Duncan Goodwin
Premier Miton Global Sustainable Growth Fund Manager
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Powering change
A megatrend underpinning many a conversation – from the Russian invasion of Ukraine to the uptick in energy bills, through to the latest electric vehicle on the market – is the energy transition. The energy transition is a vast megatrend, driving forward the global energy shift from fossil-based systems of energy production and consumption to renewable energy sources like wind and solar.
Why is this megatrend accelerating?
2022 was the year when the energy transition moved through the gears to dominate thinking at a corporate, government and regulatory level. While we could be quick to point to the geopolitical situation in eastern Europe as a catalyst, and that is the case, the reality is 2022 was the year when some key legislation was passed.
As a result, we started to see some real progress made across the world to set up regulatory and subsidy regimes, not only for existing alternative energy solutions such as wind and solar, but also emerging technologies such as Hydrogen and Carbon Capture. The signing of legislation such as the Inflation Reduction Act in the US has the potential to be truly game changing in the road towards net zero.
In parallel, the costs of both solar and wind have fallen so drastically that in some regions of the U.S. as well as in the U.K. and Europe, wind power has become cheaper than traditional high-carbon energy resources. As costs continue to fall and wind and solar become mainstream, the renewable energy sector in our view will keep growing and solidify as a strong investment opportunity.
The visual capitalist?
In terms of our themes for 2023, the energy transition in our view is the most visually apparent. What do we mean by this? Well, we can see its effects everywhere we go. From the solar panels on roofs in the UK suburbs, on to the growing abundance of electric cars, EV charging points in supermarket carparks and the development of eco-friendly office space aiming to tackle the substantial global carbon emissions, the built environment accounts for.
The future of energy has already begun
Energy consumption by sector
Source: Bloomberg New Energy Finance 2000 – 2050 (Estimated)
The International Energy Agency forecasts the world’s total renewable-based power capacity will increase 50% between 2019 and 2024. As part of this shift, utility providers have begun a rapid energy transition away from fossil fuels – such as coal. Pressure is mounting on utility companies and power generators to retire existing assets that depend on coal supplies and build out other forms of power generation.
Many major oil companies are accelerating spending on and diversifying into renewable and low carbon energy in response to growing concerns over climate change.
The successful progress of renewable energies around the world, the signing of COP negotiated climate protection pledges, plus the decreasing use of coal in China and the USA all lead to the question of whether the beginning of the end of the fossil age has already begun.
The energy transition is a global reality. Photovoltaics and wind energy in particular have developed into key energies for the 21st century. In terms of investment, the renewables sector is now significantly ahead of traditional energy technologies. In Europe, regulators have taken a leading role in focusing in on how to achieve a carbon-neutral economy, with headline initiatives such as the EU’s net-zero greenhouse gas emissions target 2050.
Emerging economies, led by China, are also deciding how to increase energy access and sustain economic development, while transitioning toward cleaner energy sources. In the U.S there is growing political momentum around lower greenhouse gas-emitting power generation and a clean energy economy.
Mainstream introduction of electric transportation infrastructure and energy storage also underpin this theme. As the average cost of lithium-ion batteries has fallen drastically through a mixture of manufacturing economies of scale and technology improvements, companies and consumers alike are increasingly turning to electrification for power transportation, making the transition to electric vehicles (EVs) one of the largest potential areas for electrification. In line with some analysts , we believe that the global EV adoption rate could reach 10%-12.5% by 2025.
The future of energy is renewable
Primary energy consumption by fuel
Source: Bloomberg New Energy Finance 2000 – 2050 (Estimated). Please note that one PetaJoule is 1015 joules (1 million billion) or 278 gigawatt hours.
The global progress of renewable energies is a result of the success in reducing the costs. Wind energy plants on land are still the most cost-effective technology for renewable power generation. Photovoltaics are now becoming the most cost-effective technology for electricity generation in more regions of the world. Electricity from the sun and wind will expand its exponential progress beyond the power sector into the areas of mobility and heating.
Electric vehicles are big news. So big that the transition to them counts as a true megatrend for the 2020s. But it is not the whole picture. To decarbonize by 2050, the world will need to base energy use around alternative fuels. Sustainable aviation fuel, hydrogen, biofuels. These could become the biggest source of power for transportation and industry.
The energy future is decentralised
Source: Bloomberg New Energy Finance 2012 – 2021
Energy generated from renewable energy sources is decentralised. Instead of a few large power plants, the energy system will see many small plants generating energy. Many of the stakeholders involved will be both producers and consumers of power. However, this does not mean that only small power plants will be left. The infrastructure and plants based on wind and solar power will keep their position in the new energy system. In many emerging regions of the world, which have an abundant supply of sun and wind, members of the public as small generators of energy could benefit long-term from decentralised renewable energy systems.
This focus on developing domestic supply chains for alternative energy solutions such as solar panels provide a sustainable advantage for the likes of US listed panel manufacturer First Solar and US alternative energy developer NextEra Energy Partners.
The future of energy is digital
Digital energy storage systems are changing the way we think about energy management. Looking back through history, most energy storage systems have been mechanical or chemical. But with the rise of digital technologies, we see a generation of energy storage systems that offer a more efficient and cost-effective way to store, manage and use electricity.
The IT and energy sectors are growing together. Only a combination of both will be able to reliably match the energy supply and demand at all times. The rapid cost depreciation in storage technology, particularly for small and large battery banks, opens up the possibility of reliable energy supply at any time. The ultimate goal being a 100 per cent transfer to renewable energies. As costs fall and efficiency improves further, digital energy storage has the potential for wider use beyond the markets it works in today.
Quick case study: Samsung SDI
An example of a company working in this niche is Samsung SDI which develops battery technology, enabling the transition to electric vehicles and supplying storage capacity to the renewable energy industry. Samsung SDI have a target for net zero by 2050 whereby the company will be 100% renewable energy. The company launched a “Power Consumption Composition Innovation Task Force” in March 2022.
The final thought
With today’s headwinds of energy security and inflation adding to the challenge of tackling the climate crisis, how companies, governments and utility providers move ahead with a resilient, affordable and orderly energy transition is fundamental.
In our view the energy sector will undergo a huge transformation in the next 30 years at an unprecedented rate. This energy transition simply has to happen from an environmental perspective, in particular due to carbon emissions.
2022 was an inflection point in terms of how politicians support the energy transition – this is one of the reasons why we believe this megatrend has so much potential over the long term.
Other major factors include the continued increasing use of electric vehicles, the reduction in the cost of wind and solar energy, plus the adoption of innovative technologies such as storage and smart grids which will drive the overall transition, creating some compelling investment opportunities along the way.
