The energy transition could be as big as the industrial or digital revolution
But the market may not be pricing in the speed of the transition
Stockhead reached out to George Whiting at Perennial Better Future Trust
John Kerry, the US Special Presidential Envoy on Climate, has described the world’s energy transition as the greatest economic opportunity since the Industrial Revolution.
“The decisions of some of the largest financial institutions in the world are being driven by ESG factors, and trillions of dollars are going to be invested in this new sector to avoid sheer catastrophe.
“This is going to be the biggest transformation, economically, since the industrial revolution,” he said.
One thing humans have proven throughout history is an incredible capacity for innovation.
We’re well into the energy transition – and perhaps the greatest economic opportunity since the Industrial Revolution. pic.twitter.com/s4SCqmL3oo
— Special Presidential Envoy John Kerry (@ClimateEnvoy) August 24, 2023
The phrase ‘Energy Transition’ has indeed been one of most used in the market over the past few years.
It refers to the global energy sector’s shift from fossil-based systems — including oil, natural gas and coal — to renewable energy sources like solar, wind, as well as lithium-ion batteries.
While results have been mixed, the market is unanimous when it comes to predicting that it will boom as investors prioritise ESG factors.
Market not pricing in the speed of energy transition
But there are experts who think that the market is failing to factor in the speed of this transition.
George Whiting, Head of Institutional & Retail Business Development for the Perennial Better Future Trust, says the market is currently pricing in a low probability of material impacts from this revolution, for a number of reasons.
“Firstly, the market is typically more focused on short term impacts – such as the impacts of recent conflicts on short-term energy prices,” Whiting told Stockhead.
“Secondly, as discussed by Oxford academics in their paper “Empirically grounded technology forecasts and the energy transition”, forecasters typically underestimate the rate of cost reduction of technology, and hence the deployment rate of new technologies as they scale, which means that they are likely to underestimate the medium term impacts.”
Whiting says that in his view, this short-term focus represents an opportunity for investors who have a more medium-term mindset.
It’s also a good opportunity for investors looking to avoid the many potential headwinds and harness the tailwinds of companies exposed to the DEM (decarbonization, energy and mobility) revolution.
George Whiting of Perennial Better Future Trust
“Interestingly, recent falls in the price of materials that are currently key to the technology – such as the lithium price – are likely to accelerate the cost reduction and hence the deployment rates relative to what thinking was 3 to 6 months ago,” Whiting said.
“In our view, this pricing volatility is one of a number of factors that is likely to cause consumers, businesses and governments to adopt new technology as part of the DEM revolution.”
“As disruptive as the digital revolution”
Whiting draws a bullish picture of a world transitioning away from fossil fuels faster than anticipated, with solar and roof top solar poised to be a significant source of energy by 2026.
Wind is also increasing its percentage share of energy capacity, while coal and natural gas are reducing as a percentage of the overall energy mix.
He believes the push for renewable energy is a revolution with the potential to be as disruptive as the digital revolution of the past 20 years.
“Morgan Stanley expects renewable generation to contribute 45% of global electricity consumption by 2030, and the share of solar and wind will nearly triple by 2030 in the power consumption mix,” he said.
“The rate of technological change is enormous, and we think people underestimate this. For example, the batteries that are in today’s electric vehicles (EV) are quite different to those sold a few years ago.”
3 ASX stocks to benefit from energy transition
In Australia, the uptake of renewables has been significant, especially since 2021-22, a trend Whiting expects to continue.
“When it’s considered that one-third of the ASX will be directly impacted by the energy revolution and another third indirectly, it doesn’t seem feasible for it not to be a critical element of any investment strategy.
“But despite this tailwind, we believe that markets are inefficient, and are not pricing it in the short term.”
Whiting says that as a result of this mispricing, the Perennial Better Future Trust is bullish on the prospects of these 3 ASX stocks:
Meridian is New Zealand’s largest renewable electricity generator with 100% of generation from renewable resources, primarily hydro.
“It generates strong cash flow, has a good balance sheet and has tailwinds from electrification as EVs and NZ industrial energy users convert from fossil fuels to electricity.
“Renewable energy also currently represents around 80-85% of all electricity generated in NZ,” says Whiting.
Whiting says Calix has multiple “shots on goal” in assisting industries to decarbonise.
The Calix technology was developed in Australia, and now has an impressive list of global partners.
The company’s kiln technology is at an increasingly advanced stage of development across a number of industries.
These include the cement and lime industry (which generates around 8% of global greenhouse gas emissions) where it is partnering with global producers such as Heidelberg Materials and Cemex.
The technology is also being used in Australia in lithium ore processing where it is partnering with Pilbara Minerals (ASX:PLS).
In addition, it is being used in direct air carbon capture where it is partnering in the US with Heirloom Inc and Microsoft, as well as zero emissions iron and steel where it is partnering with global iron ore companies.
“While we invest in the Australian and NZ market, we also keep an eye on listed decarbonisation companies in other markets.
“And in our view, Calix is one of the more interesting listed companies in the decarbonisation space globally,” said Whiting.
Alpha HPA has developed a low carbon and low cost process to produce high purity alumina.
High purity alumina (HPA) is used a range of products including products involved in decarbonisation.
Alpha’s production process results in HPA which has around 70% lower total emissions compared to incumbent processes.
Applications include lithium-ion batteries, semiconductors, and LED lights, all critical to decarbonisation as well as sapphire glass, which is used in display screens such as for smartphones.
The company’s key partners include Orica, which has recently acquired an equity stake and uses Alpha’s byproducts as inputs to its process.
“Alpha has also partnered with global industrial company Ebner Industrieofenbau to enable it to produce synthetic sapphire glass, which is a downstream product of the company’s high-purity alumina.
“This agreement will result in the production of value-added product in Australia at the company’s Gladstone, Queensland production facility using Ebner’s low-energy technology and Alpha’s HPA,” said Whiting.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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