Nicolas Jacob – Oddo BHF Asset Managment
The final communiqué of COP 28 in December 2023 marks a historic turning point in the fight against global warming. By stressing the need to “‘transition away from fossil fuels in energy systems” in the coming decades, oil, gas and coal were put on an equal footing and the importance of the coming decade for an accelerated reduction in greenhouse gas emissions was emphasized. To comply with the Paris Agreement, greenhouse gas emissions must be reduced by 43% by 2030 compared to 2019 and by 60% by 2035. This requires a tripling of global renewable energy capacity by 2030, which corresponds to an average annual growth rate of around 15%. Achieving the ambitious targets will also require accelerating the development of zero or low carbon technologies, including nuclear energy, carbon capture and storage and the production of low carbon hydrogen. This objective is challenging and will bring about a profound change business practice. This will create many opportunities for companies worldwide whose business model makes a positive and significant contribution to ecological change. Beyond combating climate change, sustainability is thus becoming a megatrend that opens long-term earnings opportunities for investors. This is also confirmed by figures from the International Energy Agency (IEA).
Accelerated expansion of renewable energies
In October 2023, the International Energy Agency (IEA) published its outlook for the global renewable energy market. This describes an energy system in 2030 in which clean technologies play a significantly greater role than today. This includes almost 10 times as many electric cars on the road worldwide; solar PV generating more electricity than the entire US power system does currently; renewables’ share of the global electricity mix nearing 50%, up from around 30% today; heat pumps and other electric heating systems outselling fossil fuel boilers globally; and three times as much investment going into new offshore wind projects than into new coal- and gas-fired power plants. Renewable energies are now competitive in terms of cost. This, in turn, positions companies well to capitalise on the accelerated growth of investment in renewable capacity across the entire value chain – from infrastructure planning, installation and maintenance to power generation and distribution.
Super cycle for investments in electricity grids
A modern, efficient electricity grid is essential for a successful energy transition. Last year, global investment in the modernisation and construction of electricity grids amounted to USD 274 billion. A CO2-neutral scenario by 2050 would require USD 800 billion. One fifth of the necessary investment would go towards replacing severely outdated systems and two fifths each towards modernising and building infrastructure systems. Of this, 40 % would be transmission infrastructure, i.e. high-voltage grids for long-distance transport, and 60 % distribution infrastructure, i.e. medium and low-voltage grids for local transport. For the operators of these grids as well as the entire value chain, the market is expected to grow by an average of 7-8% per year until 2030. The investment backlog that is evident in many regions has so far been compensated for by greater energy efficiency. However, three factors are now likely to lead to an acceleration in investment. 70 % of the electricity grids in the USA and Europe are more than 30 years old. At the same time, the availability of renewable energies is growing. The development of new forms of use, particularly in the areas of mobility and digitalisation, for example in electric vehicles and data centres, is generating additional demand for electricity and making increased grid expansion necessary.
Flexible grids, efficient energy utilisation
In November 2023, the European Commission presented a series of measures to accelerate the expansion of the electricity grids in Europe to make them smarter and more efficient. As a result of these measures, Europe will double its annual investment in electricity grids from €40 billion to €80 billion. However, the efficient use of energy is also becoming increasingly important in the private sector in response to high electricity prices. There are also interesting sub-topics within the megatrend of ecological change and achieving net zero emissions: The increasing digitalisation of the economy and industry in particular has given the business software sector average annual growth of around 7% over the last 20 years, and the market for industrial software has even grown by more than 10% per year over the last five years. The use of this type of software makes it possible to reduce overall energy consumption and CO2 emissions, particularly during the prototyping and testing phases of various industrial applications. This contributes significantly to increasing energy efficiency in areas such as aviation, the automotive industry or the energy efficiency of wind turbines. It is therefore not surprising that the COP 28 also formulated the goal of increasing the annual rate of increase in energy efficiency from the current 2% to 4% by 2030.
Complex topic – clear structure According to international estimates, there is still an annual investment gap of USD 4 trillion to make the ecological transition a reality. Private capital is finding a multitude of attractive investment and growth opportunities in this global megatrend. As fund managers and investors alike, it is helpful to focus on those areas whose growth potential encompasses key aspects of ecological change: from clean energy and energy efficiency to sustainable mobility and the conservation of natural resources.
