Hidden positive sides of the energy crisis

Few people have avoided straining their household budgets during the wave of inflation that has taken root around the world over the past two years. After decades in which inflation seemed a distant past, it came with a bang returned after a combination of tangled supply chains and Russia’s war in Ukraine, which sent consumer and energy prices soaring. While this has caused real pain for most households, it has also accelerated the global deployment of renewable energy and green technologies in a bid to reduce dependence on Russian natural gas and fossil fuels more broadly. This acceleration builds on the significant benefits that companies providing green solutions are already experiencing. These adverse factors have recently gained momentum as countries representing 91% of global GDP have signed up to net zero CO2 emissions₂ promises, i.e. A a significant increase from 68% in December 2020^AND. Achieving these goals is expected to require annual investments of $5 trillion by 2030^II, which is equivalent to the combined GDP of the UK and France. This article provides a concise look at how investors can navigate this environment, identifying the companies that are best positioned to take advantage of these opportunities.

Accelerated development of renewable energy

One of the most important investment topics of the last decade was the global expansion of renewable energy. This occurred as renewable energy moved from being a subsidy-based market to a secular market where, in many cases, it became cheaper than fossil fuels. Looking ahead, the development of renewable energy sources is expected to continue, with global installed capacity, excluding China, on a 3.5-fold growth path from 2022 to 2030. Market growth forecasts for 2030 are accelerating amid the energy crisis, Russia’s War in Ukraine, and monumental legislation such as the US Inflation Reduction Act (IRA) and the Green New Deal in Europe.

For these reasons, the growth forecast for 2030 increased 1.9-fold from 2,110 GW to 4,045 GW in just two yearsⁱⁱⁱ. These large amounts of renewable energy will require significant investments in grid connections, as well as large-scale grid modernization to be able to integrate and balance energy systems that increasingly depend on natural resources such as solar and wind energy. Globally, grid upgrades and upgrades are expected to require annual investments of almost $1 trillion by 2030^IV. Strong growth, both from renewable energy expansion and grid modernization, will spill over into the supply chain responsible for the expansion and bring material benefits to wind turbine, solar and cable manufacturers, as well as utilities building power plants. renewable energy sources and grid connections.

Green technologies are entering the present

Over the past decade, green technologies have steadily advanced, with some becoming competitive with fossil fuel-based solutions. While this was the case, maturation was often slower than initially anticipated. Looking ahead, there are signs that this will change as a result of pressures to reduce dependence on Russian gas and decarbonization, as well as near-shoring initiatives. Decarbonization and energy independence are no small tasks and will require a wide range of technologies. Green hydrogen has great potential in this regard, as it can be an alternative to natural gas in many industrial processes, as well as in energy storage.

So far, ambitions for green hydrogen have been high, but actual implementation has been slower than many initially anticipated. Part of the reason for poor implementation was the slow rollout of regulations and the higher price, which was stubbornly much higher than traditional fossil-fuel hydrogen. However, both are likely to improve in the coming decade. On the regulatory side, the Inflation Reduction Act lays the groundwork for years of ambitious incentives for both renewable energy and green hydrogen. In the case of green hydrogen, this will likely lead to an abundance of renewable energy and the industrialization of the green hydrogen supply chain, which together will likely significantly reduce the price premium. Globally, these improvements mean that green hydrogen is expected to reach 260 GW by 2030.

From the investor’s point of view, this implementation represents significant investment potential. This will apply not only to companies supplying equipment needed to produce hydrogen, but also to companies involved in industrial gasification, which will play a significant role in its production. In addition to the direct beneficiaries, the renewable energy value chain is also likely to benefit significantly, as 260 GW of green hydrogen will require a significant amount of new renewable energy, creating a positive feedback loop.

