The race for energy independence: accelerating the green transition

This underpins our long-held conviction that clean energy solutions are well suited to replace fossil fuels as the world’s dominant source of energy. In our view, neither new liquefied natural gas (LNG) land-based import terminals nor the extension of coal power generation in Europe are needed to be able to decouple from Russian natural gas.

Instead, we feel investment in solar and wind power generation, battery storage, green hydrogen infrastructure and energy efficiency solutions – at a cost of €800bn+ in the EU alone – are required, which the core portfolio holdings of the Polar Capital Smart Energy Fund are likely to directly benefit from.

Renewables boost

The EU currently imports 90% of its natural gas, 45% of which comes from Russia. In May, the European Commission announced the REPowerEU joint action plan for more affordable, secure and sustainable energy. The plan aims for the gradual replacement of at least 155bcm of natural gas use – equivalent to the volume imported from Russia in 2021 – to make Europe independent from Russian fossil fuels well before 2030, and triple solar and wind power installed capacity by 2030.

REPowerEU also targets the doubling of the current deployment rate of heat pumps, resulting in 10 million units over the next five years. Additional measures include energy savings, enabled by higher
energy efficiency targets, as well as the increase of biomethane production.

The British Energy Security Strategy, published in April, also includes a boost of renewable power generation and green hydrogen. In particular, the British government targets increasing offshore wind capacity nearly five-fold by 2030, more than enough to power every home in Britain. The strategy foresees a similar five-fold increase in installed solar capacity by 2035. At the same time, the government is incentivising the production and installation of electric heat pumps to replace natural gas-fuelled gas boilers.

The renewable power ambitions are accompanied by nuclear power, which is expected to account for 25% of electricity demand in Britain by 2050.

Green energy solutions

Clean energy solutions will, in our view, help the EU achieve independence from Russian gas imports. In accordance with the REPowerEU proposal, we assume that close to 40% of the gas imports from Russia in 2021 can be replaced through non-Russian sources using the existing pipeline (Azerbaijan, Algeria, Norway) and LNG (from Qatar, the US, Egypt, West Africa) infrastructure in the short term.

While the EU’s strategy also includes energy saving measures as well as an increase in biomethane production, we believe renewable power-based clean energy solutions will allow the entire replacement of the remaining 60%+ of Russian gas imports in 2021, over the medium term:

• Replace fossil fuel-based power generation with solar and wind power. Approximately one third of natural gas demand in Europe is for power generation. In our scenario, switching one third of the existing natural gas-fuelled power generation capacity to renewables will remove more than 25% of Russian imports.
• Electrify the heating of water and space in buildings. Replacing gas boilers with 30 million electrically-powered heat pumps will reduce natural gas use for heating by more than 20% of Russian imports. Part of the natural gas used in industrial heating processes could also be replaced by electricity (food) or renewable-based green hydrogen (steel and cement).
• Decarbonise hydrogen. Natural gas-based grey hydrogen is mainly used in the EU’s chemical sector and in the production of fertilizers, as well as other industries such as semiconductor manufacturing. Based on our estimates, replacing half the EU’s grey hydrogen production with green hydrogen, created with renewable power, would remove more than 10% of Russian gas imports. Over the long term, the blending of green hydrogen into the existing gas grid could be an opportunity to further reduce the need for natural gas imports. 

Double solar and wind capacity

As well as using extensive third-party research, we do a great deal of our own modelling. Our research shows a medium-term scenario to replace more than 60% of Russian natural gas imports by clean energy solutions requires doubling the existing solar and wind power capacities in the EU.

Compared to the REPowerEU’s target, this would leave extra capacity for the planned retirement of coal power capacities and growth in electricity demand.

In our scenario, the renewable energy and battery storage capacities will substitute approximately one third of natural gas-fuelled electricity generation, power 30 million electric heat pumps for space and water heating in buildings, and provide enough electrolysis systems to replace half of today’s natural gas-based grey hydrogen with green hydrogen.

We estimate a total cost at c€817bn in the EU, which could benefit the Polar Capital Smart Energy Fund’s portfolio holdings in the clean power generation, power conversion and storage, green hydrogen infrastructure and energy efficiency supply chains.

Accelerating Transition

Efforts outlined in the European Green Deal were primarily driven by the ambition of cutting greenhouse gas emissions by at least 55% by 2030, reaching climate neutrality by 2050. Europe’s strong push for energy independence as a result of Russia’s subsequent invasion of Ukraine will, in our view, further accelerate the transition towards clean energy solutions. 

Solar and wind power combined with energy storage, green hydrogen infrastructure, electrification and energy efficiency technologies will allow Europe to achieve the existential targets of energy independency and decarbonisation.

The Polar Capital Smart Energy Fund invests in a diversified portfolio of differentiated companies that are in a strong position to enable and benefit from Europe’s transition towards energy independence and decarbonisation.

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By Thiemo Lang, Senior Portfolio Manager, and Güenther Hollfelder, Senior Analyst, Polar Capital Smart Energy Fund.

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