Building blocks for a super cycle in clean energy

Oil as fossil fuel may be on its way out but it remains important for a range of other industries. Still, the world is slowly kicking the addiction, also because battery-powered sports cars are so much cooler than gas-guzzling SUVs (although some will dispute that). You can still step on the gas – but “gas” is on its way out, anyway. The technology to go clean is available, despite what some expert seem to think (see chart 1).

To read up on the topic of energy super cycles, click here and here (in German).

Technological progress drives climate solutions

Pledges to decarbonize the world will remain hot air without rapid technological progress. And this is happening slowly but surely. The exponential growth of renewable energy, driven by technological improvements over the past decade, is a good example. For a new installation, the cost of electricity of both wind and solar energy is now cheaper than nuclear and coal, and slightly lower than that of natural gas (see chart 2). Almost 90% of the increase in total power capacity worldwide could last year be attributed to growth of wind, solar and hydro power.

For more facts on global challenges like climate change, click here .
 

Governments splash their cash

Governments are simultaneously announcing massive green infrastructure packages. The European Union’s (EU) Green Deal aims to meet the targets of the Paris Agreement and making the trade bloc carbon neutral by 2050. The 1 trillion EUR package includes funding aimed at projects mitigating climate change. Key legislation and policies, including an EU Emissions Trading System and national emissions targets for the transport, buildings and agriculture sectors have also been put in place. Meanwhile, the US has returned to the global climate arena following Joe Biden’s arrival in the White House. The Democrats have introduced a wide-ranging climate bill, aiming at a fully decarbonized US economy by 2050 and will trigger multi-billion dollar investments into climate-friendly infrastructure.

The world’s at once largest polluter¹ and major installer of green power infrastructure, China, plans to become carbon neutral by 2060. This effort, which Goldman Sachs expects to be driven by renewable power, “clean hydrogen”, and carbon capture, would require investments of 16 trillion US dollars, according to the bank². Whether or not all of these plans will come to fruition is up for debate. Any way you look at it, governments will splash their cash.

The number of climate experts grows in lockstep with the number of governments promising to combat climate change. Take former Bank of England Governor Mark Carney, now a United Nation’s climate official, or former US Secretary of State John Kerry, currently Joe Biden’s climate envoy. And there is a growing number of opinions, too. John Kerry recently said that half of the aimed-for carbon emission cuts should come from future technologies "we don't yet have” – a statement that left some engineers aghast . We believe that using and investing in the already available clean technology will go a long way.

Alternative ways to propel your clean-tech engine

So it seems a super cycle is forming, and we believe it will bring out the best of companies’ innovation skills, and may ultimately fire up investment portfolios. Yet sometimes investors can feel a bit lost in light of the multitude of potentially valid portfolio candidates. Or, to use our introductory example, there may be too many car dealers extolling the “green” quality of their products. Having long followed the comings and goings on the vast clean technology parking lot, we are happy to offer some guidance here. To do this, we concentrate on one of our so-called impact pillars, clean energy infrastructure. Under this heading, we target power equipment manufacturers, providers of smart grid as well as transmission solutions, and utilities.

Find out more about our impact investing approach here .

• Clean energy infrastructure including “smart grids”

Over the next three decades, the world’s cumulative investment in new energy capacity should exceed 15 trillion US dollars. Two-thirds of this sum will be funneled into solar and wind power infrastructure (see chart 3). The problem with these two energy sources is they produce a surplus of power during a certain period and none at all during others, To make up for this shortfall, the world needs smart grids. These are decentralized electricity networks that can integrate the behavior and actions of all users in a cost-efficient manner. In contrast with traditional networks, they integrate across national boundaries. Smart grids can include small-scale transmission lines and be bi-directional. They can therefore incentivize small-scale electricity production. Homeowners can turn into active power producers, through the installation of solar panels on their roofs and then resell the surplus produced. Smart grids have the potential to significantly reduce the environmental impact of the entire electricity supply system. A company active in the area of smart grids is US-based Itron, for example. Their smart meters combined with real-time advanced data analysis allow detecting leakage, infrastructure failures as well as their location, avoiding losses and reducing repair work cost.

For investors with a taste for emerging market companies, Jiangsu Zhongtian Technologies (ZTT), a Chinese manufacturer of power transmission cables, be it high voltage interconnections between grids or the integration of renewable power generation, could be a name to consider.

• Low-emission travel needs batteries – hydrogen a solution?

Another impact pillar of ours is low-emission transportation, which brings us to question how to make rail and road travel more efficient. Companies that come to mind here are Japan-based Nidec, a manufacturer of highly efficient electric motors and components for the automotive industry, or Germany’s Continental, which provides components for hybrid and electric vehicles as well as tires with low rolling resistance.

Low-emission travel will increasingly rely on powerful batteries, but their capacity is currently limited. Using hydrogen instead as a means of storing energy could be a solution, but the problem is that it is currently produced from natural gas, a cheap but polluting production method. Gaining hydrogen from renewable sources – electrolysis of water with energy from solar panels or wind parks – is likely to become a viable option in a few years’ time. A broad tax on carbon emissions or subsidies, or both, could accelerate the change (see chart 4).

Among the companies we follow in the area of batteries is South Korea-based Samsung SDI, whose products are used in electric vehicles and electrical storage solutions, mostly in combination with renewable energy generation. Lastly, in the hydrogen field, we keep an eye on Air Liquide from France, which operates a number of hydrogen fueling-stations for cars, trucks and buses.

Pedal to the metal without a bad conscience

The coming (three) decades are likely to be a super cycle for investments in clean technology. Clean energy infrastructure and low emission transportation are two of the main building blocks of a portfolio focusing on environmental challenges. The globalization of climate policies across the globe and the aim of the world’s super-powers to reach zero emissions between 2050 and 2060 will boost investments in green infrastructure. So will additional government packages in favor of greening their economies. Over the next thirty years, we expect many interesting opportunities for long-term investors in the energy sector. This should finally allow drivers to hit the “go” pedal without a bad conscience.

1. China accounts for 28% of global CO2 emissions, followed by the US (15%), India (7%), and Russia (5%), according to US-based Union of Concerned Scientists (data as of August 12, 2020) https://www.ucsusa.org/resources/each-countrys-share-co2-emissions

2. “Carbonomics. China Net Zero: The clean tech revolution”, Goldman Sachs Equity Research, January 20, 2021.