocation in technologies. And once they invest in some of these new technologies that we cover, that could bring them nice returns and at the same time, if they bring back the technologies to their home states, they create the growth that they’re working so hard to develop. So that’s part of the sovereign finance universe.

(24:46):
Another aspect of the story is that many sovereign wealth funds are not only about wealth preservation. They’re not only about dealing with crisis like earthquake or things related to weather, which is also important part of the sovereign finance universe, but part of it is actually about economic growth, what we call development sovereign funds. There are many great examples around the world.

(25:12):
And as part of this development process, what they’re trying to do, Jason, is to accelerate development locally. And one way to deal with that is to improve electrification because you need electricity for everything on the development side, and they see increasing allocation to energy investment as a way to improve the development metrics in the country. So bottom line, in the sovereign finance universe, we meet the sovereign funds and energy in so many different ways.

Jason Hewitt (25:42):
You talk about the role of electrification, the role in growing the domestic economy with capability. It all lends itself very well to those more complicated investment structures like joint ventures and partnerships, where there’s an opportunity for technology transfer or technology sharing as well as innovation. I mean, one observation I’d make thinking about the FDI angle, joint ventures are very often a way of unlocking FDI risk. When you partner with domestic players, you can neutralize some of the concerns about shared foreign ownership.

Efraim Chalamish (26:13):
And that’s connected to a much bigger topic that I know you were about to address, which is conflicts in this space. Energy historically, for those who are involved in disputes management, energy has been one of the more happening sector in disputes because again, the numbers are big, big stakes, and it takes years to develop these energy assets. So what we’ve seen historically is a spike in energy-related disputes. Institutions around the world like the World Bank, [inaudible 00:26:47], for example, or even European institutions, sometimes you see 40, 50, 60% of total cases coming directly or indirectly from the energy sector. And when I talk about the energy sector, it’s not only oil, gas and renewables. Could be electricity-related, grid-related components, could be, as I said before, the more innovative technology in the energy space. But if you put all of them together, it’s becoming a big part of disputes in institutions around the world.

(27:15):
I think an interesting point to talk about is really how the recent development, the fragmentation in geopolitics and geo-economics, the new wars in the Middle East and the upcoming agreement with Iran, how all that going to change the way disputes come out of this reality and how people will come up with creative ways to solve these disputes. I just want to give one example, which we already see. Many people remember how Spain changed very quickly its approach to renewable energy investments. For a couple of years it was the hottest place to go because of subsidies and then they changed the views and we saw many cases coming out of it. We saw in Germany different view on investment in nuclear and what it means for those investors who invested in nuclear assets, hoping that nuclear would be the next big thing in Germany. We saw investment in Japan and how the Japanese market and the government changed its view after Fukushima. And now there is a pressure in Japan to go back to nuclear because of the shortages in the energy sector.

(28:22):
Just to sum up on this one, I think this trend which started a couple of years ago of inconsistent policies in the Western world, in places that are considered stable and very attractive for investors in energy, these are the places that we are going to see more and more inconsistent policies, especially in light of the pressure that we see locally, again, in light of geo-economics and geopolitics, to change the policy very quickly on energy, the same way that we see it on immigration in advanced economies, the same way that we see that on industrial policies.

(28:57):
So if we are going to see these changes happening very quickly like the examples I gave, we’re going to see many, many new cases and disputes in the energy sector coming out of it. And for a really long time, I told people that we should create a better pipeline of people who are experts in this space. At least historically, it’s been a very ad hoc solution that I think, especially in light of the new technologies, people should develop more and more expertise in how this industry actually works and what are the new technologies. It’s almost like all other sectors, if you don’t actually understand the underlying technology, it’s going to be very hard for you to be involved in the dispute itself and help both the governments and private companies to solve the disputes very effectively.

Jason Hewitt (29:46):
I want to give you, Efraim, a last word of 30 seconds on the topic generally, but I was reflecting on some of the conversation we’ve had and probably three things that I take away. I think fragmentation and conflict have really driven pricing risk and challenges, but also opportunities for investors. Those opportunities seem very centered around the shifting base load to nuclear and the role of renewables and storage in supporting that transition. I suppose the third thing is thinking about China adjacency, thinking about timing the market, all of these issues are fundamentally geo-economic issues, aren’t they? And for investors, it is a case of pretty careful thought and timing their market in order to pick winners. But Efraim, I want to offer you the last word.

Efraim Chalamish (30:38):
First of all, thank you for having me. It’s really exciting to have this very timely discussion with you and I appreciate your leadership role here globally. I can just add to the wonderful summary that you just presented, the one important conclusion, at least on my side, is that it doesn’t matter where you are in the cycle. Energy markets are so complex and so much going on that you can always find a place to play a very important role on the policy side, on the investment side, on the market structuring side, financing side, you name it. It’s not like other sectors where people say, “We’re on the wrong side of the cycle. Let’s just leave the sector altogether.” There are plenty of examples where people out of the markets and they come back after five, 10, 20 years when things change.

(31:24):
No, I think if we learn anything from today’s discussion and what we’ve seen in the world over the last couple of months and of course years, is that there is always a place to play a role, to be part of this story. As you just said, it’s important to understand where you are in the cycle, how things change and to make sure that you do it in a very important way. And I think the learning experience, which is one of the goals of today’s discussion and recording, is really a very effective way to do that.

Jason Hewitt (31:51):
Excellent. Well, Efraim, it’s been excellent having you on our podcast, Foreign Correspondent, here. I want to thank you again for your time. It’s been excellent.

Efraim Chalamish (31:58):
Thank you for having me.

Voiceover (32:01):
Thank you for joining us for today’s episode of Foreign Correspondent, an FDI podcast. If you like what you’re hearing, be sure to subscribe in your favorite podcast app so you don’t miss any future conversations. Additional information about Skadden can be found at skadden.com.