- The transition to alternative energy represents a tectonic shift in supply and demand that goes far beyond power and transportation.
- Estimates indicate that global capital expenditure on infrastructure is likely to increase fourfold as a result of energy transition.
- Demand for commodities like copper, a key input for electric vehicles and cleaner technology infrastructure, is expected to surge.
It’s Not Just Fuel Driving the Energy Transition
While the focus on environmental sustainability tends to be on new fuel sources, the related investment opportunity set is much broader. Meeting carbon-reduction goals requires an overhaul of existing infrastructure and the modernization of buildings and factories across the global supply chain. The energy transition will also increase demand for commodities like copper, which is a key raw input for batteries and the infrastructure needed to shift to cleaner technologies.
The Expected Infrastructure Buildout Is Massive
The construction sector accounts for nearly 50% of annual global CO2 emissions and, in 2040, approximately two-thirds of global buildings will be structures that exist today.1 Modernizing the world’s commercial and residential buildings is an enormous undertaking that will require significant investment.
In addition to retrofitting existing infrastructure, supporting the world’s transition to renewable energy includes the development of electric charging stations, metering, battery materials, and power processing and storage facilities. Estimates indicate that global capital expenditure on infrastructure is likely to increase fourfold as a result of the energy transition, from $280 billion per year from 2015-2020 to over $1 trillion per year in the 2040s (Exhibit 1).
The growth trajectory of Level 2 charging ports (the typical charging station for electric vehicles) helps put the scope of this infrastructure buildout in perspective. In 2017, there were between 50,000 and 70,000 Level 2 ports2 in the United States. In 2021, the number of Level 2 ports grew to roughly 90,000.3 To meet expected demand for electric vehicles, the number of charging stations needs to increase to between 2,230,000 and 2,240,000 by 2025.2
Requirements for additional infrastructure are pushing companies to develop new technologies and introduce new specialties across industries. For example, updating the current power transmission infrastructure will require heat-resistant, water-proof cables. Recently, these cables were used to create the world’s longest submarine electricity interconnector between the United Kingdom and Norway4, which enabled the sharing of renewable energy between the two countries for the first time.
Copper Finds a Second Act
We expect the energy transition to alter the global supply chain, amplifying the importance of a new set of commodities like lithium, manganese, and graphite. Traditional commodities will also play a significant role. This is especially true of copper.
As Exhibit 2 highlights, copper is a key manufacturing input for electric vehicles, which need ~2.5 times as much of the metal as conventional cars. Due to its electrical conductivity and low reactivity, copper is also essential to the infrastructure needed to transport renewable energy, with uses that include cables, transistors, and inverters. In addition, harnessing solar and offshore wind requires significantly more copper per megawatt of installed capacity than power generated using natural gas or coal, as renewable-generation volatility requires higher-voltage interconnectors and batteries.
According to S&P Global, copper demand is expected to nearly double to 50 million metric tons by 2035. By 2050, demand for copper is expected to reach more than 53 million metric tons.5 Put into perspective, this exceeds the amount of copper consumed globally between 1900 and 2021.5
The Companies Best Positioned For the Path Ahead
From an investment perspective, we believe the companies best positioned for the energy transition fall into three key categories: supply, demand, and enablers. The supply category includes companies that harness and/or produce lower- or zero-emissions fuels. Companies in the demand category promote energy efficiency across industrial applications, storage facilities, and buildings. Enablers provide technological innovations, equipment, infrastructure, materials, goods, and services that facilitate clean(er) supply and demand reductions in absolute terms and by displacing carbon-emitting fuels.
As it relates to the infrastructure component of the energy transition, we believe the opportunities across these three categories are as follows:
- Companies supporting the creation of a new power grid architecture and infrastructure, including electric charging stations, metering, and transmission
- Companies specializing in the materials required to develop wiring across the power transmission grid
- Companies working to create electricity solutions that are needed to store and use renewable electrical energy
- Companies advancing battery technology to address the intermittency of renewable power generation
- Companies focused on infrastructure modernization, including retrofitting existing infrastructure to decrease wasted energy
Like the development of the railroad and interstate highway systems of the previous two centuries, we expect infrastructure spending related to the energy transition to be massive. We believe this will lead to a rich and diverse opportunity set as this transition plays out over multiple decades.
1 Source: Architecture 2030, US Energy Information Administration, Global Status Report 2021
2 Copper Development Association, Copper Drives Electric Vehicles 2017
3 EVAdoption and Alternative Fueling Data Center December 31, 2021
4 Prysmian Group, Prysmian completes North Sea Link, the world’s longest submarine electricity interconnector, ahead of schedule March 16, 2022
5 S&P Global, Copper on the Rise, July 14, 2022
The views expressed herein are those of Jennison investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice and should not be considered investment advice.
Certain third party information in this document has been obtained from sources that Jennison believes to be reliable as of the date presented; however, Jennison cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. Jennison has no obligation to update any or all such third party information. There is no assurance that any forecasts, targets, or estimates will be attained.