Energy efficiency and electrification at scale

While green technologies and renewable energy are growing rapidly, their pace is closely matched by more traditional green solutions such as energy efficiency solutions and electrification. This has been particularly the case since the onset of the current European energy crisis, as building out renewable energy typically requires years of planning and construction, and while green technologies will make a huge difference in the medium to long term, it will likely take years to do so. before they reach scale. For these reasons, energy efficiency and electrification are key catalysts for reducing emissions and energy dependence because they can quickly reduce demand. In Europe, where before the war, Russian gas accounted for approximately 50% of consumption^Init was particularly important to focus on reducing gas demand. As a result, the European Commission has introduced even more ambitious energy efficiency targets, currently targeting 11.7% by 2030.^VI.

One of the most effective technologies for increasing energy efficiency is replacing inefficient fossil fuel boilers with electric heat pumps. In Europe, this has resulted in massive market growth with just 7% growth in 2020^VII up to 34% in 2021^VIIIand 40% in 2022^IX. In Germany, for example, this market grew by 111% in the first quarter of 2023.^X. Looking to the future, the heat pump market is likely to continue to grow as there are currently only 20 million households (10%) in Europe with heat pumps^xiand key legislation such as the Inflation Control Act establishes ambitious incentives for households to switch to new heat pumps in the US.

The issue of a just transition came into focus

One element of the ecological transition that is sometimes overlooked is the risk that the transition will have a negative impact on some parts of society. People most often associate this risk with workers in the fossil fuel industry because they may lose their jobs as society moves away from fossil fuels. While these risks are real, there are likely to also be risks for households at the lower end of the income pyramid due to potential transition costs. Examples of these costs could be regulations increasing the cost of owning combustion cars or tariffs on food or goods with a high impact on the climate. Ultimately, the green transition is likely to benefit economically disadvantaged households, as a world powered by renewable energy with near-zero marginal costs should bring lower energy costs. However, because the pace and ultimate success of the green transition depend on continued public support, investors should remain vigilant and monitor for signs of waning public commitments.

The energy crisis has created a microcosm of how rising energy prices disproportionately affect vulnerable households. This becomes particularly important in a future in which fossil fuels are replaced by renewable energy, which is likely to lower energy prices over time, but at the same time accompanied by increasing intermittency due to dependence on solar and wind resources. Increased resilience of the energy system and energy storage will therefore be crucial for long-term viability, but in the transition period until these solutions are implemented at scale, the risk of fatigue will become real if vulnerable households remain under persistent pressure.

Application

The hidden positive effect of the energy crisis is the significant acceleration of the implementation of renewable energy and green technologies, which allows us to break away from energy dependence on Russian gas and implement key emission reduction initiatives. And while the pain many households feel from rising energy prices is real, the acceleration brings greater investment potential for companies providing solutions to achieve this green goal. By continuing to increase their attractiveness as a potential investment opportunity, the top ten renewable energy owners have become cheaper and their growth prospects have broadened. Finally, the tensions of the 2022 crisis have been particularly acute in Western Europe; however, long-term “positive” solutions will benefit the world.

Sources:

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^AND The Net Zero Tracker report shows that serious credibility gaps remain across global, national, regional, city and corporate targets

^II Net zero by 2050 – Analysis – IEA

ⁱⁱⁱ Capital Markets Day

^IV Net zero by 2050 – Analysis – IEA

^In https://www.consilium.europa.eu/en/infographics/eu-gas-supply/

^VI Energy Efficiency Directive

^VII REHVA Journal European heat pump market

^VIII Record growth of the European heat pump market in 2021

^IX IEA: Sales of heat pumps in Europe increased by 40% in 2022.

^X Sales of heat pumps in Germany increased by 111% in the first quarter.

^xi Market data

Risk Considerations

Past performance is no guarantee of future results. Investing involves risk, including possible loss of capital. Asset allocation and diversification do not guarantee profit or protect against loss. Stock markets are subject to many factors, including economic conditions, government regulations, market sentiment, local and international political events, and environmental and technological issues, which can affect returns and volatility. International investing involves greater risks, such as currency fluctuations, political/social instability, and different accounting standards.

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Editor’s note: The summary bullets for this article were selected by Seeking Alpha editors.