Energy Security & Renewables

While there is little positive coming out of the energy crisis facing Europe, one silver lining is that the EU is being forced, in real time, to address key deficits to its energy infrastructure and supplies that have been building for decades.  It is also accelerating the EU’s adoption of renewable energy sources in order to fix the problem.

 

The central part that renewables will play in the International Energy Agency’s proposed plan for the EU to eliminate its Russian energy imports as outlined here could be viewed as a preview to the hard choices other nations will face in the years ahead if we stand any chance of achieving net zero emissions by 2050.  In short, the choice we all face is between carbon-intensive power sources that are inexpensive in the short term but increasingly controlled by autocratic or hostile nation states, and renewable power sources that are not reliable enough to base an entire electrical grid upon using current technologies and require meaningful investments to make them the core of our energy supply.  As you can see from the graphic below, the costs of solar, wind and other renewable energy sources have fallen to the point where they are competitive with other non-renewable energy sources like nuclear and coal.  While this doesn’t include the (substantial) cost of storing them in order to stabilize the grid, it does illustrate that they are economical enough to become a growing component of energy production going forward.

 

 

 

Renewables will attract trillions of investment dollars in the years ahead, which is the investment opportunity we are most focused on.  Studies by the IEA, Mckinsey, Bloomberg and the Intergovernmental Panel on Climate Change estimate that annual investments in climate initiatives to achieve net zero emissions will need to grow meaningfully from current levels.  Mckinsey estimates here that amount will be $9.2 trillion/year, which implies an additional $3.5T in spending on climate changes from current levels. To put that figure in perspective, that’s about 2x Canada’s annual GDP in additional investments in renewables that will need to be made every year for the next 30 years.  The key areas of investments will be in renewable power generation, battery technologies, energy efficiency efforts and supporting infrastructure like EV charging stations and smart grid technologies.  The graphic below illustrates the scale of the potential investments and the potential target end markets:

 

 

While the thought of how these projects will be funded may be daunting to consider (venture capital has had a poor track record of investing in climate innovation, meaning that public investments will have to pick up the slack), the costs of inaction are equally dire.  Deloitte’s estimates here that inaction on climate change could cost the U.S. economy alone $14.5T over the next 50 years due to “heat stress, rising sea levels, damaged infrastructure and reduced agricultural productivity.”

 

The past few years have forced business leaders to rethink some of the core tenets of our global economy, from the supply chain to reliable energy sources.  While this has caused considerable disruption in the short term, there is also considerable opportunity in the transition from prioritizing efficiency and cost to prioritizing resiliency and reliability.

 

 

 

 

 

 

 

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