Renewables
The Case for Renewables & Sustainable Infrastructure Amid the Urgent Need for Energy Independence
Article
Mar 10, 2022
We believe the investment case for listed renewables & sustainable infrastructure is particularly compelling, with the current market environment creating a major inflection point that represents an opportunity for investors.
Renewables equities appear to be pricing in little-to-no growth (see our March Real Assets Monthly), and there are increasing commitments from countries and corporations around the world to reduce carbon footprints. There also is now another factor driving demand for renewables & sustainable infrastructure development: Countries are focusing on an urgent need for energy independence. We expect this will accelerate the energy evolution toward renewables.
A Catalyst for Change
The past few weeks have been a strong wake-up call for countries that are dependent on Russian commodities—specifically the oil and gas supplies. We believe the implications of the sanctions against Russia will not only lead to a reduction in dependency on Russian imports but will also be a catalyst for positive environmental change to our planet. In our view, this may trigger a faster and more substantial transition in energy policy toward a world that runs on electricity, which is led by renewables & sustainable infrastructure, with the first steps coming from Europe.
The European Response
Europe is one of the regions most heavily dependent on energy imports. The EU currently imports roughly 90% of its gas consumption, of which Russia accounts for about 40%, according to the European Commission. As global commodity prices continue to soar and pinch European consumers, there will be a meaningful negative impact to gross domestic product (GDP) growth of about 0.5% in 2022, should prices stay at these levels. This is occurring amid an already difficult, supply-chain-constrained backdrop as a result of COVID-19. In response, the European Commission has just rolled out “REPowerEU” to achieve more affordable, secure and sustainable energy. It is a call to action to reduce dependence immediately on fossil fuels imports, specifically from Russia, while pushing forward the energy transition. The European Commission is now proposing the following, according to its recent communication of the plan:
- Ramp up production of green energy to provide affordable and secure power
- Diversify sources of supply to substantially mitigate the import need from Russia
- Reduce demand (primarily for gas) and promote energy efficiency
- Protect against price hikes (rising fossil fuel prices hit vulnerable consumers particularly hard)
Wind and solar are already the most affordable form of power. As the pressures on consumer wallets from the energy disruptions worsen in today’s commodity price environment, the gap is only widening. The EU’s proposed “Fit for 55” plan for decarbonization from July 2021 already envisions doubling wind and solar capacities by 2025 and tripling them by 2030, and the full plan would reduce gas consumption by about 30%.
Accelerating the rollout of rooftop solar systems, increasing production of biomethane, and pushing forward hydrogen implementation could reduce fossil fuel consumption even further. What this also importantly translates to is security of supply—countries across Europe would become more in control of their energy production via renewables, reducing the need for importing fossil fuels to power the economy.
We have already seen countries focus on acceleration of renewable development. For example, it was reported last week that Germany is planning to upgrade its rate of wind and solar installations to more than 30 gigawatt per year (vs. about 6 GW currently) and has set up a new goal to achieve 100% of its energy from renewable power by 2035 (previously its goal was 2050). This potential new renewables policy could meaningfully accelerate the electrification process of the country, while also improving its security of supply and, ultimately, enabling it to achieve energy independence.
We believe the other alternatives in Europe are to either delay the phase out of nuclear power or diversify sources of gas supply through new liquefied natural gas (LNG) terminals with strategic storage to improve resilience. While delaying the phase out of nuclear power is a short-term solution, utilizing LNG in the mid-to-long term is a key alternative to reduce dependency on Russia.
Between now and 2030, we believe the crux of energy independency will come from the role of electricity (and importantly, the role of renewable energy) in the electrification of the economy. We anticipate this will include the use of heat pumps in buildings, green hydrogen as a fuel source, and bilateral electric use from electric vehicles/energy storage. The faster these alternatives can be adopted into the economy, the quicker society will be able to decarbonize.
Investment Implications for Infrastructure Companies
We believe that infrastructure companies are well-positioned to deliver energy independence. We have been investing in large-scale developers of renewables, as well as in integrated utilities that are uniquely situated to invest on behalf of countries and help pave a path toward energy independence, while also keeping customer bills affordable and ensuring reliability of the electrical system.
Given the recent market environment, we see growth opportunities for renewables & sustainable infrastructure accelerating substantially, which, in our view, is not reflected in today’s share prices. In the coming months, the megatrend of renewable energy development geared toward decarbonizing the global economy could potentially gain more traction than it ever has, given the call for energy independence amid today’s current geopolitical landscape.
In the meantime, in response to current share price volatility, we are gradually repositioning toward attractive investment opportunities that we expect will be leading forces for energy independence. We believe renewables & sustainable infrastructure will be at the forefront of this evolution. Renewable sources of energy are increasingly the answer to achieving energy independence, and we expect those companies will continue to be in increasingly strong positions to create value for shareholders.
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