It is five years since the Paris Climate Agreement on global emissions was instigated. Time moves quickly, but policy and change don’t always maintain the same pace.
As Lenin, not a noted capitalist, but a fine observer of trends, said in 1918: “There are decades where nothing happens – and there are weeks when decades happen.” 2020 was such a year.
The energy transition – in Europe first, and potentially now in the US – has been moving fast, accelerated by the global pandemic:
- As part of the European Green Deal, the European Commission will raise its greenhouse gas emission reduction target by 15 percent, to 55 percent of 1990 levels, by 2030.
- US President Biden is promising a similar net-zero carbon target by 2050, and has rejoined the Paris Agreement. Global political climate ambitions now look more robust, and this creates many strategic opportunities and challenges.
This article outlines why green growth has created greater shareholder value for both energy and utility companies, and why focus on sustainability will generate value for all corporates.
In addition, we examine some of the hottest new investment opportunities for companies in the energy sector.
Green significantly outperforms black
Over the last decade, green investments have become more mainstream, driven by strong policies and subsidies, declining costs, low interest rates, high fuel prices, and changes in public and consumer opinion.
In 2019, for example, three-quarters of new investment in electricity went into renewables, the utilization rates of coal generators fell to 53 percent, and fossil fuel demand for electricity decreased significantly. And then came the COVID-19 pandemic. According to the IEA1 , demand for fossil fuels is likely to have collapsed in 2020 by 7–8 percentage points, while demand for renewables is likely to have risen, albeit slightly.
Renewables accounted for 90 percent of new generating capacity in 2020 and will continue to grow strongly. We forecast that installations over the course of 2020–2025 globally will grow by 8 percent per annum for wind and 13 percent per annum for solar.
With the cost of wind and solar power declining rapidly and priority dispatch obliging grid operators to turn to these generating sources first, renewables have outperformed conventional power.
In turn, this has been reflected by strong stock market performance. Green utilities, developers, independent power producers, and even wind and solar original equipment manufacturers (OEMs) have significantly outperformed the markets (see Figure 1), providing investors with higher returns than carbon-intensive businesses.
Click here for the full report: arthur_d_little_prism_green_energy.pdf
