Tailwind in the energy transition. Nine themes for investors.

The race is on: Global competition for renewable energy sources

Business and politics have stalled far too long with the energy transition. Unfortunately, it often requires a crisis for society to wake up, as evidenced by the year 2022. Rising temperatures, the Ukraine war, energy shortages and soaring prices, inflation, and the dawn of a new world order have done more for the energy transition than anything else in history.

For companies in many industries such as energy, mining, and IT, this transformation poses a unique opportunity and a challenge at the same time. However, the developments affect us all: When it comes to the global energy transition, governments and companies have long since heard the call and are competing for resources, technology, and market leadership.

In what is now the third energy revolution, renewable energy sources have begun to replace fossil fuels. The process is here to stay. Little wonder, then, that oil multinationals are among the largest investors in the energy sector. However, their investments have yet to be rewarded by the capital markets, one likely reason being that the energy transition is far from being a done deal. Investors play an important role in this. Many of them are now wondering where to invest.

The energy transition fuels many industries

There are no comprehensive indices or collective investments specifically for the energy transition. This makes it all the more important to take a closer look at the subject. Nine major themes (list not exhaustive) are listed below, each playing different roles in the global energy transition. The main takeaway: The themes offer diversification and can improve the potential returns.

1. Wind power and photovoltaic equipment

Full order books and pricing power are on the rise despite personnel and materials shortages. But this is where the risks of the boom-and-bust cycles of the "upstream" segment of the energy transition make their mark. Just take a look at the "mini boom" and subsequent correction of the S&P Clean Energy Index over the last two years. Initially, the industry was riding high on an ESG wave. But investors fled for higher ground when they realized that manufacturers were struggling with materials and personnel shortages while order books were full.

2. Electricity produced from renewable energy sources

The good news: From a purely economic standpoint, renewable energy is also the most profitable for now. And now the bad news: Although renewable electricity has been subsidized in the past, it is likely to be taxed more in the future. The energy industry is no exception. What this means is that global diversification will also be needed for investments in power companies.

3. Infrastructure for power grids and storage

Bigger, stronger, smarter: Of course, existing infrastructures must also be adapted in terms of performance and efficiency for the energy transition. Because solar and wind power are often produced far away from where they are actually used, for instance, additional high-performance DC power lines are necessary.

In addition to the power grid, power storage is also required. The International Energy Agency expects to see unprecedented investments in infrastructure development for the energy transition by 2050. The equivalent of 30 trillion US dollars is expected to flow into renewable energy production and 20 trillion dollars each into better electricity grids and increasing global energy efficiency. This creates huge opportunities for various investments in public and private markets.

4. Nuclear power

This old technology is trying to reinvent itself. The EU's taxonomy has favored it after long discussions. However, criticisms about economic viability and sustainability – for example, when it comes to disposal – cannot be disputed. This is why innovative start-ups are looking for new solutions.

5. Green hydrogen

This technology is promising and revolutionary, but the market advantage of electric batteries is huge. Nevertheless, global markets with enormous business potential are looking to hydrogen production on the high seas and for use in industry.

6. e-mobility

The global shift in mobility is here to stay. It requires the expansion of the electrification infrastructure, smart cities, and "intelligent mobility." But it has already initiated a global race for scarce resources, such as lithium.

7. Raw materials in the energy transition

From rare-earth elements to steel, copper, nickel, and gravel, bottlenecks are inevitable. The consequences could be protectionism of resources, higher prices, and greater vertical integration of companies. One question for the future might be: "When will the first car company buy a lithium mine?"

8. Gas infrastructure

The war has turned the global gas market on its head. It is a golden era for gas companies. The US gas industry grew from zero to hero in a very short time, from a gas importer to the largest gas exporter. At the same time, Europe and Asia are building floating LNG regasification plants. But pipelines and terminals are critical bottlenecks. A handful of specialized industrial companies dominate the market – which means they can stabilize and increase their profits through long-term purchase contracts.

9. Integrated multinationals

Europe's oil and gas giants are investing heavily in the energy transition. However, these investments have no value on the stock exchanges. Investors need to answer one question: value or value trap?