Investing in the production of renewable energy isn’t the only opportunity in the transition away from fossil fuels, according to Schroders’ Mark Lacey, who sees several other areas as being attractive for investors.
The world is progressively moving away from its dependency on fossil fuels to more renewable sources. Last year, the US’ annual energy consumption from renewable sources exceeded coal for the first time ever, according to the US Energy Information Administration (EIA).
Lacey, manager of the Schroder ISF Global Energy fund and the group’s head of commodities, said the aim of this shift “is to reduce energy-related carbon dioxide emissions to help meet global climate targets”.
Below, Lacey gives four investment opportunities in this transition to renewable energy.
Clean energy generation
The first opportunity is investing in the actual production of the alternative, clean renewable energy.
As mentioned above, the generation of renewable energy is “the most obvious part of the energy transition”, according to Lacey.
It is also “one of the more advanced investment areas of the energy transition”. This, he said, was partly due to the significant policy support from various governments to help enable the transition from fossil fuel dependency to more renewable energy sources.
A case study of this has been the European Union’s (EU) coronavirus recovery fund.
The economic stimulus launched to help the bloc’s members deal with the economic impact of Covid-19 has to be channelled through the pre-existing European Green Deal, which aimed to make the EU carbon neutral by 2050.
The EU stipulated that 30 per cent of the recovery fund – dubbed ‘Next Generation EU’ – must be spent on ‘pure climate action’ alone, thus making the energy transition an intrinsic part of the coronavirus recovery effort.
On the investment opportunity, Lacey said that “demand looks set to rise as costs fall”.
“Improvements in technology and economies of scale mean that renewable energy is now cost-competitive with fossil fuels, even without subsidies,” he added. “And the desire of consumers for more emissions-friendly technologies - such as electric vehicles – is set to fuel the growth of clean power generation.”
The shift towards clean energy also provides new opportunities in the utility companies which specialise in renewable energy, Lacey said, and for fast growing, small independent power producers (IPPs) who focus solely on developing and managing renewable assets.
“It also benefits companies who produce renewable energy equipment, such as wind turbines and solar panels,” he added.
But it’s not just in the ‘classic’ solar and wind providers which are an investment option.
“Away from renewable electricity, hydrogen has enormous potential to be a key fuel at the centre of a low carbon economy,” the Schroder ISF Global Energy manager said.
“While renewable electricity will solve a significant chunk of the global emissions puzzle, an energy source with greater power density and the appropriate chemical properties will be required to decarbonise activities such as heavy industrial processes, manufacturing and aviation.”
Hydrogen can provide a solution to this, Lacey said.
“Hydrogen can do almost everything natural gas does in the current economy and can displace many of the non-power sector uses for coal and oil too,” he added.
But at the moment a major headwind to hydrogen becoming a widespread source of renewable energy is that it’s much more expensive compared to wind and solar.
But this could change in the coming years, Lacey said, as governments including the EU, Japan, Korea and the US are all aiming to increase the use of “clean hydrogen”.
Transmission and distribution
The second opportunity is investment in the solutions for transmitting and distributing renewable energy.
One issue with renewable energy production is that wind and solar farms usually have to be built where the energy is not actually needed, such as in oceans, deserts or rural areas.
“The US is a case in point here: the ‘wind belt’ is in the centre of the country, but most of the population lives on the coasts,” Lacey said.
“Meanwhile, offshore wind farms present their own challenges. This is a big difference from conventional power plants, which can be built more or less anywhere.
“Connecting new renewable projects to the electrical grid therefore creates investment opportunities for companies that manage the large-scale electrical transmission system.”
This increased demand for more transmission lines creates a need for electrical cables and other power equipment.
“By 2050, the world will need to more than double the length of global power lines and transformers to enable the growth of renewables,” the manager said. “If we do not, wind and solar farms will sit idle, unable to send their power to the grid.”
This increased demand for electricity in general versus other power sources means that many existing networks will have to invest in replacing and upgrading their pre-existing systems to cope with the higher load and demand, providing another investment opportunity.
Energy storage
Renewable energy isn’t just produced as and when it’s needed, according to Lacey. Huge amounts of energy can be cheaply produced when the sun is at its brightest or when the wind is blowing.
“But what happens when the sun doesn’t shine and the wind fails to blow? This is where energy storage comes in,” he said.
Energy storage solutions, such as batteries, can help with this intermittent stage between energy production and when it’s required.
“As the need for storage becomes clearer, opportunities are emerging for expert battery operators, as well as those companies that design and manufacture the growing range of storage products,” the Schroder ISF Global Energy manager said.
Electric transport infrastructure
One area which is driving demand for energy storage options and is an investment opportunity on its own is electric vehicles (EVs).
Lacey said: “The need for storage becomes clear when we consider how demand for electricity is likely to change with the rising popularity of electric vehicles.
“The ability to charge EVs, whether at home or out and about, will become increasingly crucial.”
As the number of EVs continue to rise globally, the number of charging stations must also increase.
He said: “According to the European Commission, if the ratio of vehicles to charging points exceeds 10, then the average consumer will start to be discouraged from purchasing an EV in the first place.”
The ability for EVs to go longer between chargers and have greater access to charging stations is a problem which EVs companies are already trying to tackle. Last month, Elon Musk unveiled Tesla’s plans for a ‘one million mile’ battery at his Battery Day event.
Lacey added: “The potentially huge earnings opportunities from the manufacturing, installation and operation of charging points has already attracted a range of different players, including utilities, new pure-play companies and even the oil and gas majors.”