All Aboard the Energy Transition?

Record flooding, searing heatwaves, and the worst drought since the Middle Ages. These are just some of the extreme weather events that befell Europe this year, underlining the urgency of tackling climate change.

While much progress has already been made so far, the road to Net Zero by 2050 will require a herculean effort. Annual clean energy investment, for instance, will need to triple to $4 trillion by 2030 for the world to have any chance of reaching its carbon goals.¹

And disruptive solutions are sorely needed: the International Energy Agency (IEA) estimates that nearly 60% of emission reductions will need to come from new technologies. Exciting innovations are already happening in areas like renewable energy, green hydrogen, electrification, energy storage, vertical farming, cultured meat, and even waste management.

But with necessity breeding innovation, further gamechanging breakthroughs are likely, heralding exciting new opportunities for savvy investors. So, as the green revolution takes shape, what do investors need to know? And where do the opportunities lie?

No looking back
Innovation in the energy sector is nothing new. From the coal-powered industrial revolution that radically transformed the world to the fossil fuels that underpin modern society today, energy consumption has always evolved over time. Now, however, we’re at the early stages of another revolution – one that could prove even larger and more disruptive.

Europe is leading the way. Already wind and solar represent Europe’s largest electricity source, according to the IEA, having recently overtaken natural gas.² And under the EU’s’ REPowerEU plan – aimed at making Europe less beholden on Russian gas – energy from renewables is expected to double in the next eight years.³

This should increase domestic energy security in the near-term and may lower prices over time; renewable energy prices generally fall as capacity is expanded, and renewable energy in the UK was some four times cheaper than natural gas recently.⁴

The doubling in renewables will also help the EU reach its ambitious 2030 Climate Target Plan, with the EU aiming to reduce greenhouse gas emissions to at least 55% below 1990 levels by 2030.

A hugely ambitious goal, it requires massive investment: the European Commission, for example, estimates that the EU requires an additional $350 billion in investment each year to meet these targets, alongside another $130 billion for other environmental goals.⁵

All told, by 2050 the EU – alongside much of the world – aims to achieve ‘Net Zero’, with the EU becoming completely carbon neutral by the middle of this century.

Across the Atlantic, meanwhile, the new climate, tax and healthcare bill, curiously named the ‘Inflation Reduction Act’, represents the most significant climate legislation ever enacted in the US.

The Bill aims to raise around $790 billion in new revenues and savings through a new minimum corporate tax and improved tax enforcement. Crucially, though, there’s $369 billion earmarked for on the US clean energy economy, mostly in the form of tax credits, grants, loans and supporting policies.⁶

With a focus on clean electricity, electric transport, and carbon capture and storage, the results could be profound – even as the total number looks small in comparison to the trillions needed to fund the overall energy transition. The Repeat Project, an environmental consultancy, reckons the $369 billion spend could cut emissions by roughly 42% below 2005 levels by 2030.⁷ Energy Innovation⁸ and the Rhodium Group⁹ have published similar figures.

After several years of intense disappointment, governments are finally beginning to embrace the energy transition in earnest. Much uncertainty remains, of course, but there is no turning back.

New investments
As the world embarks on the biggest energy transformation in over a century, where should investors look for opportunities? The coming years are likely to see huge growth in areas like carbon capture and storage (CCS), clean energy, hydrogen, and other, more niche industries, like vertical farming. In all these sectors, a vast wave of spending and investment is about to be unleashed.

Clean energy, in particular, is likely to see a huge boost: total clean energy capex could hit $4.1 trillion between now and 2035, 2.7x larger than previously thought, according to the Repeat Project.¹⁰ Investment in so-called ‘mature’ industries, like wind and solar, are set to double to $385 billion annually by 2030 too, while flows to nascent industries such as hydrogen and CCS are expected to rise.¹¹

The knock-on effects could be similarly huge. Increased demand for EVs and battery storage is set to drive demand for key raw materials, including copper, lithium, cobalt and nickel. Many of these minerals are already in short-supply, so prices could rise over time – benefitting the mining industry.¹²

Other energy industries, such as nuclear, may also be needed to help countries bridge the gap and meet their Net Zero targets by 2050, especially since renewable energy alone is unlikely to help countries reach their Net Zero targets. Costly and controversial, countries are slowly beginning to embrace nuclear energy once more.

The UK recently gave the go-ahead to a new plant in the Suffolk Coast,¹³ Japan has signalled a probable return to nuclear power after the Fukushima disaster,¹⁴ and the EU even included nuclear power in its Green Taxonomy – leaving the door ajar for more investment in the future.¹⁵ A giant stepchange, it would likely to boost flailing uranium companies after a decade of disappointment, as well as nuclear utility companies.

Carbon credits should enjoy strong demand too, and there are funds designed to help investors get exposure to all these areas. Still, uncovering the next Tesla, Vestas Wind Systems or Enphase Energy will be no easy feat, and no-one knows for sure which green companies or sectors will come out on top by 2030, let alone 2050.

Instead, investors may want to explore a range of different funds – across equity, fixed income, or even private credit – and invest alongside an experienced manager that can help them tap into this once in a generation opportunity.

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.