24.05.2024
Source: Energy & Management Powernews
There is no magic formula for the global energy transition. It is not yet clear which technologies will meet the new requirements.
This is the conclusion of a study by PGIM, investment manager of the US insurance group Prudential Investment Management. The restructuring of the energy industry and the growing demand for energy, particularly in emerging markets, present opportunities for investors, but also new risks, write the asset manager's experts.
There is "no perfect energy or power source", says the head of PGIM's research department, Shehriyar Antia: "Regardless of whether an investor is pursuing decarbonization goals or not, it is crucial to understand which companies will get us through the energy transition and which technologies may not live up to the hype."
Despite the urgency of achieving the goals of the Paris Climate Agreement, the energy transition "cannot happen everywhere at the same time". Simple strategies that divide the world into "brown villains" and "green heroes" are not an effective approach, either from an environmental or investor perspective. The study refers to the experience that further developments in the energy industry have supplemented old energy sources in the past, but have never completely replaced them. The authors therefore believe that "companies that ensure the provision of energy, promotion and adaptation during the transition" currently offer the best investment opportunities.
This includes the "infrastructure-critical components of renewable energies", as electricity generation from wind and solar is increasing rapidly in all regions. As a result, the global demand for "complementary infrastructure such as electricity storage and transmission" is growing and, as a consequence, the demand for metals such as copper or grid components. The best opportunities are in emerging markets such as India and Latin America.
While the infrastructure for renewables is being built, the increasing demand for energy must be covered by fossil fuels. Coal will gradually be replaced by natural gas. PGIM expects global demand for liquefied natural gas to increase by 50 percent by 2040.
Sceptical about hydrogen, nuclear fusion and CCS
The authors of the study are sceptical about "speculative green technologies such as hydrogen energy, nuclear fusion and carbon capture". Economical operation on a large scale faces "major challenges". It is also unlikely that "trendy, green technology start-ups" will displace the established, multinational energy companies. There is much to suggest that these companies are also leaders in innovative green technology. "Oil companies that are committed to the energy transition and find ways to remain energy suppliers independent of primary energy sources are more likely to be among the winners."
Whoever relies on the extended life cycle of fossil fuels, on the other hand, risks becoming redundant. At the same time, investors need to be aware of the fact "that fossil fuels will remain an important element of the energy supply for decades to come". Although renewable energies are increasingly becoming the first choice for new generation capacity, the energy transition is taking place at different speeds depending on the region.
Hydropower and geothermal projects are particularly interesting investments because they do not become obsolete as quickly as wind or solar projects and are subject to less competition. There are opportunities in Scandinavia, Italy and Latin America in particular, where the existing infrastructure is being modernized.
India with great potential
The study identifies India as an interesting market, which is already the third largest producer of electricity from renewable sources and has enormous growth potential. Companies that have already successfully implemented large projects and have experience in dealing with local authorities are an attractive investment against this backdrop. This also applies to metals and minerals such as lithium, which are of particular importance for the energy transition.
The increasing global demand for energy offers important, long-term investment opportunities, but also requires "strict discipline in overvalued areas". PGIM considers "speculative innovations" with particular risks to include hydrogen, small nuclear reactors, so-called SMRs, CCS, but also battery storage systems based on lithium. Although the latter are an important element in the electricity system of the future, their production is not always sustainable. Batteries based on sodium could be produced in a more environmentally friendly way and with more readily available raw materials, but they are only in the development phase and are still a long way from industrial production.
The 56-page study"Fueling the Future. Investing across the global energy landscape" can be downloaded from the PGIM website.
Author: Tom Weingärtner
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