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July 21, 2022
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Image Credit: Akil Mazumder
Rob West, the CEO of Thunder Said Energy, a London based research consultancy working on the energy transition, summarized the difficulties in the energy transition in a recent podcast. Specifically, he focused on the "trilemma" that preoccupies all governments: balancing decarbonization with energy security and affordability. The energy transition is inevitable, but it is not going to be orderly and it is currently discounted. Beyond all the macroeconomic headwinds affecting economies globally, the invasion of Ukraine and the energy crisis that Europe is facing have given rise to a very polarized market.
Some analysts suggest that Putin may have inadvertently solved climate change as economies like Germany accelerate the energy transition to move away from volatile hydrocarbons. Other analysts, by contrast, forecast new Exploration & Production (E&P) investments in the U.S., with shale gas and LNG receiving great attention. This would have a negative impact on climate change mitigation.
April was a sea of red in the stock markets – quantitative tightening distracted from long term climate solutions and reignited interest in short-term palliatives
With inflation spiking, recession fears, China back in lockdown mode, upcoming further interest rate hikes and no signs of a resolution in Ukraine, April was a sea of red for the markets. At my firm, we develop unique equity indices, and both had a very negative month: the iClima Decarbonization Enablers Index was down 10.93% while the iClima Distributed Renewable Energy Index was down 7.02%.
A wide range of views from no transition to slow transition are being priced in. A fast transition seems to be discounted and in the midst of such turbulent times, investors are attracted to the excess cash flows that E&P companies are generating out of the triple digit crude and high NatGas prices. For example, the SPDR S&P Oil & Gas E&P ETF is up 38.21% in the year. We expect “brown value” to remain top of mind until central banks demonstrate that they are succeeding in combating inflation, the war ends, no further interest rates are expected, and/or supply chain issues subside - in some concrete combination.
When this happens, this should allow a rotation back to growth. We expect “green growth” to be the major beneficiary of this, as it becomes clear that the same high fossil fuel prices that are momentarily generating excess cash flows for E&P companies will also drive demand destruction and provoke the substitution of internal combustion engines for battery electric vehicles, retail utility bills for solar rooftop panels, and prompt users to embrace energy efficiency. The companies providing climate change solutions are to be the real beneficiaries of the energy crisis and the acceleration of the energy transition. Current valuation levels are at a huge discrepancy vis-à-vis the unprecedented growth opportunities we expect the true climate leaders to benefit from.
Germany’s "Easter Package:" a massive concrete step towards an unprecedented acceleration away from Russian coal, oil and gas, towards a fully renewable grid
While the stock market wrestled with the allure of brown value and the uncertainty surrounding anything else, the real economy continued to march ahead with its transition to a low carbon economy. This time, it was Germany at the helm. After only five months since the formation of the country’s new government, the new Minister of Energy & Economy Robert Habeck presented his 600-page “Easter package,” targeting a grid with electricity produced from wind, solar and biomass, fully replacing nuclear, gas and coal. This came as Germany followed up on its promise to bring forward the goal of a fully renewable grid to 2035.
This new legislation encompasses a Renewable Energy Act, an offshore wind law, an energy industry law and new rules to expedite the development of the transmission grid. The package is being sent to parliament and could be adopted before the summer. The core item in the “Easter Package” is the principle that the use of renewables is of ‘overriding public interest’, and thus takes priority over other matters until carbon neutrality is achieved. It is hoped that this will remove hurdles such as local opposition, lengthy planning procedures, or conflicts with other strategic goals. In a similar vein, the package includes changes to grid rules which allow for a faster permitting process.
More specifically, the plan is to dedicate 2% of land area to renewables, including an annual increase of 10 GW of onshore wind (reaching a total of 115 GW by 2030), and 22 GW of solar (totaling 215 GW by 2030). For offshore wind, the government set new targets of 30 GW of capacity by 2030, rising to 40 GW by 2030 and 70 GW by 2035. Once again, the targets will be supported by a heavily streamlined permitting process. Regulation has even reached the level of standardizing procedure for birds killed by wind turbines, a remarkably significant obstacle to new construction.
All signs so far point to the package being a model for other countries to follow. Germany, being the fourth largest economy on the planet and the largest in the EU, will showcase how a reliable grid, 100% renewable base can be built. When the installed capacity of the new projects starts to be built, we expect markets will no longer discount the fast transition case, putting an end to the coexistence of “green growth” and “brown value."
Authored and published for Nasdaq.com
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