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.”
Find out about
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.”
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.
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.
“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.”
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.
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.
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 firstname.lastname@example.org.
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.
PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.
An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.
The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.
Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.
Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.
For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com