In this paper, Frank Beaudry and Natalya Zeman consider the key long-term investment implications of the transition towards sustainable energy.

Decarbonisation is an important structural trend, but is not without challenges

Decarbonisation – the term used for the process of removing or reducing the carbon dioxide output of a country’s economy - is an important structural investment trend that is here to stay. It is important because greenhouse gas emissions are causing global warming, and this is having unsustainable effects on our environment. Many countries and companies across the world have responded by committing to remove as many emissions as we produce, in other words, to reach “net zero”.

The challenge with getting to net zero is that greenhouse gases are part of all human activities. Achieving net zero does not just entail ceasing to run coal fired power plants and switching to electric vehicles. The challenge is much broader: ranging from transportation, agriculture and forestry, to the boxes used for Amazon deliveries.

Energy consumption is highly positively correlated to wealth and energy demand will continue to rise as emerging nations develop. Solar and wind are currently a small part of the overall mix, although cost competitiveness, government policy, innovation and professionalisation are increasingly driving scale and investment in these technologies. There are comparisons with energy transitions that have taken place in the past, such as the rise of oil in the 1920s, or coal in the 1830s. We are at the beginning of the renewable phase, the key drivers are already in place, and this transition is a survival imperative.

Electrification is the route to net zero

Achieving net zero means reducing fossil fuel use and finding renewables to replace them. The most efficient route to decarbonisation is to have more things running on renewable electricity (either through wires or stored as green hydrogen), because this is where we have the most mature, low-carbon technologies in place.

Hydrogen is a molecule that can be made through electricity by splitting water, which is why it can be considered ‘green’ if it is made with electricity from renewable sources. This is still very nascent; the current green hydrogen capacity is very limited and it’s in the early stages from a commercialisation point of view. Because not everything can be run directly on electricity, the option to run on hydrogen will become a larger consideration in the future. Consider industries that can't be connected into the grid – such as shipping companies. They will need to transition to an alternative to fossil fuels and green hydrogen has the potential to power their ships around the world.

25% of our world's energy is currently running on electricity and that needs to grow to almost everything. According to the International Energy Agency, the full transition to electricity for the global economy is likely to cost around US$1.5- 1.8 trillion per year for 30 years² (roughly the gross domestic product of Australia). This could be an overestimation for a couple of reasons. First, there are some fairly mature technologies already in place to support this transition. Second, renewable energy has historically been perceived as expensive and unprofitable but all that is quickly changing. Scale, innovation, and professionalisation have driven down the cost of renewables and some of our analysts are expecting green hydrogen costs to fall by about 75% over the next decade³.

1. Data as at 13 May 2021. Source: Vaclav Smil (2017) & BP Statistical Review of World Energy. Published online at OurWorldInData.org
Primary energy is calculated based on the ‘substitution method’, which takes account of the inefficiencies in fossil fuel production by converting non-fossil energy into the energy inputs required if they had the same conversion losses as fossil fuels.

2. Data as at September 2020. Source: SystemIQ analysis for the Energy Transitions Commission (2020), IEA (2017), Energy Technology Perspectives, Catalysing Energy Technology Transformations Global Infrastructure Hub, Material Economics (2018), Industry Transformation 2050, IEA (2019), World Energy Outlook

3. Source Capital Group analyst estimates

 

• This material is not intended to provide investment advice or be considered a personal recommendation.
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