The energy transition is going to require a huge outlay of capital to meet some ambitious and hefty targets by 2050, according to founder and senior portfolio manager at ClearBridge Investments, Nick Langley.
But, as cost-of-living pressures bite, government subsidies for new technologies are likely to reduce, which he said means investors need to seriously consider these impacts on longer-term portfolios.
In a new ClearBridge Investments white paper, Langley points out that "new capital will be required across the entire electricity value chain, with estimates of US$2.5 trillion per year by 2030 (in 2019 dollars), according to the International Energy Agency".
"While the predominantly private-funded generation segment will face increased risk of funding being taken away, as the political reaction to higher costs of living threaten subsidies currently supporting their buildout, investor returns in regulated entities across the electricity value chain, or broadly listed infrastructure, look to be much safer, as their returns tend to follow regulator-allowed returns on equity over time," he explained.
Langley said that as the energy transition plays out, there will be other major changes in economic sectors that will have significant implications for longer-term portfolios.
In the 2020s, the International Energy Agency said that emissions from the power sector will decline as solar and wind expand — supply from these sources are expected to rise from 27-60 per cent — and coal plants are shuttered. Power sector investment is seen to likely triple, with more than half of it spent on renewables, and one-third of it spent to update electricity networks.
"Furthermore, by 2030 about 65 per cent of all cars sold annually are expected to be EVs. In terms of electricity demand, two EVs are equal to one house being added to the grid. Such growth in EVs will involve considerable spending on poles, wires and transformers in the streets of our major cities to support the increased current required to charge," Langley continued.
Langley also said investor returns in regulated entities across the electricity value chain, or broadly listed infrastructure, look to be the safer choice for the longer-term investor, as their returns tend to follow regulator-allowed returns on equity over time.
"This is due to the nature of regulated assets, where revenues are normally determined by a regulator-allowed returns on equity on an underlying asset base, which is in turn is determined by the level of investment," Langley concluded.