We need a more resilient and efficient energy system

Jonathan Hick

Jonathan Hick

Despite a recent, relatively modest recovery in equities seen in the latter half of this summer, the capital markets will have left many investors bemused for the most part of 2022, with one of the worst-performing first halves on record, and trillions knocked off global stocks.

Coupled with painfully high inflation, lacklustre growth, tightening monetary policy and the gloom of recession looming, investors seeking yield have had to look outside of equities and bonds for a reliable return. This is where alternative investment vehicles are making their mark. 

Investments in alternative, private, cash-generating, long-term inflation-linked assets, including those assets that are driving decarbonisation and the energy transition, have fared better.

Indeed, investment trusts, which have been described as funding a new wave of innovation in a period of rapid technological change, are the chosen vehicle for many today.

They can provide those much-desired uncorrelated returns that the public capital markets are not delivering, and in 2022 recorded their best year for dividend payments.

One of the areas they focus on today is the energy transition. It is no secret that we are amid a worsening energy pricing emergency and there is an urgent need to support a more resilient and efficient energy system.

What is more, if we are to realise the UK’s commitment to achieving net zero by 2050, we need to significantly increase investment across the whole of the UK energy system by up to £50bn a year by 2030 as part of the energy transition. 

For this to be achieved, major, concerted, and holistic investment is required across all segments of the energy system. 

The decarbonisation challenge 

Despite halving our overall greenhouse gas emissions profile in the past thirty years, we still have a long way to go to achieving net zero, and our demand for electricity is rapidly increasing.

As our lives become increasingly digitised, data storage and transmission requirements rise, public transit electrifies, and electric vehicles gradually replace the combustion engine, the energy driving this must come from somewhere. 

Indeed, the UK emitted 405.5mn tonnes of CO2 in 2020, 81mn (20 per cent) from the energy sector alone, and it has been estimated that our electricity consumption will triple by 2050.

The International Energy Agency has advised in its decarbonisation roadmap that the radical transformation of global energy systems required to achieve net zero CO2 emissions is dependent on a major expansion in the volume of investment and a major pivot in where that investment is deployed, with a core focus of this being clean and energy efficient technologies. 

From a global perspective, the UN’s Net Zero Financing Roadmap, produced in tandem with COP26 and in line with the IEA’s roadmap, proposes that between 2021 and 2030, about $32 trn investment is needed to put the world on the path to net zero.

These numbers sound almost too staggering to comprehend, but when considering that 70 per cent of the financing required will need to come from the private sector, the opportunity for investors is manifold and significant. 

Through direct capital investment in decarbonisation projects and assets, it becomes clear why well positioned, specialist investment trusts and companies are such an important vehicle to drive this forward.