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Frédérique Carrier
Managing Director, Head of Investment Strategy
RBC Europe Limited

The world is in the midst of a transformative shift toward renewable energy. This transition will be more rapid and potentially more profound than the adoption of oil in the 1850s. In that instance, it took a century from the time commercial oil wells were first drilled for oil to account for a quarter of the energy used worldwide.

Today's goal—set by the Paris Agreement to keep global warming to well below two degrees Celsius compared to pre-industrial levels—is to achieve the bulk of this transition to green energy by 2050.

To reach that goal, a considerable share of the energy currently produced from fossil fuels will need to be replaced by energy from renewable sources. At the same time, demand for electricity will continue to rise, populations will continue to grow and many activities, such as transport, are becoming increasingly electrified.

According to IRENA, the International Renewable Energy Agency, $110 trillion will need to be invested over the next 30 years to realize the global energy transformation.

Cumulative investments needed for energy transition

The donut chart depicts the breakdown of cumulative investments needed for the energy transition.

The donut chart depicts the breakdown of the estimated $110 trillion in cumulative investments needed for the energy transition, according to the International Renewable Energy Agency: Electrification and infrastructure, $26 trillion (23%); Renewables, $27 trillion (24%); Energy efficiency, $37 trillion (35%); Fossil fuels and other, $20 trillion (18%).


Fossil fuels & other: $20T (18%)

Electrification & infrastructure: $26T (23%)

Energy efficiency: $37T (35%)

Renewables: $27T (24%)

Note: Fossil fuels = mostly oil, natural gas, coal

Source - IRENA

Transformative investments in renewable energy are being driven by a government policy roadmap that's synchronized globally—for the first time. The turning point came in 2020 with three major events across the world:

  • The European Green Deal refocused the EU's COVID-19 stimulus package onto renewables—charging infrastructure, power generation, and green hydrogen projects, allocating up to $600 billion to green projects.
  • China's 14th Five-Year Plan called for electric vehicles (EVs) to constitute 20 percent of overall new car sales in China by 2025 from just five percent now and to reduce its dependence on coal (spending up to 10 trillion yuan, or $1.5 trillion).
  • Joe Biden won the U.S. presidential election, with a sweeping infrastructure program (up to $2 trillion) as one of his key initiatives.

These three major events culminated to significantly quicken the global pace of the transition to renewable energy.

Some industries set to benefit from the energy transition

Transformation Industry
Renewables
  • Independent wind farm operators
  • Wind turbine manufacturers
  • Utility companies with expertise in renewable power
  • Solar panel equipment manufacturers
  • Enablers (semiconductor manufacturers)
  • Software/enablers
  • Monitoring systems
Energy storage
  • Battery systems operators
  • Battery manufacturers
Transmission & distribution
  • Transmission systems managers
  • Electric cable manufacturers
  • Power equipment manufacturers (e.g., substations, transformers)
  • Electricity distribution companies
Electric vehicles
  • Manufacturers and operators of charging infrastructure
  • Parts manufacturers

Source - RBC Wealth Management

This is of course no easy feat. The energy transition requires a change in how energy is produced, stored, transmitted and consumed within a few decades.Enter GreenTech, environmentally-friendly technologies which aim to reduce Green House Gas emissions. Here, we explore how GreenTech will transform these 4 areas of the energy sector.

1. Transform the way energy is produced

Energy used in industry, transport, and buildings is responsible for some three-quarters of all greenhouse gas emissions. At the moment, fossil fuels (mostly oil, natural gas, and coal) are burned to produce electricity, creating carbon emissions in the process. The energy transition has forced oil and gas companies to invest in renewables. European majors are leading the way. Royal Dutch Shell even links executive pay to the progress it makes in reducing emissions. U.S. Big Oil has been more reticent, though these companies are starting to take some steps.

One way to reduce emissions is to shift to electricity generated by wind turbines, solar panels, and other renewables. Hydropower is already being used as much as it likely can as not all countries have the water resources necessary, and those that do have already developed them as much as possible over the past 100 years.

The International Energy Agency (IEA) projects that renewables will account for 95 percent of the net increase in global power capacity through 2025. It points out that solar and onshore wind, for which costs have fallen dramatically over the past two decades, are already the cheapest ways of adding new electricity-generating capacity in most countries. The IEA expects solar alone to account for 60 percent of all renewable capacity additions through 2025, with wind providing another 30 percent. Offshore wind is expected to see the most growth, driven by further cost declines and a move to new markets such as China and the U.S. where ample potential remains.

