Why Everyone's Talking About… The Energy Transition

Energy market volatility – caused first by Covid, then the supply rebound from re-opening – and the war in Ukraine have driven energy prices sky-high, severely affecting households and businesses alike.

Some have questioned whether the pace of the shift to renewables will bring too much short-term pain, while others say the spiralling costs of net zero will hit the poorest hardest. In the UK, for example, an increasingly vocal opposition in UK government says the energy transition will be unfair⁵.

According to a report by an influential House of Lords economic affairs committee, gaps have been highlighted between the UK government’s low-carbon power generation ambitions and its practical plans for delivery. The report also stressed that the UK needs to make sure that its transition from fossil fuels does not become reliant on minerals that are used in renewable power technology, such as solar panels, wind turbines and electric vehicles⁶.

Others have asked whether accelerated deployment of new renewable generation capacity in all geographies is even practically possible.

In May, for example, renewable energy developers in Australia – and elsewhere – were struggling to deliver their renewable projects on time, given rising global energy prices were pushing the costs of steel and other materials higher. Additionally, supply chains from across China, including for chips and for solar technologies, were facing significant delays⁷.

Meanwhile, across the Atlantic, the US supreme court ruling at the end of June appeared to have delayed US action on a transition to clean energy. The court ruled that the Environmental Protection Agency cannot use the Clean Air Act to bring about systemwide transformation without the explicit approval of Congress⁸.

Until late July, the clean energy ambitions of the world’s biggest economy had been stalled by senator Joe Manchin, a West Virginia Democrat, who has repeatedly refused to support his party’s climate plans⁹.

Manchin has since reached an accord with party leaders on a rejigged package that would include $369 billion for energy and climate change change programs¹⁰. But details remain unclear – and another U-turn is never out of the question.

Meanwhile, action has continued at state level regardless: at least 16 states now have legislation requiring reductions in GHG emissions¹¹. But the states embracing the transition are nearly all blue. Federal action will be needed to spur change in Republican-led states.

There are still federal actions that President Biden can implement without Senate approval, like compelling strict regulations around coal- and gas-fired plants.

Indeed, he had indicated that he may declare climate change a national emergency, thus enabling him to use executive powers to force actions to advance his climate agenda¹². Even then, it likely still wouldn't be enough¹³ to fulfil the US’s Paris Agreement pledge to at least halve GHG emissions by 2030¹⁴.

According to the International Energy Agency (IEA), June was the first month on record that the EU imported more gas from the US than via pipelines from Russia¹⁵.

Under its ‘RePower EU’ plan, Europe aims to diversify its gas supply as it distances itself from Russian gas. Currently, the EU relies on gas imports from Russia for around 45% of its total supply¹⁶. Yet as part of the plan, Europe aims to fully replace Russian supply by as early as 2027.

The plan consists of a three-pronged approach. In the short term, energy supply and security will be the top priority, given the elevated risk of disruption in the months to come. And, to meet targets, there will be a focus on optimising and expanding existing gas infrastructure in order to facilitate more diverse supply sources.

The US and large middle Eastern players, such as Qatar, will play an important role in plugging this gap. Additionally, there will also likely be a short-term increase in power production from coal – particularly in Germany – in order to cover the shortfall in affordable energy.

In the medium and longer term, this focus will change. The energy shift will act as an accelerator for various other initiatives already under way at European level – notably, its ‘Fit For 55’ plan, which aims to cut the continent’s GHG emissions by 55% by 2030¹⁷.

Fossil fuels will continue to play an outsize role in energy markets, even if green alternatives come online faster than expected. Yet companies that are part of the transition – those involved with wind, solar, energy storage, nuclear, hydropower and biomass – make a strong investment case.

Nuclear power offers the greatest potential for low carbon power, but it's costly and controversial. Still, that hasn’t stopped members of the European Parliament: in July, they voted to include nuclear power in the EU green taxonomy¹⁸.

In the UK, meanwhile, the government gave the go-ahead for the new Sizewell C nuclear power plant on the Suffolk coast. Up to 24GW of nuclear-generated electricity is planned by 2050 – three times more than the country has today, which could provide up to 25% of its required electricity demand¹⁹. This shift in attitudes, as well as positive supply and demand dynamics, mean nuclear and uranium could be interesting investment ideas.

The UK government has also backed wind power, granting approval for six offshore wind projects in July – the projected energy capacity is expected to total 8GW, or enough to power more than 7 million homes. It’s part of its wider strategy to significantly ramp up the deployment of renewable energy, including boosting offshore wind capacity to up to 50GW by 2030²⁰.

Elsewhere, green hydrogen is another promising area – per kilo, it contains 2.2 times more energy than natural gas, 2.75 times more than petrol, and three times more than crude oil²¹. Converted into electricity, heat or natural gas, it offers the opportunity to harness surplus electricity generated from renewable energies, produce natural gas without using fossil fuels, and provide the transport sector with a low-carbon and zero local pollution fuel.

However, any discussion about energy transition opportunities must include electric vehicles (EVs). For one, demand is set to soar: consumers bought 6.6 million EVs last year – twice as many as in 2020²² – and the total could grow by more than 60% in 2022 to 10.6 million²³.

With consumers expecting the total cost of ownership to be increasingly attractive, the development of a charging ecosystem to support the new fleet of EVs on the road could be the next big energy transition investment opportunity.