By Charlie Thomas, CIO of EdenTree
Against the backdrop of another tumultuous quarter in markets, investors could be forgiven for adopting the adage “sell in May and go away”. While we have seen that further fallout from the mini-crisis in the US banking sector was successfully contained, the inflation dilemma remains front and centre for central banks and consumers. However, despite a darkening economic mood, as ESG investors, we know there are opportunities to be found in the green revolution.
Electrify everything
First, let us take a step back and look at the eye-catching statistics this quarter has produced about the electrification of…well, almost everything needing power.
- The International Energy Agency (IEA) forecast solar power investment alone will eclipse investment in oil for the first time, with $1.7trn expected to be spent on clean technologies overall
- Solar and wind barely existed as industries at the start of the century. Today, they account for about 15% of the global electricity supply
Indeed, solar is now the fastest-growing energy technology ever. At a growth rate of approximately 20% per annum, total installed capacity could move from one to six terawatts soon after 2030 – exceeding the combined capacity of gas, coal, nuclear and hydro. At that pace, 80 terawatts of installed solar capacity is achievable by 2050, which according to estimates from Professor Andrew Blakers of Australian National University, would provide 130,000 of an estimated 200,000-terawatt hours of power for a global population of 10 billion people, with the gap plugged by other low-carbon sources: wind, hydro, geothermal, nuclear and so on.
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This would not only cut carbon but also the marginal cost of energy, which would have a profound impact on the global economy.
EV uptake ramps up
Like solar, the growth rate of electric vehicles (EVs) has often massively exceeded forecasts. The IEA’s Global EV Outlook 2023 – a report released during the quarter – is a case in point. It expects EVs to make up 18% of new sales this year, rising to 23% by 2025 and 36% by 2030. However, as noted by Hannah Richie of Our World in Data, the IEA’s 2022 report had EVs down for 13% of new sales by 2025 and 21% by 2030, significantly below this year’s figures. But it is easy to see why forecasting the explosive growth of EVs has been so difficult: in 2020 EVs accounted for just 4% of new car sales, climbing and 9% in 2021. It will be double that this year. EVs are certainly on an extraordinary trajectory.
The revolutionary potential of heat pumps
While trends in solar and electric vehicles are incredibly encouraging, it is the green revolutionary potential of heat pumps that particularly caught our eye this quarter.
The potential for heat pumps has been thought-provokingly outlined in recent analysis by Michael Liebreich of BloombergNEF as a mainstay for general spatial heating but also as a key source of industrial-scale energy in developed economies, with greater efficacy per joule of input than green hydrogen. Put simply, heat pumps can provide energy of a higher quality than hydrogen in many spatial heating and industrial situations; for example, providing heat for three homes to every one heated by hydrogen.
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The industrial potential of this technology is particularly exciting. Until relatively recently, the dominant view has been that renewable sources of heating will only be able to tackle a relatively small amount of the heating required by the industry – a view often used as a reason (or excuse) for the continuation of fossil fuels.
These solutions may not be suitable everywhere in the world, especially in some developing countries where the infrastructure isn’t available to support them. Even in Europe, the grid is not ready for the level of rollout required to meet potential industrial demand. However, current analysis debunks some myths around heat pumps, which typically put hydrogen ahead of heat pumps as the best option for industrial heating needs. The extraordinary potential of this technology is clear to see in this quote by Liebreich: “We are constantly told that there are no silver bullets in the fight against emissions; the closest thing we have is a heat pump.”
Challenging backdrop
The economic backdrop for the second half of the year looks challenging. Central banks remain steadfast in their commitments to bringing inflation down, even if this involves periods of recession. At a time of uncertainty, we could expect to see further bouts of volatility across asset markets, some of it irrational. This can be unsettling but also a source of opportunity.
The outlook for the green revolution remains promising and continues to confound expectations about rates of growth and adoption, as well as the potential for technology to accelerate progress towards a zero carbon economy.
