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As with any investment, your capital is at risk.
Whether it is clean or renewable, there is consensus that global energy demand is increasing. Despite a hiatus during Covid, the years since have seen a steady increase in consumption, driven by rising populations, globalisation and our insatiable appetite for energy-hungry digital technologies. Meeting these needs will require global solutions, and internationally-minded investors may benefit from the energy transition opportunities found abroad.
A disorderly transition?
The path, however, is not completely clear. Geopolitical tensions and ongoing efforts to address the effects of climate change have presented countries with a never-ending balancing act of satisfying short-term needs while trying to implement longer-term energy solutions. A pragmatic approach may be needed, with recognition that the energy transition will require intermediary steps.
In this vein, companies such as Air Liquide, a French industrial gas company, are well-poised to benefit from the increasing ubiquity of hydrogen as a source and store of energy. Liquified natural gas has more recently been used to power gas turbines for the ever-growing use of AI and its fields of data centres.
On the other hand, Vestas, a leading manufacturer of wind turbines, has faced a challenging period as supply chain issues and interest rate rises have impacted offshore wind farm projects. While the company has faced difficulties, the opportunity of wind energy and Vestas’ position as a major player in an oligopolistic market provide optimism for future growth.
In the short term, the path toward a full energy transition remains bumpy. For long-term investors like us, it presents an opportunity for investment returns.
“During a Gold Rush, sell shovels”
Not every beneficiary of the transition will be an energy producer. There are many companies in the international space providing the tools and fundamental components needed to support the energy transition.
We have long invested in services and support companies that are insulated from the front line in a variety of industries, from healthcare to oil and gas.
As we shift toward renewable energy sources, such as wind and solar, the need for infrastructure to ensure that generated electricity reaches its destination becomes more crucial. Cable designers and manufacturers, such as Nexans and Prysmian, have positioned themselves as fully integrated players within the electrification value chain. Most projects would struggle to get off the ground without essential cabling solutions, and both companies have seen strong share price performance over the last year as demand for grid upgrades and key infrastructure projects grows.
Last year Nexans won a contract for the Great Sea Interconnector that connects Greece and Cyprus. The interconnector will deliver up to 2,000 megawatts of energy to Europe and will be the largest interconnector project in history, supplying over 3 million homes with electricity. These large-scale projects coupled with strategic acquisitions have helped Nexans to increase H1 2024 earnings by 16.4 percent year-on-year.
The economies driving growth in global electricity demand
The International Energy Agency estimates that 85 per cent of the global rise in electricity demand up to 2026 is expected to originate from outside advanced economies, with India, Southeast Asia, and China – which is contributing substantially even as the country’s economy undergoes material structural changes – being the primary contributors.
There are many companies that are looking to drive growth and benefit from this rise in demand. Reliance Industries is a great example of this. Originally a textiles company, it diversified into a range of markets, including refining and petrochemicals, telecommunications, media and entertainment, and retail and renewables. It is the largest corporate taxpayer in India with revenues equivalent to 3 percent of India's GDP.
The company has laid out a 15-year vision to become a leading new energy and materials company and a vision to provide the "world’s most affordable green energy within this decade". To do this they are focusing on reducing the price of production for green hydrogen, which will see them convert two plants in India later this year from 'grey' (unsustainable) to green production.
This is happening alongside vast investment in solar farms aimed at powering these plants. Given Reliance Industries’ track record and position in the fastest-growing economy in the world, we are hopeful of the company’s growth prospects.
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We are currently at an inflection point in grid infrastructure investment with around $3.1tn expected to be spent on grid upgrades around the world by 2030, particularly in emerging markets. As international equity investors, these long-term structural growth trends offer an exciting opportunity in our investible universe.
Earlier this year, China announced a long-term plan to upgrade its power grid to deal with rising consumption. Chinese companies CATL and BYD are market leaders in energy storage systems which help with the management of volatile energy demand, while also allowing the integration of renewable energy sources into existing systems. Both companies are also playing a big role in the increasing adoption of electric vehicles (EVs) which goes hand-in-hand with advancement in battery manufacturing. BYD is the largest manufacturer of EVs globally, aided by the high penetration within its domestic market.
Patience can be rewarded
The reorientation of supply and demand as part of the energy transition presents both risks and opportunities for us as investors, and the international market is at the epicentre of these developments.
As long-term investors, we have the benefit of being able to invest in companies during their transition in anticipation of what they might become. Provided they can demonstrate strong operational performance, these companies can reward investors willing to wait for them to shine.
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