The contrast between the two announcements was clear for all to see… on the one hand you had BP, a giant of the oil industry writing off up to $17.5bn in fossil fuel reserves in what many saw as the oil industry going into managed decline and an acknowledgement that peak oil demand has passed. On the other hand, eight years after Ørsted began its transition out of the oil and gas sector, its CEO Henrik Poulsen announced his resignation after having transformed the company into a sustainability and offshore wind leader, and with the share price sitting around an all-time high.
The focus on renewable energy isn’t new. In fact, despite the Committee on Climate Change’s assessment of the UK’s massive failings in meeting most of its climate progress indicators and nearly all policy milestones, in the decade after the UK’s 2008 Climate Change Act was passed, renewable energy generation has increased rapidly. And it now provides over a third of the UK’s electricity supply.
2050 is widely seen as the target year for decarbonisation, although meeting that goal would still result in climate change causing dramatic negative human, ecological and financial consequences. It is not expected that this goal will be reached on a global basis, but there are encouraging signs that the transition to a low carbon economy in some locations is moving more rapidly than expected.
The economics of clean energy and storage have changed so fast over the last 15 years that a recent report from the University of California Berkley estimated that the US could reach 90% clean energy by 2035 without increasing consumer bills, and with massive job creation along the way. The reported findings were actually prudent as the initial results suggested this milestone could be possible at least five years sooner.
But as we increasingly turn the corner into a low carbon-powered future, which seems to be gaining even more traction with the Covid-19 recovery programs, the renewable energy business is maturing and wrestling with some important questions:
- How to deal with negative prices
- How to store electricity from periods of high supply to low supply
- How to diversify generation beyond offshore wind power and what the right mix is
Subsidies worked initially to get the market off the ground, but what’s their role now?
The answer to some of these questions could come from a well-know, but underappreciated source: Hydrogen.
Hydrogen has exploded on to the clean energy scene recently and is one of the most exciting ongoing developments. Using renewable energy to create ‘green’ hydrogen results in a fuel that produces no potent greenhouse gas emissions when used, and has the potential to decarbonise harder to reach sectors such as transport, steel manufacturing and other heavy industry.
Governments need to invest heavily to provide the initial spark for the industry. Without government support for hydrogen, private capital is not likely to make any meaningful allocation. So, access to early stage hydrogen investment opportunities seems easiest through public equity markets for now. In terms of government backing, the US Department of Energy’s announcement in June that it would spend $100m over five years to advance research was blown out of the water by announcements from Germany, Saudi Arabia and China that they would each be establishing multi-billion dollar hydrogen strategies.
The UK’s government has been hounded by academics, unions and industry leaders to support the area more given that Scotland, in particular, is already at the forefront of green hydrogen production and end-to-end solutions, but there appears to be some hesitation in attempting to catalyse the current position. In short, it seems as though politics and vested interest groups have been adding their own chapters to the rapidly developing hydrogen story.
European governments, in particular, should have some capacity to support hydrogen as they remove subsidies from wind and solar energy, which produce lower-cost electricity than fossil fuels. In the UK, LCP’s Energy Analytics team were quick to notice that energy production from renewable sources exceeded demand at points in May, resulting in negative energy pricing. Renewables paid the market to take their energy in order to receive their subsidies. Negative pricing is expected to increase in the future as the share of renewables in the power generation mix grows.
As renewable energy grows, it has the potential to reduce the security of income for investors as newer subsidy regimes will not cover this risk of excess supply. There are ways to reduce this risk, for example through entering long term energy contracts directly with energy users. But it adds weight to our preference for investors in clean energy to diversify exposure across a wide range of technologies and, to a degree, across different geographies. Since the open market price for electricity can be affected by the price a region pays for non-renewable generation sources, it can be wise to optimise a renewable energy portfolio across various pricing exposures and subsidy regimes.
Version 2 of the renewables investment opportunity will add newer clean energy generation technology. Energy storage will play an important role. And the electrification of systems and industries will provide further opportunities. For all-in-one solutions, fund managers like Octopus, Capital Dynamics and Greencoat have built up multi-asset renewables offerings which can provide exposures to various assets such as solar, wind, hydro and bioenergy electricity generation, and to supporting infrastructure opportunities such as energy storage and electric vehicle infrastructure.
Clean energy technology has been exceeding expectations in terms of deployment speed and cost reductions. Despite this, a huge amount of extra investment is still required. The success experienced by investors in Ørsted in comparison to the volatile ride experienced by investors in BP over the past few years is surely an indication of what the future is likely to hold across the broader clean energy and fossil fuel sectors. But as fossil fuel industries decline, challenges will appear in the energy transition. Addressing those challenges will likely require government support but should present further opportunities for investors. While direct infrastructure investment opportunities in hydrogen appear limited for now, clean energy investors should make sure the risks appearing for more mature clean infrastructure technology are addressed and that their portfolio is diversified across a range of technologies. For more reading on how investors can align their portfolios with a low carbon future, see Claire Jones’s article “Aligning with Paris: What’s your plan?”.
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