Why coronavirus will benefit the energy transition

To understand the 2020s, we must look back to 2008.

In the aftermath of the Great Financial Crisis, the response was monetary.

Central banks printed money in every country, and used it to buy government bonds.

This was “quantitative easing”, and it worked in some ways but not in others.

The financial system survived, but national economies haven’t exactly been doing great.

Growth in GDP has been slow, inequality has widened, and each unit debt has fuelled less and less growth, while austerity has hindered the quality of our public sector.

So the banks survived, but on an IV drip, you could say. The expansion of central bank balance sheets in the current crisis reflects that – it is not stimulus, it is life support.

But in the last six months a tidal change has occurred.

Figureheads from across the spectrum of public and private life have realised that next time must be different. Next time governments must do their bit.

This can be seen in the direct government spending packages which have been so quickly announced. Record spending commitments have come out of Europe, America, Germany, the UK, and the rest.

And consensus has built that central banks cannot buy national growth.

Governments are ready for what Nike has termed “revenge spending” – on a national scale.

My good friend and colleague Nick Hubble has been writing of late about a “Great Reset” – a new monetary system for a world whose fiat currency system is running out of road.

Today I want to propose a different great change.

I’m calling it The Green Reset.

We have established that a fundamental difference has appeared between the current response and the last one. Government spending has arrived – and let’s not worry for now about the fact that the key people in charge of it are Donald Trump, Christine Lagarde, Boris Johnson, Xi Jinping, Scotty “from marketing” Morrison, Vladimir Putin, and the rest.

Here’s a chart of major nations’ fiscal pledges this year, as a % of their national GDP.

 Source: John Authers, Points of Return

But that is just one great change in 2020.

The other multi-decade transition that seems to be reaching critical mass this year is, regular readers won’t be surprised to read, the energy transition.

Few things have aroused such great passions in the minds of investors of late.

These two things coincide in crucially important ways in my view.

Lower interest rates and easy money are hugely beneficial to renewable energy plants, for whom all the cost comes in the first few years and is debt financed – while returns over the following 25 years are steady, predictable and in many ways guaranteed by “PPAs” – power purchase agreements.

One glaring need for the energy transition is infrastructural – EV charging points, manufacturing capacity, long range interconnectors for international power trading, even (dare I say it!) 5G capabilities.

Government commitments on spending are hugely supportive of this.

A couple of months ago, names such as Fatih Birol, head of the International Energy Agency, Michael Liebreich (founder of Bloomberg New Energy Finance), and our very own James Allen, were calling for a sustainable, green response from governments.

Support from voters for green policies has never been higher, and this has led to Green New Deal proposals in the US and Europe.

Germany and France are leading the way on electric vehicle (EV) subsidies, leading to higher than ever uptake this year. In Europe, battery electric vehicle sales grew over 260% year on year in June, while plug-in hybrids grew only 117% and all internal combustion engine (ICE) vehicle sales metrics fell. Battery electric vehicles (BEVs) grew from a 1% market share to 6%. It’s happening now.

In the next couple of years, we are also going to see the largest number of model additions to the range of EVs available globally than ever before. The big auto companies are finally entering the race, with seven new Audi e-tron models and eight new ones from Peugeot’s assorted brands, and an assortment of others too, the choice that has been absent from the market for too long will finally arrive.

And on Wednesday we saw one of the biggest pieces of policy news in the energy space.

Frans Timmermans and Kadri Simson together announced the EU’s hydrogen strategy and launched the EU Clean Hydrogen Alliance to help achieve it.

Billions in investment, 4,000% growth in production capacity by 2030, broad public-private sector collaboration… I can hardly think of a small, fast-growing investment trend receiving such powerful support at the highest level.

Timmermans, VP of the EU Commission, called hydrogen “the rock star of clean energy”, while declaring that the legacy energy systems we have are fast becoming a “relic of the past”. He said that clean tech will be a global growth engine in the years to come.

Kadri, commissioner for energy, said “you cannot build the energy system of the future with the ideas and policies of the past”, describing hydrogen as a “fuel of the future”.

Japan and South Korea are already far ahead in terms of hydrogen, and the US is catching up too, so it’s good to see Europe trying to drive leadership on this front.

Will the UK join in the race? We’ve got all the right conditions for it – plenty of cheap renewable electricity, existing expertise and good business conditions, and obviously lots of water for electrolysis, the process of extracting hydrogen out of water.

It didn’t feature prominently on the government’s New Deal, but with an independent hydrogen strategy due soon, perhaps that will change.

The policies are certainly falling into place, as governments around the world realise that pushing the energy transition forwards is a clear win-win, helping us reduce emissions, meet our long-term climate targets, and slow the rate of climate change, while creating new jobs, skills, businesses, sectors, and economic growth.

I will also briefly reiterate that the costs of building and producing solar power, wind power, and battery storage have fallen by 80%, 50% and 50% respectively since 2010.

Economics is driving the transition now more than ever, as solar and wind can, when combined with storage, compete against most forms of gas and undercut almost all coal power plants the world over.

The energy transition has, through Greta Thunberg’s incredibly successful campaign, gained powerful and widespread social support.

Political support has been scaled up hugely in response to the pandemic and the lockdown, as emergency fiscal support becomes more palatable and desirable.

But what about investment?

Well I think the comments from Larry Fink, head of teacher’s pet BlackRock, give the best clue as to what’s happening in this space. Even better than the dazzling share prices on offer in this space.

He said that climate change is altering the fundamentals of modern finance.

He said, “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

His annual letter earlier this year alluded to a reshaping of finance so that it would include fully realised climate risks, and alterations to the economy that are required to successfully achieve the goals set out in the 2015 Paris Climate Accord.

Including climate risks in financial evaluations means that a raft of previously ignored factors must now be included, and the first step for investment firms is demanding greater disclosures from companies about their own emissions, policies and exposures to climate-related risks.

It requires economists to put a price on emissions, pollution, sustainability, the changing environment and all sorts of other things.

Assessing the financial impact of climate change is a new and difficult step, but the investment world intends to drive a better understanding of that particular relationship, and pension fund managers and equity researches the world over will be moving to modes of analysis which include it in their valuations and stock selections.

With green stocks soaring and the most influential investment CEO predicting a ‘fundamental reshaping of finance” to cope with the energy transition, the final piece of the puzzle is falling into place.

Greta secured the will of the people, politicians have seen an opportunity to use green spending to pull their countries out of this crisis, and are taking it, while the investment community too is learning that when the beaten-down energy sector gets mixed up with brilliant technology, new business models with a powerful, multi-decade tailwind… Shazam!

The three legs of The Green Reset are in place. It has begun…

One-year performance of five stocks from James Allen’s Exponential Energy Fortunes service (redacted)
Source: Koyfin


Kit Winder
Editor, UK Uncensored

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