The conflict in Ukraine has triggered spiking oil prices and worries of fuel shortages. Rob Lambert, Portfolio Manager, of the BlueBay Fixed Income team, updates us on the impact for energy transition investing.
What are the best ways to invest in the energy transition?
We see renewables, electric vehicles, carbon capture, large-scale battery storage and hydrogen as some of the most compelling themes connected to energy transition.
Which are the most appealing alternative sources of energy for investors?
I would say hydrogen – it is renewable, abundant, non-toxic, carbon-free and far more efficient than other sources of energy.
What implications could the conflict in Ukraine have on investor demand for funds holding fossil fuel investments? And for alternative sources of energy?
The rationale shouldn’t change but the hike in energy prices is a timely reminder of our reliance on natural gas and the need for baseload solutions in the long term, which renewables do not support.
..the hike in energy prices is a timely reminder of our reliance on natural gas and the need for baseload solutions in the long term..
Hydrogen could be a long-term solution to reducing our reliance on natural gas, but as yet, the cost is prohibitive. However, increasing private investment levels should bring the cost curve down.
Although renewables are intermittent energy sources, they are still cost-competitive, particularly versus natural gas. However, we also need significant investment into transmission networks, which are often overlooked.
Will ESG investors force widespread divestments from Russian sources of energy?
It is quite likely, yes. Russian energy exports are mainly natural gas, which is attractively priced due to the cheap lifting and production costs. The support for Ukraine makes Russian energy holdings untenable.
Will the conflict accelerate the move towards alternative sources of energy?
Yes – in our view, the hike in energy prices has highlighted the need for Europe to move away from fossil fuels even quicker than signalled at COP26.
The cost curve for renewables is already competitive. Most countries have announced ambitious renewables targets. They are likely to now garner support to accelerate investment as consumers see the real impact of our reliance on natural gas.
What are the challenges and opportunities?
Current renewables are intermittent and can’t be switched on and off like natural gas or coal, or remain operating at a high degree of capacity constantly as is the case with nuclear.
They can also be considered inefficient given their reliance on environmental conditions. Solar panels typically process just 15–22% of solar energy into usable energy, while wind is around 30-45% efficient. This inefficiency became very apparent in 2021 as a poor summer for wind and solar resulted in a high draw on natural gas in early winter.
We see investment in efficiency improvements and large-scale batteries to smooth energy flows as some of the biggest opportunities.
Does the conflict create the risk that countries put their plans for net zero on hold and start drilling new oil wells and using carbon plants?
I don’t think so. It takes time and European reserves are in decline.
The conflict may delay net zero plans as investment is transferred to improving grids, investment in LNG terminals and alternative pipelines. However, there is already talk of EU bonds to fund energy investment, in order to reduce our reliance on natural gas.
There is also the potential for a nuclear renaissance, which France has already announced. But given the long build times and the fact most European countries have been exiting nuclear, we don’t anticipate this being widespread.
How will the conflict change asset managers' engagement strategies with fossil fuel state-owned fossil fuel companies in Russia and other high-risk countries? Is the shift towards divestments?
It’s already the case. Every oil E&P name in our coverage has held calls with investors following the invasion. Most have announced no new investment in Russia and are exiting the market. This action suggests they are screening other regimes and considering scope to divest.