Investing in the energy transition

Conan McKenzie

Co- Portfolio Manager, Charity Funds

Angus Dell

Investment Strategist, Charity Funds

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The world’s focus on delivering energy security has sharpened significantly this year, as European countries in particular seek to reduce reliance on Russian energy imports. With the rising cost of energy, a shift to renewable energy has now become not only the key to governments meeting net zero commitments, but also one of the most attractive ways to strengthen the resilience of energy supply. This is because the cost of deploying renewables has plummeted,¹ which in turn has led to adoption rates that have significantly outpaced even the most optimistic predictions.²

It is forecast that global electricity demand will triple by 2050³ as a result of population and economic growth, as well as the increased electrification of the economy. Whilst renewable energy makes up an increasing proportion of the energy mix, we are still heavily reliant on fossil fuels to meet demand. However, with soaring gas prices, the case for increasing the speed and scale of the roll-out of renewables, energy efficiency measures, and investment in new technologies is compelling.

Given that a comprehensive global system of renewable energy will take decades to build, the world will continue to rely on fossil fuels, particularly gas, over the medium term. This will be required in order to ensure a reliable and affordable supply of energy during the transition. We see a role here for traditional energy companies, but given the anticipated decline in fossil fuel demand, only those that have clear and credible transition plans.

A compelling opportunity

The investment required to get the world on track for net-zero by 2050 must accelerate from current levels to over US$4 trillion annually by 2030,⁴ not only in renewable power generation assets, but throughout the entire clean energy value chain. This underscores our view that the transition to a net-zero carbon economy is one of the long-term megatrends that we see shaping the global economy, business, and society. This represents a significant investment opportunity.

As a team, we have a long history of investing in renewable energy. We’ve been making investments in this space for almost a decade, starting initially with solar power. We typically invest through the primary markets, directly giving capital to companies that are building renewable energy infrastructure. By investing in this way, we are having a tangible real-world impact as additional renewable power generation assets can be constructed using that capital, helping to decarbonise electricity generation. As we have continued allocating to this area we have expanded our investments into wind and hydroelectric technologies and diversified our exposure by geography with assets now across the UK, Europe, and Australia.

However, turbines only work when the wind blows, and solar panels only generate electricity when the sun shines. As the weather is not always predictable, production from wind and solar varies in seasonal and daily cycles. New and innovative technologies will therefore be required in order help facilitate the continued roll out of renewable energy and eventual decarbonisation of the energy system. In addition to our renewable energy investments, we are also investing in technologies such as battery storage and energy efficiency that will help provide some of the solutions required in order to facilitate the energy transition.

Diversifying renewable energy exposure

Increasing the energy efficiency of the economy has the obvious benefit of reducing overall demand for energy. This reduces carbon emissions, cuts energy costs, and can strengthen energy security. Without a push to maximise energy efficiency it is estimated that final energy consumption will be a third-higher in 2030, significantly increasing the cost and difficulty of decarbonising energy supply.⁵ Our investments look to fund solutions to reduce energy waste from generation, transmission, distribution, and finally at the point of end use. This includes ensuring cleaner and more efficient supply of energy by bringing the energy generation closer to where it’s used, or reducing demand by retrofitting buildings, installing combined cooling, heat, and power systems or replacing inefficient lighting systems. Energy efficiency solutions are a cost-effective way to complement the deployment of renewable energy in reducing reliance on fossil fuels.

Another area in which we have invested is battery energy storage systems (“BESS”) which play an essential role in supporting the shift away from a reliance on fossil fuels. The fluctuation in power generation from renewable assets and infrastructure constraints, often as a result of being situated far from demand, means that there is currently a need for back-up generation capacity to ensure the supply of reliable and affordable energy. This often results in the system operator telling renewable energy producers to switch-off generation, at the same time as paying to turn on fast-responding generation, usually gas turbines. According to independent analysis commissioned by Highview Power,⁶ since the start of the energy crisis in September 2021, the UK has wasted over 1,300 GWh of wind power, or enough renewable energy to power 500,000 homes a day, all the while paying over £390 million to turn off wind farms and using gas as a backup. Not only can BESS store energy closer to where it is expected to be used but excess energy can be stored when it’s produced and discharged when it’s needed, reducing reliance on gas and also saving on consumers’ energy bills. This helps mitigate the intermittency issues associated with renewables, helping stabilise the energy network, and enabling further deployment and production of renewable energy.

Delivering on the energy transition is something that aligns the priorities of increasing energy security and meeting the world’s net-zero commitments. This is a prime example of how we can help our clients invest their capital to increase political security, accelerate the net zero transition and generate financial returns at the same time. These areas present a compelling investment opportunity and an area that we continue to invest in with great excitement.

Risk:
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.

The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

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