First proposed in March shortly after Russia invaded Ukraine, the REPowerEU plan builds on the EU’s much broader “Fit for 55” package of policies announced in July 2021 to deliver the European Green Deal, which is a massive, system-wide transformation of the European Union economy to cut net greenhouse gas emissions across all 27 EU member states to net zero by 2050. (See Big Strides Forward on Climate Action.)
The plan envisages a rapid increase in the deployment of renewable energy to replace gas, oil and coal, in addition to curbing energy demand through improving energy efficiency.
Even as it condemns Russia for its ongoing aggression in Ukraine, the EU has found itself in the awkward position of continuing to rely on Russia for tens of billions of euros worth of oil and gas imports under existing contracts. Russia provided the EU with 39% of its natural gas and 25% of its oil in 2021, according to Eurostat data.
The European Union is heavily reliant on Russia for its fossil fuel energy needs
EU 2021 imports of natural gas by partner, % of trade value
Source: Eurostat
EU 2021 imports of petroleum oil by partner, % of trade value
Source: Eurostat
As we highlighted in our earlier report, the invasion of Ukraine has inflicted lasting damage on Russia’s relationship with Europe and is likely to drive a profound and lasting shift in Europe’s energy policy. We also highlighted selected names offering exposure to this theme – both traditional and renewables – with relatively better risk-reward propositions at prevailing valuations. (See When Energy Transition Accelerates Because Of Energy Security.)
Even before Russia’s invasion of Ukraine, strong demand coupled with supply disruptions in Europe and China last year had served as a powerful reminder to global policymakers that the energy transition is complex and must be carefully managed.
Despite the latest disruptions, we expect investments in renewables and other energy transition technologies to continue and even accelerate, as we see continued broad-based policy support for the adoption of renewables, electric transport, and other low-carbon technologies to meet longer-term strategic goals of energy security.
Energy transition investment reached a record USD755 billion last year, fueled by wind, solar and electric vehicle investments.
Worldwide spending on the deployment of renewable energy, electrified heating and transport, energy storage, and other energy transition initiatives has risen steadily in recent years; last year, energy transition investment rose further to a record USD755 billion, driven by surging investments in wind and solar installations and electric vehicle sales, according to the latest estimates by BloombergNEF
Nonetheless, the European Commission (EC) recognises that short-term energy supplies will need to be secured to sustain households and businesses through this transition. This will require “targeted investments” for security of supply in oil and gas infrastructure, while “some of the existing coal capacities might also be used longer than initially expected, with a role for nuclear power and domestic gas resources too”, it said.
Fundamentally, this reflects the unavoidable tension between Europe’s short-term energy needs and its long-term goals of weaning itself off Russian energy.
Other major economies are also facing similar tensions. This is well illustrated by China's continued build-out of coal power capacity following its energy crisis last year even as it invests heavily to expand its renewable energy capacity and supporting infrastructure. (See Powering Up for Net Zero.)
What lies ahead for the energy transition
The current macro environment is challenging for equities overall, while rising interest rates are a key headwind for the utilities sector as well as companies that are exploring new, still-unprofitable ventures including business lines that are positioned for the low-carbon transition.
The transition towards climate-friendly economic growth is unlikely to be smooth but the longer-term policy trajectory is clear – the world is heading towards a low-carbon economy. This will create significant disruption and new opportunities for businesses as supporting regulations and policy incentives are progressively rolled out globally.
As we have previously highlighted, we see new opportunities emerging for a wide range of businesses across multiple sectors in the global transition towards a carbon neutral economy, given the broad reach of decarbonisation efforts worldwide. Businesses that reduce emissions and waste, re-use natural resources and deliver products and services that support the overall decarbonisation of human activity are likely to be better positioned than their peers in adapting to the fast-evolving regulations and incentives being rolled out by governments worldwide, as well as shifting investor and consumer preferences.
These include suppliers of specialised chemicals, chips or other critical components used in clean-air systems to reduce emissions from vehicles and industrial plants and to produce batteries for electric vehicles, as well as clean energy technologies such as hydrogen, which is attractive as a low-carbon energy source to decarbonise a wide range of economic activity such as power generation, transport, and heating and power for buildings.
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