The Multi-Decade Energy TransitionTheMulti-DecadeEnergyTransition

A Massive and Evolving Opportunity Set

As governments around the world pursue long-term carbon-reduction policies, investments in renewable energy and related technologies are expected to soar. It is estimated that the United States’ net-zero carbon emission goals will require $2.5 trillion of incremental spending over the next decade.¹ Meanwhile, Europe’s “Fit for 55” initiative reflects its target of reducing net greenhouse gas emissions by at least 55% by 2030,² an effort that will also require significant capital expenditure. Even more conservative estimates like the International Energy Agency’s Stated Policies Scenario³ (which assumes that many governments will be unable to fully meet their current carbon-reduction goals) show a dramatic increase in spending for renewable energy and associated technologies over the next several decades.

The bottom line is that the energy transition represents a tectonic shift in supply and demand that goes far beyond power and transportation. For example, meeting carbon-reduction goals will require 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 a different set of commodities like lithium, copper, cobalt, and nickel, which are key inputs for the transition to cleaner technologies. In addition, the technology required to improve efficiencies and costs, as well as to store alternative sources of energy like wind, solar, and hydrogen, will evolve over time.

It Won’t Happen Overnight

Given the massive scope of the energy transition, a full pivot is expected to take a very long time. It is also important to note that fossil fuels like oil, gas, and coal are not expected to be fully replaced. Rather, estimates suggest these energy sources will not grow at the same pace as renewable energy (Exhibit 1).

As Exhibit 1 shows, petroleum-based fuels are expected to remain a critical component of overall energy supply. Renewables, while rapidly growing, are still a relatively small part of the current energy mix and, as the energy transition unfolds and evolves, an “all of the above” approach to energy production will be needed to meet demand.

What’s Old Is New

The resulting shift in commodity market supply and demand dynamics will undoubtedly pave the way for new winners to emerge in the renewable energy space. At the same time, the opportunity set among oil and gas companies will also evolve as more mature companies race to keep up with sustainability trends and changes in the supply chain.

Take natural gas as an example. Europe is among the largest consumers of Russian-supplied oil and gas. With its “REPowerEU” initiative in response to the conflict in Ukraine, Europe accelerated efforts to diversify its sources of energy and fast-tracked the roll-out of renewable gases like renewable hydrogen. In addition, as emerging markets seek to displace coal as a primary fuel source, demand for US natural gas has grown dramatically over the past several years. This trend is expected to continue given the ongoing shift in global commodity trade flows (Exhibit 2). Lastly, as the move toward electrification continues, electricity generated from natural gas could help complement the inherent intermittency that comes with the growth in electricity generated by renewables.

Change Creates Opportunities

As the energy transition evolves, so will the opportunity set and this should provide fertile ground for fundamental investors. We expect the pursuit of carbon-reduction goals to drastically alter a wide range of industries, including electricity generation and transmission, building infrastructure, vehicles, industrial users, forestry, and agriculture. At the same time, we do not expect fossil fuels to be fully replaced. Broadly speaking, we believe the opportunity is most compelling among companies that are positioned to help drive this transition and keep up with changes in the supply chain.

In these early innings of the energy transition, our real assets and carbon-related strategies maintain a healthy exposure to oil and gas companies, favoring high-quality exploration and production companies, and large, fiscally-conservative, integrated energy companies. Among renewables, we are currently focused on companies in the relatively more mature wind and solar markets, where near-term fundamentals remain strong.