Multiple elements need to combine to meet the world’s burgeoning energy needs while moving to cleaner fuels. This creates complexities for investors to navigate, says the team on the BlackRock Energy & Resources investment trust.
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.
It is tempting to portray the energy transition as linear: the world will move progressively away from fossil fuels, adopting clean energy such as wind, solar or hydrogen. The reality is more nuanced, likely to be stop-start, and with considerable debate among policymakers on the right course of action.
The most recent IEA report onto investment in energy markets exposes this complexity. Overall, it shows that the whole pot is growing. Energy consumption has grown from 122,857TWh in 2000 to 178,899TWh in 2022, a rise of 46%.1 While growth is slowing, the world continues to need more energy year on year. Alongside investing for the energy transition, companies and governments also need to invest in expanding supply. Against this backdrop, the IEA estimates that investment in energy will be around USD2.8 trillion in 2023.
While it might be assumed that most of this new investment would be directed towards renewable energy infrastructure, the reality is far more complex. While there has undoubtedly been significant investment into renewable energy creation and infrastructure, driven by initiatives such as the Inflation Reduction Act in the US and Fit for 55 in the EU, it is not grabbing as high a share of energy investment as much be expected.
The report showed investment of USD 1,740bn in clean energy, a rise of USD 123bn on the previous year.2 However, it also showed a significant rise in investment in fossil fuel investment – USD 1,050bn from USD 1,002bn the previous year.
A complex picture
Partly, this is the distorting effect of the Ukraine crisis, with intense volatility in fossil fuel markets prompted by the invasion of Ukraine accelerating momentum behind the deployment of a range of clean energy technologies, but also a short-term scramble for oil and gas supply. However, after a dip from 2019 to 2020, fossil fuel investment has risen steadily ever since. As such, while annual clean energy investment is rising faster than investment in fossil fuels, (24% vs 15%), fossil fuels are by no means a spent force.
The clean energy complex
In addition to the division between fossil and green fuels, there is also considerable complexity in where capital is being deployed within the clean energy complex. It is not enough simply to target solar or wind farm production, the whole infrastructure of energy distribution needs to be adapted to accommodate different types of energy. For example, wind and solar suit more localised distribution. As such, investment is being spread across renewable power, nuclear, grids, storage, low-emission fuels, efficiency improvements and end-use renewables and electrification.
Clean energy infrastructure also requires certain mined commodities, including copper, and rare earths. These go into battery manufacturing, for example. Silver is an important component of solar cells that are used in photovoltaic panels. Without the mining companies extracting these commodities, the energy transition cannot happen.
In short, the energy market has many moving parts. A vast array of factors need to come together to create the right conditions for the transition from fossil fuels, and in the meantime, the world may continue to rely on fossil fuels to meet its growing energy needs. This is why we believe a binary approach to investing in the world’s energy markets is misplaced, and it is important to look across all the elements as the world re-engineers its energy supply, distribution and consumption.
