In today’s Exponential Investor

  • BNEF
  • Three pathways to saving the planet
  • Flows not pros

BALHAM, LONDON

As many of you may know, one of the biggest investment themes I look at is the energy transition.

For 200 years we have built a global economy based on the production and use of fossil fuels – primarily coal, oil, and natural gas.

Now, through necessity, we are trying to overhaul that energy system, and the appliances which rely on it. And we’re trying to do so faster than any previous transition has been achieved (from wood to coal, for example).

For people who, like me, see this as a massive opportunity, one of the key organisations to follow is BNEF (Bloomberg New Energy Finance).

What is BNEF?

BNEF is the leading organisation for data, research and analysis on the energy transition.

Originally founded by Beyond Oil 1 guest Michael Liebreich as “NEF”, it was acquired by Bloomberg in 2009.

A key report which it releases every year now is its “New Energy Outlook”, and the 2021 edition came out last week.

It’s a piece of in-depth forecasting, looking at how the energy transition might develop. The short summary is a must read for any energy transition investor.

This year, the approach it has gone for is to outline three different scenarios for getting to net zero (i.e. carbon dioxide emissions), where a different technology dominates in each one.

Three routes to net zero

The first scenario examines how renewables could become the dominant form of energy production, alongside green hydrogen.

The second wonders how the energy system will look of fossil fuels continue to dominate, with carbon capture as the key mitigator of carbon emissions.

Finally, it investigates a nuclear-dominated energy transition.

In its own words…

  • Our Green Scenario is a clean-electricity and green-hydrogen net-zero pathway. Here, hydrogen produced from water using electrolysers powered by wind and solar is applied in sectors such as industry and heavy transport, as well as in power generation to complement electrification.

    Electricity split: Renewables 85%, Fossil Fuels 10%, Nuclear 5%.
  • Our Gray Scenario is a clean-electricity and carbon-capture-and-storage (CCS) net-zero pathway. In this scenario, in addition to growth in electricity use and renewable power, emissions from fossil fuels in some sectors are abated using post-combustion carbon capture and storage technology. It also includes small amounts of so called ‘blue’ hydrogen produced from natural gas with carbon capture technology for use in non-stationary energy applications, and greater use of bioenergy.

    Electricity split: Renewables 42%, Fossil Fuels 52%, Nuclear 5%.
  • And finally, our Red Scenario is a clean-electricity and nuclear net-zero pathway. This one follows a similar trajectory to the Green Scenario except that we deploy small, modular nuclear to complement wind, solar and battery technology in the power sector, and add so-called ‘red hydrogen’, which is manufactured using electrolysis as in our Green Scenario, but this time powered by dedicated nuclear power plants.

    Electricity split: Renewables 27%, Fossil Fuels 7%, Nuclear 66%.

People often imagine that the path to net zero is clear, that there is a list of things we must do.

But this report challenges that ideology, reminding us that the future is very uncertain.

Renewables, hydrogen, nuclear, or carbon capture: there exists more than one way to balance our carbon budget.

A couple of things are assumed in each scenario though. Firstly, “each of our scenarios combines greater electrification, clean electricity and energy storage batteries.”

No matter what, we need to massively scale renewable energy production across the globe, electrify more appliances like cars, or heating, and find ways to cheaply and effectively store (and re-deploy) the electricity near where it’s needed.

Meanwhile, there is also a role for bioenergy, recycling, and efficiency improvements in all three scenarios…

The report outlined eight key metrics which need to be achieved by 2030, which I believe will reinforce the scale and extent of the transition – and the size of the opportunity for investors in equal measure.

To be on track to reach net zero by 2050 and stay within our carbon budget…

  • We need to add 505GW of wind power every year until 2030
  • And 455GW of solar per year too
  • We should also add 245GWh of battery capacity by 2030
  • And be adding 35 million electric vehicles to the roads each year
  • Sustainable fuels should make up 18% of aircraft fuel by 2030
  • And we need to be deploying 18 million heat pumps for buildings by then as well
  • Electricity use for low temperature heat in industry is required to rise 71% by then
  • And 70% of current coal-fired power needs to be retired by the end of the decade.

BNEF is the one of the top researchers and forecasters in the energy transition space.

No forecast will be entirely accurate to the nearest gigawatt or percentage point – we know that. But it’s the direction and speed of the trend that it is indicating which we should pay attention to.

Which brings me on to the second thing which is ubiquitous across all the three scenarios, green, grey, and red.

The second sure thing is that all will require gargantuan levels of investment.

Despite uncertainty around the overall cost of each NEO scenario, we estimate investment in energy supply and infrastructure to between $92 trillion and $173 trillion over the next thirty years. Annual investment will need to more than double to achieve this, rising from around $1.7 trillion per year today, to somewhere between $3.1 trillion and $5.8 trillion per year on average over the next three decades.

That is an unbelievable amount of money.

When a tsunami of capital is flowing in a certain direction, it really pays for investors to take note.

Flows matter

Investment gurus like Chris Cole and Mike Green have been leaders in highlighting the power of passive investment – showing the power of ETFs and index funds in creating a powerful cycle supporting certain indices or stocks (“flows not pros” is the rallying cry of some passive investors!).

The concept is that you can get insights from looking at the huge sums that are being invested in the fight against climate change.

Moreover, there are other, subtler, simpler ways to predict the flow of capital, and its effect on share prices.

One of those forward indicators has proved to be especially predictable, and the flows it generates can be huge.

To take advantage of this market opportunity, click here now

All the best,

Kit Winder
Co-editor, Exponential Investor