While wind and solar will likely play the largest role in the low-carbon economy, other technologies will also feature:

  • Nuclear: Produces no greenhouse gas emissions, though the manufacturing of the equipment and the construction of the station most probably do
  • Carbon capture: Removes carbon dioxide from the atmosphere or directly from industrial processes and injects it into deep underground geological formations (known as “sequestration”)
  • Hydrogen: As a way to store solar and wind energy to be used when needed and as a direct substitute for fossil fuels including coking coal
  • Geoexchange: Takes advantage of the fairly constant temperatures a few metres below the earth’s surface to heat homes and buildings in the winter and cool them in the summer using heat pumps
  • Waste heat recovery: Captures the waste heat from buildings and industrial processes and converts it into electricity via thermoelectric generators

The energy transition has forced oil and gas companies to invest in renewables. European majors are leading the way. Royal Dutch Shell even links executive pay to the progress it makes in reducing emissions. U.S. Big Oil has been more reticent, though these companies are starting to take some steps. The global energy majors can be part of the solution, reinvesting part of their substantial free cash flow to help fund their transition aims. The risk, in our view, is that they overpay for renewables projects.

2. Transform the way energy is stored

One major challenge for renewables is the disconnect between the continuous nature of electricity demand and the intermittency of solar and wind power. The sun doesn't always shine and the wind doesn't always blow. Worse, storms can make a wind farm inoperable.

This can be dealt with by adding an energy source that runs only when needed—though these usually produce some harmful emissions and are costly to run if only used part-time.

Battery energy storage systems, which can store energy during periods of excess and discharge it during shortages, are another solution. These can be stationary or modular, industrial-size batteries installed at various points of the electric grid to support grid management. They are a critical component in an increasingly renewable-reliant grid.

Storage costs are coming down thanks to innovation and economies of scale. According to Shelby Tucker, RBC Capital Markets, LLC utilities analyst, storage system unit costs are expected to decline by 45 percent by 2030 and by 59 percent by 2050. The next-generation battery technologies, some offering more than double the energy capacity of standard lithium-ion batteries, may drive down costs even further. Tucker believes the global market for batteries has the potential to grow 100 times by 2050.

Battery technology can also be key to the uptake of EVs. Reducing the battery cost is important in making EVs more price-competitive as batteries represent as much as 30 percent of the cost of an EV. Already down by more than 85 percent over the past decade, it needs to fall further. The average cost of a lithium-ion battery pack is currently just under $140 per kilowatt-hour (kWh). According to BloombergNEF, EVs become cost-competitive compared to traditional cars at $100 per kWh. This appears to be achievable by 2023, with some producers reporting costs below $100 for the first time.

Battery range, efficiency, and speed of recharging should also improve thanks to innovation and investment. Volkswagen recently committed to reducing battery costs by up to half and producing long-range and fast-charging batteries from 2024.

Hydroelectric power can also act as a very large-scale battery. In Canada, Quebec recently green-lighted a large wind power project, which will utilize the province's massive hydro capacity as a backup when wind power falters. Likewise, Alberta's extensive wind and solar potential could be bolstered if it were backed up by neighboring British Columbia's extensive hydroelectric resources. What's missing is a more integrated grid system along their 1,800 km border.

3. Transform the way energy is transported

Because solar panels and wind turbines are installed where the sun shines and the wind is blustery, and not necessarily near cities, the current transmission model based on power plants sending electricity to nearby cities is not viable.

To transport solar- and wind-generated electricity, high-voltage transmission is needed over large distances. In the U.S., as in many other places, this is an issue because the transmission system is highly fragmented and doesn't easily send electricity from one end of the country to the other.

High-voltage transmission systems are under development, but this is a complex undertaking with several stakeholders including landowners and state and local governments. One example is the TransWest Express, a high-voltage electric grid designed to move three gigawatts (GW) of wind power generated in windy Wyoming to California. Construction is finally scheduled to start, 17 long years after planning began.

China has been building out its ultra-high-voltage transmission network since 2009 to accommodate surging electricity consumption and various power resources. By the end of 2020, it had constructed 30 networks to transmit electricity from its interior to the populated coastal regions in Eastern and Southern China.

