Energy Transition: set to shape the years to come

While the old energy world with oil prices scratching the US$100 per barrel mark dominates the headlines, the new energy world continues to reshape markets with exceptional momentum. The International Energy Agency’s ‘Net Zero Roadmap’ report published recently confirms the ongoing dynamics. Clean energy and electric mobility adoption rates beat expectations and are establishing themselves as mass markets this decade. Hydrogen and other solutions likely retain only supporting-actor roles in specific niches. The transition is driven by economics rather than politics. The current boom should be followed by a period of cooling and consolidation, which is the key story investors need to monitor, and for which the signs are already present in clean energy.

The old fossil-based energy world dominates the headlines these days. Perceived supply tightness fuels a bullish market mood and lifts oil prices close to US$100 per barrel. Somewhat less noticed, the International Energy Agency provided an update of their ‘Net Zero Roadmap’ report, looking in depth at how the energy transition advances. The report provides valuable insights into the status quo and the current dynamics. In comparison with the analysis done two years ago, various highlights emerge. Overall, the transition has accelerated substantially worldwide due, among other factors, to the growth of the solutions offered, the scaling of supply, and the strong demand for alternatives triggered by the fossil-fuel-induced energy shocks.

At least the energy part of the global emissions challenge seems roughly on track to meet the net zero target, unlike other meaningful parts, such as food and agriculture. The acceleration is most noteworthy in clean energy, where solar has become a global mass market and where battery grid storage these days shows some of the greatest growth dynamics. The solar business is a commodity business with low entry barriers and fierce competition. Given the massive investments into manufacturing, particularly out of China, the capacities are almost at, or potentially already exceed, the levels needed to contribute to the net zero target, estimated at around 800-1000 gigawatts per year. These dynamics result in low prices and low margins, which is the fundamental reason for our Neutral view.

For electric mobility, the dynamics have picked up and current trends exceed earlier estimates. Supply chains scale in time and the potential bottlenecks in battery supplies remain a key challenge but are less pressing than previously thought. The ongoing waves of growth in the product offering across key markets in North America, Europe, and China should continue to drive the shift towards electric mobility. These fundamental tailwinds, combined with a business that in some parts has high entry barriers, underpin our unchanged Constructive view.

Meanwhile, the expectations for hydrogen have been toned down. Logistics are burdensome, except for ammonia, and being a derivative of clean energy, cost disadvantages are structural. Hydrogen seems to play a supporting-actor role in specific market niches, such as fertilisers, shipping, and steel and biofuels production, while a role in seasonal energy storage, mobility, and heating seems very unlikely.

The energy transition is in full swing, and it is driven by market dynamics rather than politics. Roadblocks are not economics or costs but rather institutions and rigid old energy world market structures. We stick to the view that the energy transition is shaping up as a deflationary and productivity-boosting structural trend dominating the coming decade up to 2035 and beyond. Yet the nearer-term outlook is one of consolidation and cooling past the boom, which is the key element to be aware of for investors.