When a crisis hits, it’s human nature to prioritise the quickest fix, even if it doesn’t fit with our long-term goals.
When Russia invaded Ukraine in late February, some countries shifted their energy policies back to hydrocarbons and nuclear, setting aside Net Zero. Eight months on, European leaders are facing the risk of winter power outages while still thinking about longer-term energy supplies. Around the world, governments are aiming to make their energy systems more resilient, all the while mindful of the clean energy transition.
In our view, the links between energy security and clean energy are stronger than they might initially appear. Importantly, their solutions are also closely connected.
Energy security is the priority
Since February, energy security has climbed up the governmental agenda. Particularly in Europe, leaders have been working to reduce reliance on imported fossil fuels, especially from Russia.
European governments have pushed for greater energy efficiency, including increased electrification to lower vehicular demand for fossil fuels. With Russia’s supply of gas in doubt, EU states targeted 15% cuts in gas consumption, aiming to build reserves ahead of winter, introducing measures such as turning down the heating in public buildings.
No U-turn on Net Zero
Reneging on Net Zero isn’t a long-term solution. Few European countries have the option of boosting domestic hydrocarbon production. So they’d still rely on external actors, whether it’s Russia or elsewhere, with the associated vulnerability in times of stress. While some see nuclear power as an alternative to fossil fuels, support is far from unanimous and new plants take at least a decade to come online – and delays are common.
With domestic fossil fuel reserves scarce and support for nuclear patchy, governments are looking to renewables to help provide energy security.
Re-thinking the future of energy
Steep reductions in Russian energy supplies to Europe saw gas prices spike in August, giving a boost to other energy exporters keen to make up shortfalls. The long-term effect will be “a fundamental re-think on energy security which will accelerate decarbonisation.”1
There are several routes to lessening Western Europe’s reliance on imported fossil fuels. In addition to making greater use of renewables, improving energy efficiency and increasing the uptake of electric vehicles can help. These would also reduce greenhouse gas emissions, supporting energy security and Net Zero. What’s more, increasing investment in alternative energy and electrification helps to keep countries in line with the climate goals of the Paris Agreement.
A $37trn investment opportunity
We believe the lasting effect of the war will be much more investment in renewable energy as countries aim to reduce their dependency on fossil fuels, and their vulnerability to oil price rises outside their control.
France’s President Macron has pledged to increase solar capacity tenfold and to build 50 new offshore wind farms by 2050, also recently committing to reduce admin delays that slow renewable energy projects. Meanwhile, Germany’s Chancellor Scholz has labelled renewables “crucial for our security”, saying “the faster we push ahead with the expansion of renewable energies, the better.”
According to one estimate, the “higher capital intensity of renewable power and rising importance of energy storage and networks” represent a $37trn investment opportunity on the path to Net Zero2.
At Amundi ETF, we refer to this global drive towards alternative energy sources, energy efficiency, electrification and battery technology as the rise of ‘new energy’. In addition to low emissions, new energy sources offer a huge additional benefit in the quest for energy security – renewable energy is local energy, independent and sovereign.
Accessing new energy investments
New energy is a broad theme, encapsulating developments in energy sources, systems, and entirely new technologies. With the breadth and depth difficult for even a traditional sector-based approach to capture, instead we group new energy companies in a different way, aiming to identify the full set of opportunities.
- Alternative energy sources: all renewables and waste-to-energy systems, where output yields have been rising and costs sliding.
- Energy efficiency: systems to optimise energy use, including energy control and management, decentralised energy systems, green hydrogen and fuel cells.
- Battery value chain : innovative companies supporting the deployment of electric vehicles.
By directing capital into companies at the forefront of the energy transition – those committed to renewable energy generation, energy efficient solutions and products/services supporting electrification – we believe that new energy-focused investors stand to benefit from the opportunities that advances in these technologies present. We see it as our duty to be at the forefront of this energy transition by facilitating the kind of positive investment decisions that could help deliver a cleaner, safer world.
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1.Frank Jotzo, head of energy at the Australian National University’s Institute for Climate, Energy and Disaster Solutions, quoted in The Lowy Institute on 28 February 2022, https://www.lowyinstitute.org/the-interpreter/russia-s-war-will-hasten-drive-clean-energy-security
2.Source: Goldman Sachs Carbonomics, Introducing the GS net zero carbon models and sector frameworks.
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