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The article is an educational piece on listed infrastructure assets. For informational purposes only.
Global warming is real and affecting everyone. According to an article by Carbon Brief, 2022 is on track to be the fifth warmest year on record, with June seeing record-breaking heatwaves sweeping across continental Europe, England, China, and parts of America (as seen in Figure 1). Even in Singapore, we recorded the highest ever daily temperature of 36.7 degrees on 13 May 20221. While most countries can still survive the rise in temperatures thus far, for the likes of Maldives, it is a death sentence. A study by NASA estimated that 80% of Maldives will be submerged by 20502. The clock is ticking fast if you want your “Instagram” pictures of Maldives.
Figure 1: Record Warm Global Land Temperature in June
Governments have recognised the urgency to act now and avoid further damage from climate change. During the 26th UN Climate Change Conference (COP26) in 2021, global leaders agreed to radically cut back coal usage, eliminate fossil fuel subsidies, step up support for adaptation, and to deliver on climate finance3. To achieve the goal of reducing global carbon dioxide emissions to net zero by 2050, 85% of electricity generation must come from renewable sources by then4. To drive this transition, IEA forecasted that the total annual renewable energy investment must increase threefold, to USD 5 trillion, by 20305. Given strong political and societal support, renewable energy sector will see a strong multi-decade secular growth trend. So where are the opportunities in this area?
Energy sector the key target in combating climate change
Given that we are only at the early stages of this secular trend towards renewable energy transition, there are multiple investment opportunities. As of 2015, only 24% of global energy came from renewables (as seen in Figure 2). To close the gap, it means that within the next 8 years, solar and wind capacity must increase by 4x, and electric car sales must be multiple by 18x – according to International Energy Agency (IEA)5. One can consider investing in these segments within the renewable energy space.
Enshrined in law, all new fossil fuel developments have declined since 20215. This unwavering policy is a huge push for countries to explore alternative energy supplies; to fulfil the global energy demand.
Based on IEA’s roadmap towards net zero, there lies a great investment potential for wind and solar energy, contributing 36% and 22% of the global energy demand by 2050 respectively (as seen in Figure 2). The significant drop in production cost will further catalyse the exponential growth in their adoption rate (as seen in Figure 3), and hence the revenue for wind and solar companies.
The Electric Vehicle (EV) industry has been one of the most successful approach in helping to reduce global carbon dioxide emission. In Singapore alone, we are witnessing more EVs on the road. As part of Singapore Green Plan, new vehicles registered from 2030 will only be renewable energy models6. Translating this potential on a global scale, we are likely to see huge revenue growth in the EV industry.
Governments all over the world are encouraging the EV industry through subsidies and regulations. Growth has been particularly impressive over the last 3 years, even as the global pandemic shrank the market for combustion vehicles as manufacturers started grappling with supply chain bottlenecks. In 2021, sales of EVs hit 6.6 million, more than tripling their market share from 2 years earlier7.
3) Infrastructure
Large amounts of new infrastructure and modifications to existing ones will be required to further support the growth in renewable energy transition. Some of the main infrastructure components are electricity networks, storage systems, EV charging and transport infrastructure. The recent issuance of green bond by the Singapore Governement is a good example on the extent of political support towards funding renewable energy transition.
Energy storage is a quintessential part of the renewable energy transition. I had once questioned about the reliability of such energy sources; what happens if the sun is not shining, or the wind is not blowing strong enough? Battery storage system resolved my doubts, as it provides reserve capacity. In time to come, the ongoing innovation and development of energy storage system will accelerate the widespread adoption of renewable energy.
Concluding thoughts
We have already seen a breakthrough in renewable energy transition. The government commitment to support and expedite the green initiatives presents various opportunities for investors.
More recently, the rising fossil fuel prices were exacerbated by the Russia-Ukraine conflict. The need for energy security has accelerated energy transition. Governments are pushed to seek for cheaper energy alternatives and to explore alternatives to reduce fossil fuel dependency.
In my opinion, renewable energy is the future megatrend, and it could make for an excellent long-term investment. The current energy crisis may be the jolt to usher in a new era of affordable, renewable energy.
An environmental enthusiast. Lloyd started his career in the financial industry upon graduation, with a degree in Environmental Engineering. Joining the financial industry did not stop his passion for the environment and its latest development. He hopes to bring a humanist perspective to the world of finance. The love for the environment makes him outdoorsy. Lloyd prefers sports over computer games and sightseeing over shopping malls. He enjoys going for a run to declutter his mind after a long day at work.
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