What does the need for greater energy security mean for investors?

Notwithstanding the human tragedy that is unfolding before our eyes in Ukraine, Russia’s invasion has underlined the need for secure energy supplies. Not only has the escalating price of energy amplified existing inflation pressures for economies only just recovering from the pandemic shock, but a growing aim by Western governments to restrict imports from Russia has raised the issue of how reliable alternative energy sources can be accessed quickly.
The scramble for countries to find secure energy supplies is raising fears that the transition away from fossil fuels to renewable forms of energy could be slowed or even reversed. So is there a future for green energy in a time of war and how should investors respond?
Europe’s energy dependence on Russia
The conflict in Ukraine has highlighted the link between climate change, national security and energy dependence. Europe receives roughly 40% of its gas from Russia, via pipelines some of which run through Ukraine, and about 25% of its crude oil supply1. The risk of material oil and gas disruptions has seen oil and gas prices skyrocket – creating great unease across European nations about the implications of its energy dependency.

Other nations also import energy sources from Russia, but at much lower levels, meaning countries such as the UK and the US are able to include an energy import freeze as part of their economic sanction on Russia.

While Europe’s reliance on Russian fuel means it is held over a barrel to some extent, the EU has announced plans to cut Russian gas imports by two-thirds within a year in a bid to reduce this dependency.

Accelerated shift to green energy sources?
Despite the geopolitical backdrop, high demand for energy means countries will need to plug this gap quickly. So how can this be done?

Many countries have announced plans to speed up their green energy transitions.

Germany, in a rather historic move, has turbocharged its transition agenda by moving its target to be 100% renewable forward by 15 years to 2035 – bringing it in line with US and UK. The German government also plans for 80% of its power to come from renewables as soon as 2030, which will be achieved by onshore wind additions that will produce 10GW a year from 2027 (versus only 2 GW a year ago) and solar installations that produce an additional 20GW from 2028 (versus 5 GW a year ago). In addition, the new-installed government intends to dramatically shorten the timespan for onshore wind permits, which has been a significant barrier for growth in renewables.

The EU’s new energy plan also seeks to boost renewable energy generation and cut demand through efficiency measures, but it concedes that the bloc will also seek to import more liquefied natural gas and that it may need to burn coal for longer.

Seeking short-term fixes in fossil fuel
Building new, greener energy infrastructure will take time however. Therefore the EU is not alone in also considering an expansion of its fossil fuel usage to fix near-term supply issues.
The world’s fuel producers (ex-Russia) are being encouraged to step up supply; discussions to unfreeze sanctions on Iranian and Venezuelan crude oil are commencing, and nations are releasing strategic fuel stockpiles.

In addition, in the US shale oil producers are being looked on to provide short-term supplies and in the UK efforts to increase its self-sufficiency have prompted calls to increase North sea oil and gas production as well as an easing of restrictions on fracking.

Deflationary impact of renewables
As the world deals with more inflation, the ability for green energy to help bring down energy and power prices cannot be disregarded. Oil and gas prices are consistently nearing or surpassing all time highs at present, while renewable energy (particularly solar and wind) is cost competitive. In fact, the sun and wind do not charge for the marginal units of energy, the cost of producing power from solar and wind has gone down dramatically, while the efficiency has gone up significantly. This deflationary aspect of renewables contrasts markedly with fossil fuels – or example the price of oil has gone up roughly 30x since 19702.

In his State of the Union speech, President Biden promoted the argument that fighting climate change will translate into energy savings for American households. He pledged to “provide investments and tax credits to weatherise your home and your businesses to be energy efficient and get a tax credit” and “Double America’s clean energy production in solar, wind and so much more. Lower the price of electric vehicles, saving you another $80 a month that you’re not going to have to pay at the pump.”

Electric vehicle shortage
Meanwhile, consumers are recognising the money saving potential of going green. In light of the rising cost of traditional fuel, demand for electric vehicles has risen dramatically. In February 2022, passenger plug-in electric car registrations were up 127% year-on-year in the UK and represented over 25% of total car sales for the month3.

Several big-name car manufacturers have announced plans to accelerate electric vehicle production and the world’s leading EV car manufacturer has been given the go ahead for its first car and battery plant in Europe4.

Unfortunately, more consumers suddenly recognising the appeal of electric vehicles means demand is now outstripping supply. Inventories are particularly poor given EV production is caught up in the global semiconductor shortage and broader shipping delays. Some companies have now paused taking orders for new EVs, while other popular models are facing up to a year’s wait for delivery.

More action, less talk
While current supply fears are turning governments’ attention back to fossil fuels in the short-term, the situation in Ukraine presents a new catalyst for urgently decarbonising, digitalising and turbocharging the global energy system. Rather than merely being about environmental challenges, the world has woken up to the significant and broader geopolitical risks of energy security and the impacts these can have on the world at large.

The best ‘get out of jail free’ card countries can play to gain energy independence is to ramp up their green energy output, but this requires more than just rhetoric and long-term planning. Green energy infrastructure projects need to start now and planning needs to take the world’s changing geopolitical structure into consideration.

In short, the world needs to do more, faster.

At BNP Paribas Asset Management, our environmental strategies team believes that the alignment of energy security and the energy transition means the investment case has never been stronger.

They feel valuations levels have reached attractive levels amid equity market volatility and macro concerns and that perception of good value is reinforced by the fact that merger and acquisition opportunities within this area are rising.

Our Environmental Strategies capabilities aim to identify ‘tomorrow’s winners today’ among companies addressing climate change, biodiversity and ecosystems. Our concentrated portfolios are diversified across all market-capitalisations, which can provide a cushion to current volatility.

For more information about our Environmental Strategies, performance and a more detailed investment approach please click HERE.

2 Bloomberg

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