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UBP: Energy transition - a complex but compelling challenge

By Marc Elliott, Energy Transition Specialist, UBP

Reaching net-zero targets will require major investment and concerted political will. BloombergNEF
(BNEF) estimates this investment at USD 92–173 trillion over the next three decades.

To date, the energy transition has been driven economies. When it is lacking, growth isn’t benefitting from strong demand. As highlighted
by a longer-term environmental agenda. The possible. In the current environment we are earlier, governments are increasingly providing
recent energy crisis has demonstrated our seeing how growth is being affected by energy incentives to invest. Conversely, polluting
dependence on fossil fuels as well as the shortages (notably in Europe) that in turn are industries are finding it increasingly challenging
disruptions and economic pain that sudden leading to cost escalation. to raise capital, on both equity and debt
supply shocks (e.g. of Russian gas) can cause. Energy transitions are disruptive and markets, which will further benefit cleaner
Consequently, the imperative to move to consequently have major impacts on economies actors. Polluters will also face rising costs as
renewables, which makes energy systems local and investments. They are also not linear. In government policy moves increasingly towards
and thereby facilitates energy independence, this context, some equities are well-placed and penalising them (including windfall taxes on
has moved from a long-term objective to a near- others are set to suffer. Companies offering polluting industries making exceptional profits
term economic imperative. This is particularly proactive solutions to the underlying challenges like oil and gas, or tightening environmental
key for regions that are short of domestic fossil (e.g. renewables operators and clean tech) regulations), thereby putting pressure on the
fuel resources such as the EU, Japan, South offer promising potential to deliver value as value of companies that are not transitioning.
Korea and, to an extent, China. they have strong growth pathways ahead, while Fortunately, as the imperative for action rises
The cost of fossil fuels has also made the energy price takers without contingency plans with the growing cost of inaction, spending in
economic case for switching to renewables are set to suffer. the sector is accelerating and there is value
more attractive. BNEF estimate that today new Capital availability will also be influenced to be realised for companies that provide
onshore wind and solar power costs roughly by decarbonisation agendas. Green bonds solutions to tackle climate change and mitigate
40% less than new coal or gas. Renewables are becoming a major source of finance its impacts.
also have negligible variable costs,
a clear advantage in an inflationary
environment. New onshore wind
costs around USD 46/MWh and
large-scale solar USD 45/MWh,
compared to USD 74/MWh for new
coal and USD 81/MWh for new gas.
In addition, developed economies
need to overhaul their energy
systems as infrastructure is
reaching the end of its life. For
example, US grids are often 40–50
years old, while France is trying to
find ways to extend the usability of
its nuclear plants and Germany is
bringing back old inefficient coal
plants to ensure energy security.
Consequently, policy is moving
to support energy infrastructure
investment. The recent US Inflation
Reduction Act, for instance, has
allocated USD 369 billion to tackle
climate change and launch energy-
related programmes.

What this means for equity markets
The recent energy crisis underscores
the importance of energy for global

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