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By Chad Bruso, CFA
We believe current geopolitical obstacles warrant an “all-of-the-above” approach to seeking global energy transition goals.
Over the past decade, more than 130 countries have pledged to achieve net-zero emissions by 2050. However, faced with geopolitical developments that have constrained supply and laid bare national vulnerabilities associated with energy dependency, carbon-based fuels have reasserted their dominance as cheap and reliable sources of power. We believe the current global demand/supply imbalance, which has seen countries backtrack on their carbon pledges and alternative energy endeavors, should serve as a stark reminder of the importance of energy independence, especially with Europe experiencing a 500+% increase in power costs ahead of winter.
The current need-based sentiment toward reembracing carbon-based fuels doesn’t mean that the energy transition effort is doomed, but as with any aspirational goal, success may warrant a realistic plan and a willingness to change behavior. That said, we believe policymakers need to manage the realities of today, where carbon energy remains a necessity, and deliver on the long-term goal of energy independence and resiliency. For some countries, these can only be potentially achieved through alternatives to traditional carbon-based sources, with a playbook that seeks to embrace an “all-of-the-above” approach to energy, including:
- Traditional sources of energy (oil, natural gas, and even nuclear) to meet current demand, but balanced with “greener” efforts such as carbon capture, which is getting a boost in the U.S. from new tax incentives, and improvements in the processes and infrastructure associated with liquid natural gas, which can serve as a necessary bridge to new alternatives and cleaner fuel sources.
- Solar and wind alternatives augmented with backup standby power solutions to enable homeowners and businesses to generate and store energy. In 2021, solar and wind accounted for 44% and 28% of new U.S. energy generation capacity, but only 3.9% and 9.1% of the country’s overall generation, lagging behind global averages.1 Motivation has proven key to adoption, with rolling blackouts across California pushing the state to embrace alternatives on 25% of its energy generation now coming from solar.2 Europe’s vulnerability from an overreliance on Russian oil and natural gas might offer similar motivation.
- A ramp-up of lithium-powered electric vehicles, which appear well-established but need to see a six-fold increase in production by 2030 to achieve current climate goals.
We believe there are many potential opportunities in the energy transition, whether through exploration, production, infrastructure, distribution, engineering, or technological innovation. Small- to mid-cap growth investors may have the opportunity to capitalize on both current realities and vulnerabilities associated with the global dependence on fossil fuels, and the necessary longer-term effort to develop carbon alternatives.
1 https://www.nrel.gov/docs/fy22osti/82854.pdf
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