A Cleaner Energy Future

The focus on a ‘green agenda’ has gained significant momentum in recent years. Despite the current challenges faced by society and the global economy, the desire for a more sustainable and low-carbon economic model shows no signs of abating. The stimulus packages being proposed and deployed by governments have bolstered, and potentially accelerated the transition.

The direction of funding towards sustainable projects is clearly aligned with achieving ‘net zero’, a target increasingly adopted by governments globally. While the UK was the first G7 country to commit to net zero, a growing cohort of countries have now committed to similar ambitions.

To date, eight countries, cumulatively accounting for ~4.4% of global energy-related CO2 emissions, have signed net zero targets into law, typically by 2050: Norway, Denmark, New Zealand, Sweden, Hungary, France, the UK and Germany. This group is likely to increase substantially with many governments proposing legislation or introducing new policy measures. There is also scope for more concerted efforts. For example, the European Commission (EC) is working towards a bloc-wide net zero target as part of its ‘Green Deal’, described by EC President Ursula von der Leyen as being “Europe’s man on the moon moment”. The Green Deal aims for a ‘climate neutral’ Europe, with ‘net zero’ enshrined in law. Renewable energy generation targets will be a major component of this, renovating buildings and toughening up regulatory requirements as part of energy efficiency measures, targeting transport-related emissions through tougher emissions standards for vehicles, and accelerating the development of the infrastructure required for a greater transition to electric vehicles will also feature. Europe wants to be a front-runner in climate friendly industries and clean technologies and the bloc accounts for almost 8% of global energy-related CO2 emissions.

The US is a notable omission from the list of major economies with federal-level climate change commitments and the Trump administration set out plans to withdraw from the Paris Climate Accord. However, the lack of federal ambition has not impeded more localised climate change targets. Policies including carbon pricing, emissions limits, and energy efficiency mandates have been adopted at the state and regional levels to help reduce greenhouse gas emissions, develop clean energy resources, promote alternative fuel vehicles, and promote more energy-efficient buildings and appliances. 

In sum, twenty-three states (plus the District of Columbia) have adopted greenhouse gas reduction targets, with even more introducing policies requiring electricity utilities to deliver a certain amount of electricity from renewable or clean energy sources. California has led the way, passing a law in 2018 to ensure by 2045 all electricity is generated by renewable sources. The state also targets net zero by the same year. Although specific targets and policies diverge between different states, the prevalence of these demonstrates widespread support for climate action.

Significant capital deployment is required to deliver on existing and planned climate change policies. The International Renewable Energy Agency (IRENA) forecasts that the global energy sector requires cumulative investment of $110tn to 2050. Representing, on average, 2% of global gross domestic product p.a. over the period. 

This investment will shift away from the fossil fuel sector towards energy efficiency, renewable power generation and related enabling infrastructure. Investment in reducing energy intensity will also be critical in reaching climate change objectives. The share of renewable energy generation would increase from around a quarter of global energy supply, to two-thirds in 2050. In addition, the anticipated transition to electrified transport and heat means electricity is likely to become the central ‘energy carrier’, more than doubling electricity consumption (IRENA). 

Many governments have introduced varying forms of support for the clean energy sector. In the UK, the government subsidy mechanisms such as Renewable Obligation Certificates to underpinned large proportions of expected revenues for renewable energy assets and more recently the contract-for-difference model provides offshore wind developments a floor price for the electricity produced. In the US, tax equity incentives have encouraged private investment in renewable energy projects.

Beyond governmental policies, there are other factors driving the build out of renewables: notably corporate sustainability initiatives and the falling cost of renewable energy generation. High profile corporates like Amazon and Google recognise increasing consumers awareness of sustainability and the environment, and that is driving ‘additionality’, i.e. investment in renewable energy generation capacity that would not otherwise be developed under governmental targets. But it is not all about perception or climate change initiatives. The rapidly falling cost of renewable energy technologies means that in many regions wind and solar power generation is cost-effective even relative to the most efficient forms of conventional power generation. The decision to develop new wind or solar capacity instead of a natural gas-powered plant is, in a growing number of instances, one of economic sense.

The outlook for the clean energy sector is positive and the industry is likely to see a long-term structural growth trend. This is good news for successful companies operating in the supply chain and related service industries and is also an attractive dynamic for infrastructure investors looking to gain exposure to long-dated and reliable cash flows from long-life assets. The pipeline for capacity growth in infrastructure such as energy generation assets, energy efficiency projects and energy storage solutions is very sizeable and this is the type of investment targeted by the VT Gravis Clean Energy Income Fund. There is a large and growing investible universe of publicly listed companies operating in the clean energy infrastructure space, which benefit from long-dated, contracted cash flows linked to portfolios of such critical assets. 

William Argent, Director 
Fund Adviser, VT Gravis Clean Energy Income Fund

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