Renewables
The Three Pillars of a Sustainable Power Industry
Article
Oct 18, 2021
Global decarbonization efforts are rapidly changing the power industry, which is evolving to meet global net-zero targets. We believe renewables are the cornerstone of a sustainable power industry and are poised to become the world’s favored energy supply over the next three decades. This evolution will require significant investment: close to $100 trillion in capital spending globally, according to the International Renewable Energy Agency. This capex is needed to solve for what we see as the three pillars of a sustainable power industry, and it represents a large, multidecade opportunity for investors.
Decarbonization. More than 130 governments, 1,000 corporations and $5 trillion in global assets under management (AUM) have committed to lowering emissions in an effort to reach net-zero targets by 2050, where emissions produced would equal those eliminated.1 Power generation is a first mover in these efforts, as electricity is the single largest source of global greenhouse gas emissions. Renewables generation must increase significantly to reach 100% carbon-free electricity by 2050, as evident in the chart below.
Affordability. Renewables are already the world’s low-cost power provider, with further cost declines expected. Significant capital deployed into the renewables sector over the last decade has spurred technology innovations that have improved the economics of wind turbines and solar generation, driving efficiency gains that have helped lower the costs of electricity generated via wind and solar. See the chart below. Importantly, renewables—as a naturally recurring resource—may help mitigate volatility in power prices, as fossil fuel generation is phased out.
Resiliency & Reliability. Renewables, without meaningful storage solutions, are intermittent power sources that require help from other fuel sources to meet peak energy demand in a cost-efficient way. The “duck curve” in the chart below illustrates the mismatch between peak energy demand and peak solar supply. Solar power output (the green line) increases in the morning, but then drops as the sun sets. However, power demand (the blue line) peaks around sunset, when more people use electricity, meaning help from other power sources (the gray line) is needed. We believe investments in battery technology will help lower the cost of storage and make storing renewable power generation sources at scale possible over the longer term. Billions of dollars are being poured into the development of long-duration batteries; we expect the cost of battery storage will decline quickly, following the similar pattern that wind and solar experienced over the last decade.2 See the chart below.
The Investing Implications
We believe this investment opportunity is powered by real assets, as it mostly is centered around companies that develop, own and operate these critical power assets. We recognize that investments in other parts of the renewables value chain are important to this transition. As an example, many clean technology companies are critical to maximizing grid modernization and energy efficiency. We focus on wind & solar, clean power, clean technology and water sustainability companies, which represent the foundation of the investment opportunity around solving for these three pillars.
Endnotes:
1 https://eciu.net/netzerotracker; Science-based targets initiative, October 2020. Climate Action 100+, November 2020. UN Net Zero-Alliance, November 2020. https://www.fsb-tcfd.org/supporters/, November 2020.
2 Source: Bloomberg New Energy Finance.
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