The hidden silver lining of the energy crisis

Only a few people have been able to avoid putting a strain on their household budgets during the wave of inflation that has gripped the world over the past two years. After decades when inflation seemed like a thing of the distant past, inflation is rising Once again after a combination of tangled supply chains and Russia’s war in Ukraine sent consumer and energy prices skyrocketing. Although this has caused real pain for most families, it has also accelerated the global deployment of renewable energy and green technologies in an effort to reduce dependence on Russian natural gas and fossil fuels more broadly. This acceleration builds on the physical tailwinds that companies offering green solutions are already experiencing. These tailwinds have strengthened recently, with countries representing 91% of global GDP signing on to net zero CO2.₂ Pledges, which is A significant increase from 68% in December 2020^I. Achieving these goals is expected to require annual investments worth $5 trillion by 2030^secondlyEquivalent to the combined GDP of the United Kingdom and France. This paper provides brief perspectives on how investors can navigate this environment by identifying companies that are best positioned to capitalize on these opportunities.

Accelerating growth in renewable energy

The global expansion of renewable energy has been one of the most important investment themes of the past decade. This has unfolded as renewable energy has gone from being a subsidy-driven market to becoming a chronic construct as it has become cheaper than fossil fuels in many cases. Looking ahead, renewable energy is expected to continue to build, and global installed capacity, excluding China, is on track to expand 3.5 times from 2022 to 2030. Market growth forecasts for 2030 have accelerated in the wake of the energy crisis, Russia’s war in Ukraine, And massive legislation such as the US Inflation Reduction Act (IRA) and the Green New Deal in Europe.

For these reasons, growth projections for 2030 have increased 1.9 times from 2,110 GW to 4,045 GW in just two years.^Third. These large amounts of renewable energy will require significant investments in connections to the power grid, as well as extensive grid modernization to be able to integrate and balance energy systems that increasingly rely on natural resources such as solar and wind. Globally, network upgrades and modernization are expected to require nearly $1 trillion in annual investment by 2030^Fourthly. Strong growth, whether from renewable energy construction or grid modernization, will flow into the supply chain behind construction and materially benefit wind turbines, solar equipment, and cable manufacturers, as well as utility companies building renewable energy and grid connections.

Green technologies leap into the present

Over the past decade, green technologies have steadily matured, and some have become competitive with fossil fuel-based solutions. While this was the case, maturation was often slower than initially expected. Looking ahead, there are signs that this will change due to pressure to reduce reliance on Russian gas and decarbonisation, as well as upcoming initiatives. Decarbonization and energy independence are no small tasks and will require a wide range of technologies. Green hydrogen represents great potential in this regard because 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 deployment has been slower than many originally expected. Part of the reason for the lackluster rollout was the slow introduction of regulation and price increases that were materially higher than traditional fossil-based hydrogen. However, both of these elements are likely to improve over the next decade. On the regulatory side, the FRA lays the groundwork for years of ambitious incentives for both renewable energy and green hydrogen. For green hydrogen, this will likely lead to an abundance of renewable energy and green hydrogen supply chain manufacturing, which combined will likely materially lower the pricing premium. Globally, these improvements mean that green hydrogen is expected to reach 260 GW by 2030.

From an investor’s perspective, this deployment represents great investment potential. This will apply not only to companies providing the equipment needed to produce hydrogen, but also to industrial gas companies that will play an important role in production. In addition to the direct beneficiaries, the renewable energy value chain is likely to benefit materially as well, as 260 GW of green hydrogen will require a significant amount of new renewable energy, creating a positive feedback loop.

Energy efficiency and electricity on a large scale

While green technologies and renewable energy are developing rapidly, their pace has closely matched more traditional green solutions, such as energy efficiency and electrification solutions. In particular, this has been true since the start of the current European energy crisis. The reason is that building renewable energy typically requires years of planning and construction, and while green technologies will be paramount in the medium to long term, it will likely take years before They reach size. For these reasons, energy and electricity efficiency are key drivers of reducing emissions and energy dependence, as they can quickly reduce demand. In Europe, where Russian gas represented about 50% of consumption before the war^FifthThe focus on reducing gas demand was particularly important. Against this backdrop, the European Commission has introduced more ambitious energy efficiency targets, now targeting 11.7% by 2030.^VI.

One of the most impactful techniques for increasing energy efficiency has been replacing inefficient fossil boilers with electrically powered heat pumps. In Europe, this has led to massive market growth from just 7% growth in 2020^Seventh To 34% in 2021^EighthAnd 40% in 2022^Ninth. In Germany, for example, this market grew by 111% in the first quarter of 2023^s. Looking to the future, the heat pump market is likely to continue to grow, as in Europe today only 20 million households (10%) have heat pumps.^eleventhKey legislation such as the Inflation Control Act creates ambitious incentives for households to switch to new heat pumps in the United States.

Just transition has come into focus

One element of the green transition that is sometimes overlooked is the risk that the transition will negatively impact certain parts of society. People most often associate this risk with workers in the fossil fuel industry, because they may lose their jobs as society transitions away from fossil fuels. While these risks are real, there are also likely to be risks for households at the lower end of the income pyramid due to potential transition costs. Examples of these costs include regulation that makes internal combustion cars more expensive to own or tariffs on foods or goods with a high climate impact. Ultimately, the green transition is likely to benefit economically vulnerable households, as a world powered by renewable energy at near-zero marginal costs is bound to entail cheaper energy costs. But since the pace and ultimate success of the green transition depend on continued public support, investors must remain vigilant in watching for signs of faltering public commitments.

The energy crisis has provided a microcosm of how vulnerable households are disproportionately affected by rising energy prices. This becomes particularly important in the future as fossil fuels are replaced by renewable energy, potentially lowering energy prices over time, but also bringing with it increased intermittency due to reliance on solar and wind resources. Increasing resilience in the energy system and energy storage will therefore be key to long-term viability, but during the transition period until such solutions become widespread, the risk of burnout becomes real if vulnerable households are continually stressed.

Conclusion

The hidden silver lining of the energy crisis is that the deployment of renewable energy and green technologies has accelerated significantly to eliminate energy dependence on Russian gas and meet major emissions reduction initiatives. Although the pain felt by many households due to rising energy prices is real, the acceleration brings increased investment potential for companies offering solutions to achieve this green goal. As they become more attractive as potential investment opportunities, the top ten renewable energy companies have become cheaper, while their growth prospects have expanded. Finally, tensions resulting from the 2022 crisis were particularly acute in Western Europe; However, long-term “silver lining” solutions will be beneficial around the world.

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^I Net Zero Tracker report finds key credibility gaps remain in global, national, regional, city and business targets

^secondly Net Zero by 2050 – Analysis – International Energy Agency

^Third Capital Markets Day

^Fourthly Net Zero by 2050 – Analysis – International Energy Agency

^Fifth

^VI Energy efficiency directive

^Seventh REHVA Magazine European Heat Pump Market

^Eighth Record growth for the heat pump market in Europe in 2021

^Ninth International Energy Agency: Heat pump sales in Europe rose by 40% in 2022

^s German heat pump sales grow by 111% in the first quarter

^eleventh Market data

Risk considerations

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

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