COVID-19 has been front-of-mind for most governments and societies recently, but another arguably more important issue persists: climate change. Potential solutions exist in the form of renewable energy and, fortunately, there is growing awareness of the need for advances in this area. However, even when looking at a glaring solar panel, we should ask: is all that glitters gold?
As the world awakens to a new normal, we look at the motivations behind the energy transition and assess the viability of its success, both in terms of the economics and technology.
WHAT’S REALLY DRIVING THE ENERGY TRANSITION?
Society has been showing increasing engagement on climate change, thanks in part to environmentalists such as Greta Thunberg and Extinction Rebellion. However, our desire for a more sustainable energy system that extends far beyond activism.
The science is indisputable and the risks are being realised more quickly than expected. Case in point, by the end of 2017, global average temperatures were about 1.0°C warmer than in pre-industrial times. At the current rate of warming of around 0.2°C per decade, we could exceed 1.5°C of warming between 2030 and 2052, with disastrous effects on society and the biodiversity on which we depend.1
Moreover, for decades, the world’s energy resources have been controlled by a few countries. Such a status quo raises concerns, particularly in the era of The Great Instability, forcing many governments to look for new, potentially more autonomous energy solutions such as solar or wind power.
Hence, there are several reasons behind the move towards renewable energy, but ambition or incentive does not always equate to the desired outcome.
ENERGY TRANSITION – NOT SO EASY
From pushing the renewables sector, encouraging adopters and innovators, and punishing carbon offenders: many governments are putting green policies on the agenda. On the other hand, such actions significantly affect local economies and politics, leaving them with a conflict of interest in some cases.
Take the US for example. This year, coal’s share of US electricity generation is expected to be lower than renewables sources – and to fall to just 10% by 20252. On the other hand, the US is the world’s largest petroleum and natural gas producer, thanks in large part to the current administration’s ‘energy dominance’ agenda (2017).3
Governments and individuals will therefore play a crucial role in the energy transition, as will technology and science. In particular, our ability to produce, transport and consume renewable energy.
The energy sector itself will also play a crucial role, as a source of both emissions and solutions. Energy companies have a focus on reducing their carbon footprint and innovating in renewables, and many offer interesting business models. How long this transformation will take and how much it will cost is something to consider when looking at the full picture.
RESHAPING ENERGY PRODUCTION
Energy is literally everywhere, from the sun to the wind, to our numerous oceans. With these, we possess global sources of sustainable energy, with no hegemonic states or powers to control their access and prices. Moreover, and unlike coal and oil, renewable energy does not require significant transformation.
Despite this, it is still quite expensive to provide sufficient generation capacity and speed to meet today’s huge energy demands, and new infrastructures are needed.
To date, high subsidies and low interest rates have facilitated significant investment and easy borrowing, helping firms to invest in research and development, bringing down the aforementioned costs.
However, monetary and fiscal policy are susceptible to change. An increase in interest rates or decrease in subsidies could hinder energy companies’ access to the loans and investments needed to make energy production more cost-efficient and, in turn, jeopardize the growth of renewables.
RESHAPING ENERGY TRANSPORTATION
Distribution is equally important and requires similar, if not greater, levels of innovation and capital.
Renewable energy is harder to transport than fossil fuels, and the existing grid networks of most countries would need to be updated and connected to new production facilities, most likely at great cost.
Storage is another factor. The sun does not necessarily always shine, nor the wind blow. Yet, power is always needed. Storage is the solution and our ability to store renewable energy is improving, but remains expensive currently.
Solving these issues will require, along with innovation and scientific breakthrough, significant investment. Governments will likely offer some support, but will investors? The temptation is, of course, to focus on shiny wind farms instead of less glamorous projects like transportation and storage.
RESHAPING ENERGY CONSUMPTION
In addition to energy production and transportation, consumption is another important consideration.
On average, an electric car still costs more than a diesel or petrol car. For most, a like-for-like comparison will only be possible once batteries become cheaper and more efficient. Indeed, aside from their price, there are significant concerns around electric cars’ range and the ability to charge them.
On the other side, more and more cities are pushing for electrifying transport, adopting more-stringent regulations and even becoming car-free. Companies and consumers are increasingly evaluating the costs and benefits of changing habits and embracing digitisation and a zero-carbon lifestyle. The more the sector progresses and becomes more competitive, the quicker and easier it will gain consensus from the public.
THE FULL PICTURE
At BNP Paribas Asset Management, we’re exploring investment opportunities in a world more uncertain than ever, and we consider renewable energy, despite certain challenges, a once-in-a-generation chance to shape a better future while targeting attractive returns.
The COVID-19 pandemic has only served to reinforce this view. It has shown that despite globalisation and technological advance, the world is still a fragile place and susceptible to disruptive shocks. Resiliency needs to be improved and sustainable investing has a key role to play in this.
To this end, all of our funds integrate environmental, social and governance (ESG) considerations. And for those who wish to invest with an even more explicit sustainability angle, we offer thematic and impact funds including an Energy Transition Fund.