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Impact investing: why renewables are well-placed to solve Europe’s energy crisis

Europe is likely to accelerate renewable energy as a preferred solution over fossil fuels. Regnan’s TIM CROCKFORD explains why

  • Russia’s invasion has upended Europe’s energy supply
  • LNG and nuclear could take years to roll out
  • Renewables, hydrogen, batteries can be operating sooner

RUSSIA’S invasion of Ukraine could accelerate the uptake of renewable energy as European regulators fast-track approvals and sweep away bottlenecks to alleviate the continent’s energy crisis, says Regnan’s Tim Crockford.

Russia’s aggression has upended energy markets and propelled oil and gas prices to multi-year highs, triggering question-marks about what Europe can do to diversify its energy supply.

Before the invasion, Europe was heavily dependent on Russia for gas, oil and coal. Russia accounted for 55% of Germany’s natural gas supplies in 2021, more than a third of its crude oil and about half its hard coal.

While the humanitarian crisis remains a priority, focus is turning to “how governments respond and what effect this will have on renewables,” says Crockford, who heads up Regnan’s Global Equity Impact Solutions Fund. (Regnan is part of Pendal Group).

“We believe in the short term, it’s going to accelerate production increases in fossil fuels as well as renewables,” says Crockford.

“But it brings a longer-term, heightened risk for investors of stranded assets in the fossil fuels space” because the additional supply coming online is contingent on current higher prices lasting into the longer term.”

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Regnan Global Equity Impact Solutions Fund

Part of the fossil fuel price reaction to the invasion can be explained by the fact that declining investment in fossil fuel capacity in recent years has not been matched by equivalent investment in renewables.

“So, while people have been talking about growth in renewables, we would actually argue that the growth has happened at a slower pace.

“Now you’re starting to see the catch up being played out.”

LNG ramp-up faces hurdles

The EU has a difficult balance to achieve — energy security within existing decarbonisation targets.

The likely outcome is a ramp-up in liquified natural gas (LNG) — which is expected to rise 70% by 2024 in continental Europe, albeit amid falling overall gas consumption.

But there is no short-term solution to lifting fossil fuel output, says Crockford.

One reason is that most of the existing production of LNG is tied to long-term contracts — predominantly going to Asia.

“So, while theoretically, LNG should be the energy source that is most responsive to the greater need, it’s not actually materialising.”

Another problem: Europe has little spare “regassification” capacity to make use of liquid LNG imports.

What it does have is designed for gas to flow from east to west. LNG receiving facilities in Spain have capacity, but there are no pipelines to send the gas back eastwards across Europe.

“This is something that will take three to five years to put in place from when the investment decisions are made,” says Crockford.

Expect Europe to accelerate renewables

Among alternative energy sources, coal is not feasible partly because it is politically unpalatable but also because it has been through a major decommissioning process in recent years, says Crockford.

Meanwhile, public perception towards nuclear “has done a 180, but it’s not as simply as flicking a switch and turning the plants back on again — the leads times are seven to 10 years”.

While renewable energy is equally no quick fix, Crockford says investors should expect many governments across Europe look to accelerate renewable investment.

“In addition to making it more likely that they will be brought into line with net zero commitments, renewables can be operational sooner than new fossil fuel and nuclear capacity.

“This is particularly true for small-scale solar and onshore wind, but even offshore wind has a theoretical lead time of 18-24 months after an investment decision has been made.”

He says the main bottlenecks for renewables are getting permits from regulators and grid connections, but EU policy makers are acting on this by directing governments to speed up the permitting process.

Other beneficiaries of the push for energy independence are likely to be energy storage — both hydrogen and batteries — and companies that help businesses and households improve their energy efficiency.

Renewables, hydrogen, batteries set to win out

“In summary, while we are likely to see a rise in short-term support for fossil fuels, it is likely to be curtailed by supply and lead-time constraints,” says Crockford.

“It is our view that this increases the medium-term risk of assets becoming stranded, as capital is likely to be sunk into assets that command a higher cost per unit of energy relative to older capacity and therefore require commodity prices to remain higher for longer to achieve their expected ROIs.

”At the margin, therefore, it would seem to us that renewables, hydrogen and battery storage and energy efficiency are poised to win out.”

About Tim Crockford

Tim Crockford leads Regnan’s Equity Impact Solutions team and is senior fund manager of Regnan Global Equity Impact Solutions Fund. Tim previously managed the Hermes Impact Opportunities Equity Fund after co-founding the Hermes impact team in 2016.

About Regnan

Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.

Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.

The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.

The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change. Both funds are distributed by Pendal in Australia.

Visit Regnan.com

Find out about Regnan Global Equity Impact Solutions Fund

Find out about Regnan Credit Impact Trust

For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at May 16, 2022.

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