Bertrand Rocher

Bertrand Rocher

Head of Credit Research
Mirova**

Marc Briand

Marc Briand

Head of Fixed Income
Mirova

Since Russia’s invasion of Ukraine earlier this year, many countries – but especially those across Europe – have received a wake-up call when it comes to energy supplies. The shift from fossil-fuels to renewables remains the long-term goal. But how feasible are timescales, given the need for immediate energy security?

In June, the Russian energy giant Gazprom reduced the flow of natural gas through its Nord Stream 1 pipeline by 60% to address a technical problem1. By July, it had shut it down completely. Maintenance of the pipeline, which had previously supplied half of the gas used by Germany, continues to provoke anxiety for much of northern Europe2.

Many see this as another example of the need to stave off our dependency on coal, oil and gas – and limit our reliance on sometimes-hostile external regimes. But the gradual exit from fossil fuels is far from straightforward.

Today, the energy sector is the source of around three-quarters of greenhouse gas (GHG) emissions3, and it holds the key to averting the worst effects of climate change. Yet achieving ‘net zero’ is a fraught with challenges: it will require a combination of efforts in the field of electrification, accelerating the deployment of renewable energy – such as wind or solar – and optimising energy consumption.

What’s more, demand for fossil fuels is on the rise globally, energy prices have jumped, and ‘energy security’ – rather than ‘energy transition’ – has moved to the top of many countries’ agenda. According to the World Economic Forum, the transition therefore needs to be “supercharged by ramping up clean energy investments, raising policy ambitions, and transforming consumer and industrial energy consumption”4.

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.

Furthermore, those hoping for a significant shift in policy should consider that the climate talks at COP27 this November will be taking place at the same time as the US midterms.
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.

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GLOSSARY
  • Energy transition – The transformation of the global energy sector from fossil-based systems of energy production and consumption to renewable energy sources. Switching from non-renewable energy sources like oil, natural gas, and coal to renewable energy, such as wind or solar, is made possible by technological advancements and a societal push toward sustainability.
  • Fit For 55 – Inter-connected proposals that aim to ensure a fair, competitive and green transition by 2030 and beyond. Overall, the EU’s package strengthens eight existing pieces of legislation and presents five new initiatives, across a range policy areas and economic sectors: climate, energy and fuels, transport, buildings, land use and forestry.
  • Net zero – A concept that attempts to describe the balancing of greenhouse-gas (GHG) emissions so that the sum of all GHGs emitted from human activities is zero. The point where we get to ‘net zero’ is the point at which any residual emissions of GHGs are balanced by technologies that remove them from the atmosphere.
1 Source: CNBC, July 2022, https://www.cnbc.com/2022/07/05/germany-fears-russian-gas-flows-could-be-about-to-stop-for-good.html
2 Source: The Guardian, July 2022, https://www.theguardian.com/world/2022/jul/21/how-reliant-is-germany-and-europe-russian-gas-nord-stream
3 Source: IEA, August 2021, https://www.iea.org/reports/greenhouse-gas-emissions-from-energy-overview/data-explorer
4 Source: WEF, Fostering Effective Energy Transition 2022, https://www.weforum.org/reports/fostering-effective-energy-transition-2022
5 Source: BBC, March 2022, https://www.bbc.com/news/uk-politics-60572049
6 Source: House of Lords, Economic Affairs Committee, ‘Investing in energy: price, security, and the transition to net zero’, July 2022, https://committees.parliament.uk/publications/23165/documents/169430/default/
7 Source: The Guardian, May 2022, https://www.theguardian.com/environment/2022/may/24/supply-chain-delays-and-steel-costs-are-part-of-perfect-storm-stalling-renewable-energy-growth
8 Source: The Conversation, July 2022 https://theconversation.com/the-supreme-court-has-curtailed-epas-power-to-regulate-carbon-pollution-and-sent-a-warning-to-other-regulators-185281
9 Source : The Guardian, July 2022, https://www.theguardian.com/us-news/2022/jul/16/joe-manchin-biden-climate-democrats-climate-plans
10 Source: The Guardian, July 2022, https://www.theguardian.com/us-news/2022/jul/27/manchin-deal-democrats-schumer-reconciliation-bill-climate-health
11 Source: NCSL, 2021, https://www.ncsl.org/research/energy/greenhouse-gas-emissions-reduction-targets-and-market-based-policies.aspx
12 Source: ESGtoday, July 2022, https://www.esgtoday.com/biden-calls-climate-change-an-emergency-considers-use-of-executive-powers-to-take-action/
13 Source: Rhodium Group Research, October 2021, https://rhg.com/research/us-climate-policy-2030/
14 Source: NBCnews, April 2021, https://www.nbcnews.com/politics/white-house/biden-will-commit-halving-u-s-emissions-2030-part-paris-n1264892
15 Source: Bloomberg, July 2022, https://www.bloomberg.com/news/articles/2022-07-01/us-lng-supplies-to-europe-overtake-russian-gas-iea-says#xj4y7vzkg
16 Source: IEA, March 2022, https://www.iea.org/news/how-europe-can-cut-natural-gas-imports-from-russia-significantly-within-a-year
17 Source: European Commission, May 2022, https://ec.europa.eu/commission/presscorner/detail/en/IP_22_3131
18 Source: Reuters, July 2022, https://www.reuters.com/business/sustainable-business/eu-parliament-vote-green-gas-nuclear-rules-2022-07-06/
19 Source: UK government Policy Paper, ‘British energy security strategy’, April 2022, https://www.gov.uk/government/publications/british-energy-security-strategy/british-energy-security-strategy#nuclear
20 Source: ESGtoday, July 2022, https://www.esgtoday.com/uk-greenlights-8-gw-of-offshore-wind-projects/
21 Source: Mirova, February 2021, https://www.im.natixis.com/images/docs/articles/2021-02---Hydrogen---ENG---defv-1-.pdf
22 Source: IEA, January 2022, https://www.iea.org/commentaries/electric-cars-fend-off-supply-challenges-to-more-than-double-global-sales
23 Source: BloombergNEF, Electric Vehicle Outlook 2022, https://about.bnef.com/electric-vehicle-outlook/

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**Mirova is operated in the US through Mirova US LLC (Mirova US). Prior to April 1, 2019, Mirova operated through Ostrum US.

This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.