As heatwaves become the norm, the transition to alternative forms of energy has become even more urgent, writes Graeme Bencke, Fund Manager at Amati Global Investors.
The heatwaves and wildfires we have experienced of late further highlight the dramatic climate changes underway.
Coming at a time when the energy security concerns associated with access to natural gas have moved front and centre, the transition to alternative forms of energy has become even more urgent.
These twin pressures are pushing governments, companies, and households, to fundamentally reconsider their access to and consumption of energy.
Drivers of change
Moving to a decentralised structure – At the time of the last significant wave of infrastructure investment into power generation, in the 50s and 60s, the grid was structured to source power for a relatively small number of very large electricity generation units – typically coal or nuclear powered – delivering power in a stable manner over long distances.
This structure served us well until renewable alternatives began to emerge, when the nature of power generation began to change. Individual wind turbines and solar sites are small compared to a large coal plant, and as they are spread far and wide, present challenges if they are to be connected to the grid. Building the wireline infrastructure to physically connect them comes at significant cost, particularly if they are offshore sites. The unfortunate truth about renewables is that they are often best located in areas well away from the point of energy consumption.
When the grids were first designed, the demand for power varied according to the weather and the time of day, but supply was typically constant. By adding power sources which are more variable – the wind doesn’t always blow – we have created an additional level of complexity for grid operators, and they must invest to increase the flexibility of the system and remain in control. The greater the proportion of power from variable sources, the bigger the problem.
Since governments around the world committed to the Paris Agreement for carbon reduction, the process has accelerated, but we are still in the early stages in many places.
Electrification of everything – The drive to reduce emissions has been the catalyst for a wave of investment, and government support for new products such as EVs and heat pumps. As individuals switch to these more sustainable approaches, they take energy from the grid that used to come down a pipe. This increased demand also requires upgrading of the network.
Extreme weather – The third significant driver of network capital investment comes from the increase in extreme weather experienced in recent years. Whether it has come from forest fires in California, or freak snowstorms in Texas, grid operators are being forced to upgrade aging equipment to prevent the ever more frequent blackouts seen in many parts of the world. The causes and consequences of climate change are forcing their hands.
Geopolitics – As if these structural issues were not enough, the industry is now coming under huge political pressure to speed-up the process – this as part of the effort to avoid reliance on oil and natural gas in the wake of the Russian invasion of Ukraine. The very real threat of a global shortage of energy has lit a fire under the sector and brought a tangible urgency to the process of electrification via renewable sources.
Many countries are only now waking up to the true extent of the infrastructure investment required to meet the goals of the Paris Agreement and responding to rapidly changing climatic and geopolitical conditions. But most of the investment plans to date fall far short of the impending requirements to meet a fully net zero future.
As renewables continue to gain share in the provision of energy, network upgrades will be necessary, simply to keep the lights on.
The transition to cleaner energy sources also brings with it the need for an increase in energy storage through gravity, heat, or chemical systems, which further increases the complexity and the capital required.
All of this at a time of rising inflation, already high tax and debt burdens, and a cost-of-living squeeze. There has rarely been a time when efficiency improvements through innovation were more needed than today.