Reduced investment in the fossil fuel sector will lead to higher energy prices, encouraging the development of transition technologies, according to Mark Lacey, head of global resource equities and global thematics at Schroders, during a session at the Canadian Investment Review‘s 2022 Investment Innovation Conference.
“We’ve been through a massive divestment period that’s been exaggerated by this clear focus on emissions — for good reason. I believe you’re going to start seeing a mindset change over the next two to three years.”
This change in mindset will be the result of high oil and gas prices pushing consumers toward alternative energy sources, he said, noting this is rendering government-led carbon pricing efforts obsolete. “Carbon markets are rubbish — they really don’t work. But the high incentive prices for carbon and oil is redirecting capital into the energy transition.”
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Lacey said institutional investors can take advantage of consumers growing interest in alternative energy by investing in energy sector businesses that are involved in fossil fuels and renewables. “The best way to get that value is actually investing directly in the conventional companies which are changing their business models.”
With oil prices pushed up by a number of geopolitical events, including the war in Ukraine, the short-term profits of petroleum producers have been high, he added, noting many of these companies were redirecting the higher profits into renewable energy. By turning their short-term profits towards producing renewable electricity, they expect to play a larger role in the energy markets of the future.
“Obviously, we have to decarbonize electricity generation. The role played by renewables in electricity production must grow from about 20 per cent to 85 per cent between now and 2050. . . . There’s a pathway to get a very high percentage and that’s going to require a ridiculous amount of investment.”
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Improvements in the infrastructure required to support renewable energy is another area some energy sector businesses are reinvesting short-term fossil fuel profits. “We need [electrical storage],” said Lacey. “We need to spend a ridiculous amount of money on transmission and distribution networks because there’s a huge amount of energy loss in a lot of these networks — up to 20 per cent in some U.S. states.”
The inefficiency of electrical transmission networks won’t ease over the next two decades, he added. “By the 2030s, . . . the only choice you’ll have is a factory electric vehicle. . . . But in the next 36 months, the oil price is going to stay very, very tight and, depending on what Russia does, you’re going to see a fetch of the oil price potentially spike further in 2023.”
The capital required to transition the global economy won’t just benefit investors in the energy sector. The construction of more efficient electrical networks, wind and solar facilities will also drive up the prices of the commodities needed to construct them. “[While we’re all] focused on the nickel used in batteries, there’s a huge amount of copper used, too. The two areas are outside my remit, but will be very, very tight over the next five to 10 years.”
Lacey also noted some transitional investments aren’t likely to emerge as particularly useful alternatives to fossil fuels. He likened investor interest in one area — hydrogen — to the famous tulip bubble craze that warped the Dutch stock market in the 17th century. “You have to be very, very careful with these companies because the leading companies will dominate them — and that’s where you can find value in hydrogen.”
Read more coverage of the 2022 Investment Innovation Conference.