We believe that companies active along the clean energy transition value chain will be among the beneficiaries of the path to net zero. There are several reasons why.
Decoupling carbon emissions from economic growth
To begin with, policymakers and businesses worldwide increasingly recognise that, through investment in clean energy tech, it is possible to break the link between carbon emissions and economic output – a precondition for a sustainable economy.
Several regions including the US and EU have already been able to significantly reduce carbon emissions while growing their GDP, suggesting that the transition does not necessarily lead to net losses for the global economy, particularly over the long run.
Energy efficiency will remain essential
So far, most of the decoupling the world has achieved has come courtesy of improvements in the energy efficiency of all manner of consumer and commercial devices, including refrigerators, electric motors, air conditioners and industrial coolers. This has delivered a remarkable 36 per cent decline in the amount of energy need per unit of output since 1990.
Improvements in energy efficiency will continue to be an integral to the net zero transition, not least because such as artificial intelligence and efforts to rebuild domestic manufacturing will exert additional strains on aging electricity grids. Consequently, businesses developing energy efficiency technology should be a key feature of any clean energy portfolio.
Yet gains in energy efficiency alone won’t be enough to reduce total carbon emissions. Speeding up decoupling requires making energy greener in the first place. And this will inevitably mean greater demand for and expansion of renewable forms of energy and electrification. One factor that should help accelerate the growth of renewables - and potentially contain energy prices - is that production costs are falling.
Green energy production costs are falling
Over the last decade, significant improvements in economies of scale and efficiencies of wind and solar technologies have not only made renewables the cheapest source of energy, but also cheaper than the operating cost of thermal plants in many regions of the world. Looking ahead, the energy transition is expected to be driven less by government policies than by pure economics.
A study by the consultancy McKinsey estimates that falling production costs can already take the power system some 50-60 per cent of the way towards full decarbonisation at no additional costs to society, requiring no additional incentives beyond that that determined by purely rational economic behaviour.
And as renewables increase in the energy mix, overall energy costs should eventually decrease and decouple from the more volatile coal/gas/oil prices.
This will end up benefitting the consumer. While the influence of higher carbon prices can drive inflation, a faster transition towards low-carbon alternatives (with renewables being just one of the options available), could create a countervailing deflationary effect.
In other words, the quicker the world reduces the share of carbon-intensive power generation in its energy mix, the more muted the effect of carbon prices on overall headline energy costs.
The clean energy industry is generating an abundance of highly-skilled jobs
Another reason for the clean energy industry’s commercial effervescence is its capacity to create an abundance of highly-skilled jobs right across its supply chain. Globally, the clean energy sectors added 4.7 million jobs since the end of the Covid pandemic, and now employs 35 million people. By comparison, job growth was far slower in the fossil fuel sector, which now employs 32 million worldwide, three million fewer than clean energy and 1.3 million below pre-pandemic levelshttps://www.iea.org/reports/world-energy-employment-2023/executive-summary, 2023..
Less visible but no less important is the skill level associated with these new jobs. The industry employs highly skilled workers that command superior wages. Research showshttps://e2.org/wp-content/uploads/2020/10/Clean-Jobs-Better-Jobs.-October-2020.-E2-ACORE-CELI.pdf that in the US, employees in sectors such as renewable energy, energy efficiency, grid modernisation and storage, clean fuels and clean vehicles earned a median hourly wage of USD 23.89 in 2019 compared with the national median wage of USD19.14.
-
Clean energy sectors employ 3 million more than the fossil fuel sector
Source: https://www.iea.org/reports/world-energy-employment-2023/executive-summary, 2023.
Green energy is now intertwined with domestic energy security
Also boosting the industry’s growth prospects is that its development has become intertwined with efforts to improve domestic energy security – initiatives that have taken on greater significance in the wake of the Russia-Ukraine conflict. A growing number of countries around the world are implementing energy plans that rely on local energy production, which in most cases means renewable sources rather than fossil fuels. Among the most high profile are the US’s IRA and the EU’s Green Deal, which are aimed at reshoring and developing local capabilities in strategic clean technologies, including renewables, batteries and semiconductors.
Risks and opportunities in the clean energy supply chain for investors
The upshot to all this is that the clean energy supply chain is set to become one of the most dynamic sectors of the world economy. That has important implications for investors.
On the one hand, it will be home to a rich variety of investment opportunities. Yet on the other, it will also be vulnerable to speculative excess: new technology must be able to stand on its own without having to rely on subsides from unreliable governments.
In our view, investors seeking to capitalise on the green transition would be better served by building stakes in companies with specific characteristics. We describe these as the ‘picks and shovels’ of the transition, profitable firms that own electricity production infrastructure, produce enabling tech as a semiconductors or develop technology that reduces energy consumption.