Power distribution systems, which connect power lines to homes, will also need to be upgraded. As reliance on fossil fuels in the home decreases, electricity consumption is increasing. For instance, according to the U.S. Federal Highway Administration, an EV uses 4,000 kWh of electricity per year to operate, assuming 13,500 miles driven—admittedly, a long distance by European standards. By comparison, the average U.S. household consumes 11,000 kWh per year, so having an EV would increase consumption by one-third in the U.S.

4. Transform the way energy is used

Despite buzz for years about EVs, such cars were a mere three percent of global demand in 2020, though with stark regional differences. Still-prohibitive prices, inadequate battery ranges, and a lack of public and home charging infrastructure have all stunted the uptake.

Global electric vehicle demand forecast

Western Europe leads, China is catching up
Country/region EV as % of total vehicle demand % of vehicles in operation 2050
2020 2025E 2050E
U.S. 2% 7% 80% 44%
China 4% 18% 95% 57%
Western Europe 6% 20% 95% 63%
Global 3% 11% 83% 46%

But this may be about to change. RBC Capital Markets, LLC U.S. Auto Analyst Joseph Spak forecasts EVs will represent 11 percent of demand for new cars by 2025, with growth rates of some 40 percent per year, supported by regulations to phase out internal combustion engine vehicles. To date, at least 24 countries have proposed some form of zero-emission vehicle targets. For instance, the UK will ban the sale of new petrol and diesel cars from 2030.

Meanwhile, President Biden's infrastructure bill aims to build over 300,000 public charging stations. Manufacturers are in the early stages of a heavy investment and capital expenditure cycle to dramatically boost the production of EVs and develop the related software. Many are planning to ramp up EV capacity and offer a wider range of price points and models. General Motors is accelerating its EV plans by spending $27 billion over the next five years on electric and autonomous vehicles. It aims to deliver more than one million EVs by 2025 and stop making gasoline-powered cars by 2035. Ford's legacy internal combustion engine vehicles should also transition to EVs, though at a slower pace than GM.

Chinese car manufacturers are also ramping up EV production. Zhejiang Geely Holding, one of China's biggest automakers and owner of Volvo Cars, launched the luxury EV brand, Zeekr. A growing number of startups also are eyeing the country's booming EV market. Li Auto is aiming to be the top smart-EV maker in China, targeting a 20 percent market share in China by 2025.

The transition from internal combustion engines to EVs has been compared to that from horses to cars. It may not be an exaggeration. The change goes much beyond altering assembly lines. EVs are increasingly becoming more like smartphones, with wireless transmission of software updates.

Getting this digitalization right is key, as software opens up new opportunities for recurring and post-sale revenues via digital upgrades and increased customer connectivity. Volkswagen is spending €27 billion over the next five years on software, artificial intelligence, and autonomous vehicles, aiming to increase the share of its own software used in its cars from currently 10 percent to 60 percent.

Spak points out that investors have generally cheered this step-up in investment as it improves companies' future prospects. But they will likely want to see proof of better returns on these investments and of EVs as a platform with more recurring revenue opportunities, a larger addressable market, and less cyclicality. For traditional automakers undergoing this metamorphosis, investor enthusiasm should be tempered by the possibility of write-downs of legacy manufacturing footprints, restructurings, labor concerns, and culture change.

Investing in GreenTech

While GreenTech stocks lost some ground in 2021, as the market rotated into stocks that will likely benefit from the economic reopening, opportunity still abounds. A useful gauge is the MSCI Global Alternative Energy Index, which tracks companies that derive 50 percent or more of revenues from operations that contribute to a more environmentally sustainable economy. The index lost close to 30 percent of its value between January and March 2021. This followed a 220 percent gain from the trough of March 2020 to the index's January 2021 peak (versus the MSCI World Index's gain of 71 percent over the same period). After the correction, the index's relative price-to-earnings ratio is the lowest it has been in four years.

In our view, the volatility represents a good opportunity to build exposure to these long-term, secular themes.


This article is part of our SusTech series, which explores the confluence of sustainability and technology and why this concept matters as an investment theme.

Read more from the series:


Non-U.S. Analyst Disclosure: Frédérique Carrier, an employee of RBC Wealth Management USA’s foreign affiliate RBC Europe Limited, contributed to the preparation of this publication. This individual is not registered with or qualified as a research analyst with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since they are not associated persons of RBC Wealth Management, they may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.


RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.


Frédérique Carrier

Managing Director, Head of Investment Strategy
RBC Europe Limited
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