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Renewable energy is currently the most economical way to mitigate climate change and ensure energy security. Electrification, networks, and critical minerals for the energy transition are likely to benefit from increased spending.
The global energy transition is at an inflection point. Investment in clean, reliable, and affordable energy is set to increase significantly as not only consumers and producers want to behave more responsibly, but governments are also taking action to combat climate change and ensure energy security. We expect to see significant investment in electrification and the grid, which will drive strong demand for critical materials, the building blocks of the energy transition.
A history of energy transitions
Throughout history, humankind has experienced several energy transitions. Societies and economies have moved from burning carbon-heavy fuels in order to provide heat, power, and light, to burning various iterations of less carbon-intensive fuels to heat homes, cook food, power factories, and fuel modes of transportation.1 Today, the energy mix consists of coal, oil, and natural gas, with nuclear and hydropower providing a stable baseload of electricity, and renewable energies such as wind and solar power growing rapidly, albeit from a small base.
After the 1973 oil crisis, the term “energy transition” was embraced by politicians and the media. However, it was not until Jimmy Carter spoke of “a transition in the way people use energy” in his 1977 Address to the Nation on Energy that the term became popularized and more widespread.2
We use the term “energy evolution” to describe what we believe will be a very gradual transition (i.e. an evolution) from a fossil-fuel-based system to cleaner modes of energy production, storage, supply, and consumption.
Figure 1: Global primary energy consumption by source3
Energy evolution at an inflection point
We feel that the energy evolution is currently at an inflection point and believe that renewable energy is the most economical way to achieve the dual objective of mitigating climate change and ensuring energy security. The global energy system as we know it faces several issues today:
1. Demographics
Energy consumption increases with population growth as economies develop, urbanization increases, and consumers become more affluent.4
2. Affordability
Rising energy demand is meeting years of underinvestment in energy supply, resulting in high energy prices.
3. Energy security
Recent events in Russia and Ukraine have once more highlighted the issue of geopolitical events driving up the price of energy, emphasizing the need to invest in energy security and self-sufficiency and to reduce our dependency on cross-border imports to meet our energy needs.5
4. Climate change
The damage caused to the planet’s ecosystem and the economic costs of climate change6 are becoming untenable. Consumer, producer, and government awareness are rising fast, driving changes in behavior, government policy, and regulation alike.
Policy action is indeed driving a renewed wave in renewable energy, clean technology, sustainable mobility, and related energy infrastructure investment, as illustrated by the passage of the US Inflation Reduction Act,7 with significant tax credits for investments in new technology and re-shoring energy value chains. The European Union is currently working on its counterpart to attract investments as well.
Renewable energy technology and scale as evolution enablers
The global transition toward sustainable energy is being increasingly driven by the recognition that global greenhouse gas emissions must be brought down to zero to combat climate change. Since fossil fuels are the largest single source of carbon emissions,8 their use is limited by the Paris Agreement of 2015 to keep global warming below 1.5°C.9
The energy evolution from carbon-heavy energy systems to a less carbon-intensive and cleaner energy system is supported by ongoing technological improvement and the scaling-up of new technologies. Figure 2 shows that – unlike renewables – traditional coal and gas-fired electricity have hardly shown any improvements in their levelized cost of energy (LCOE)10.
In addition, it is estimated that the cost of wind and solar energy will come down further as scale increases. In other words, more capacity will be deployed in what is known as the capacity learning curve, which is the cost reduction per doubling of installed capacity.11
Decarbonization through electrification
Cost-competitive renewable energy facilitates the electrification of energy systems. This essentially means that the way we consume energy will change: instead of driving gasoline-powered cars, we will drive electric vehicles (EVs),12 while instead of heating our homes with gas or cooking on gas stoves, penetration of heat pumps will increase and we will cook using electricity. It is estimated that by 2050, roughly half of society’s energy consumption will be through electricity.13
This greater electricity demand will increasingly be met through clean energy, which means that significant investment in renewable energy will be needed to accommodate a twenty-fold increase in low-carbon power generation.
Decentralization of electricity networks
As more intermittent renewable energy is fed into the grid, investment in battery storage capacity of the network will be needed to enable storing the electricity generated from wind and solar power. After all, the sun only shines during the day whereas we might want to use solar energy when we get home from work and turn on the TV, start up the washing machine or charge our EV.14 Furthermore, investment in bidirectional networks will be needed, including the software needed to manage electricity flows, in order to keep the grid balanced. The electricity network as we have known it until now, in which a large plant dispatches power to many households, will be replaced by a decentralized network that enables distributed generation by smaller grid-connected players.15
In the same International Energy Agency (IEA) scenario in which electricity consumption more than doubles and this incremental demand for electricity is met by renewables, grid investment is set to triple between 2020 and 2040 and remain at elevated levels thereafter.
Bottlenecks in critical materials
The energy evolution is a physical transition, so the new future-proof energy system will have to be built. This means that building blocks are needed: we will need to invest in critical materials such as metallic or chemical ingredients for batteries, copper for electric wiring and transportation of electrified energy, aluminum for light-weighting mobility devices, and rare earth metals to produce permanent magnets for EVs and offshore wind turbines.
Due to underinvestment in many of these material enablers of the energy transition in recent years, it is estimated that the supply will not be enough to meet demand, leading to market shortfalls and rising prices. We have already seen this in copper markets, while lithium prices have also risen significantly in the last few years.
Total mineral demand is expected to triple by 2040, since we will need to bring the critical materials that enable the energy transition to the surface.16 Demand for minerals used in EVs and battery storage systems is even expected to increase more than twenty-eight-fold within the same timeframe.
It is worth noting, however, that it will not be possible to meet all of the demand with the (finite) amount of resources in the Earth’s crust, and therefore recycling will play a key role in increasing supply, too. Indeed, recycling’s share of meeting total demand for copper, lithium, cobalt, and nickel is expected to increase from less than 1% at present to 8% of supply by 2040 in the same scenario.
Bringing it all together: significant investment is needed to transition from gray to green
As Figure 6 shows, we are at an energy evolution inflection point, as investments in the energy transition surged to over USD 1 trillion in 2022, up 31% year-over-year. Yet, this investment will need to triple for the remainder of this decade for us to transition to a net-zero energy system.
Opportunities in the energy evolution
To combat climate change, ensure energy security, and meet the growing demand for affordable energy driven by population growth, annual investment in the low-carbon energy transition worldwide will need to more than triple from USD 1.11 trillion to around USD 3.92 trillion by 2030. This offers ample opportunities for investors looking to generate long-term returns through exposure to the energy evolution.
CFA, Senior portfolio manager, Thematic Equities
Dirk Hoozemans (MA, CFA, ESG CFA), Director, is Lead Portfolio Manager of the Energy Evolution strategy. In 2022, he joined Credit Suisse Asset Management, now part of ۶Ƶ Group, from Triodos Investment Management, where he was fund manager of a global small- and mid-cap-focused thematic impact strategy and responsible for outlining a new impact-driven investment process, including ESG integration and active ownership policies. Prior to that, Dirk held various portfolio management positions at Robeco Asset Management, including portfolio manager of a global energy strategy. Dirk holds a master’s degree in Econometrics from Tilburg University, The Netherlands, is a CFA charterholder, and has obtained the CFA Institute Certificate in ESG Investing.
