The world’s energy mix is in motion. The most recent data from the International Energy Agency shows that around a quarter of the world’s electricity is powered by renewables, with capacity expected to expand by 50 per cent by 2024. We believe the path ahead is clear: dominant fossil fuels are being replaced and a new energy infrastructure is emerging. 
The adoption of renewables has been strongest in the electricity sector, where solar and wind power have seen rapid growth driven by policy initiatives and falling prices. The size of the global wind power market grew 35 per cent in 2018 and is expected to reach $124.5bn by 2030, as the Asia-Pacific region adds capacity. There is similar growth potential in solar, hydro and biofuels as the world transitions to a less carbon-intensive energy system.
Any energy strategy needs to reflect this shift and the BlackRock Energy and Resources Income Trust recently moved to incorporate more companies linked to the global energy transition in its portfolio mix. Today’s GDP growth is less energy-intensive, which means that there is less growth in core energy markets. As such, this shift is important to build sources of new growth into the portfolio.
However, electricity accounts for only a fifth of global energy consumption. There are still areas, such as heating, where renewables are a relatively small part of the mix. Renewables met only 10 per cent of global heat demand in 2018 and are only expected to reach 12 per cent by 2024. Within transportation, dependence on oil is partly being addressed through electrification, and although this is growing fast, it is from a small base.
As such, the energy mix is likely to include some traditional sources of power for some time. There is also the question over whether the current Coronavirus outbreak might put a temporary pause on the move to decarbonise the world, as governments turn their attention elsewhere. It is our view that the pace of the energy transition will evolve and shift over time, which may change the opportunity set at any given point in the cycle.
Equally, it is important to note that many ‘traditional’ energy companies, such as oil majors, are likely to play a key role in the energy transition, as many champion renewable fuels. Increasingly, we believe it is not a question of a company being on one side or another of the fossil fuel vs renewable argument, but all being part of a broader transition.
The question is what happens in the meantime. A side effect from the Covid-19 outbreak has been extreme volatility in the oil price including, at one point, a dip to a negative rate. There have been many questions over whether oil producers can weather the short-term shock. We estimate that oil demand may be as much as 10 per cent lower for the year ahead. While some of the recent price fluctuations have been anomalous, there can be little doubt that the oil price could remain under pressure for some time.
Certainly, there may be bankruptcies among those companies with the highest costs of production – the US shale companies look particularly vulnerable. However, for larger companies, with lower debt and strong management teams, these low oil prices should not disrupt their longer-term strength and it may even accelerate their adoption of alternative energy sources. Many entered this crisis in a good position, with strong balance sheets, advantaged assets, and a clear and well-articulated strategy to be part of the solution.
The world’s energy mix is fluid. While the path of travel is clear – towards renewables and away from fossil fuels – it may not be linear. Active management can help direct investment to those companies with the greatest influence at any given point in the cycle.
Tom Holl is co-manager of the BlackRock Energy & Resources Income Trust. The views expressed above are his own and should not be taken as investment advice.