equities
Future Electrification: a window of opportunity
Our global energy system is undergoing a seismic shift toward massive electrification. It will occur over decades, but attractive equity opportunities exist now as revenue pools shift across the value chain, in our view. With a forward-looking view, and leveraging extensive research, we invest in the transition by focusing on three crucial growth drivers.
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Scale of change
About 70% of our economy needs to become electrified by 2050 to meet the Paris Agreement’s net-zero goals, up from 20% today.
Most of that electricity will be powered by renewables, primarily solar and wind. We foresee the demise of today’s centralised model, where energy flows in one direction with copious emissions. Instead, energy will be generated by multiple sources, being fed back and forth to a smart grid in a decentralised, closed-loop system that is cheaper, cleaner and more efficient.
Powerful forces are supporting the transition, including government policy and rapid technological progress, as well as the favourable economics of clean energy. Solar power has become the cheapest form of electricity in history.
We estimate that USD 24.5 trillion in global capital expenditure will flow toward electrification this decade. This creates strong potential for equity investors aiming to capture opportunities where the environmental transition is a key growth driver.
The year 2050 is distant, but change is already happening.
An industry disrupted
The new decentralised model will both create new profit pools and shift existing ones.
Areas such as electric vehicles (EVs), wind and solar power generation, and buildings renovation stand to benefit enormously, in our view. Meanwhile, sectors like oilfield services, ICE vehicles and natural gas infrastructure will be at risk of contraction.
At LOIM, our integrated sustainability research team of close to 50 people is dedicated to establishing robust, science-based and financially material analysis of Future Electrification. The team focuses on areas such as innovation tipping points and shifting profit pools.
This resource deepened with the strengthening of our partnership with system-change research company Systemiq in June 2023, resulting in the launch of holistiQ Investment Partners, to expand the expertise available to our sustainable-investment proposition.
How do we invest in electrification?
Our strategy applies three themes to invest in the energy transition: greening demand, greening supply and enabling solutions.
We use these themes to define an investment universe focused on electrification, with the aim of uncovering green alpha.2 Figure 1 shows an illustrative outlook for market size and revenue pools over the next decade according to the themes of demand, enablers and supply.
FIG 1. Revenue pools: LOIM expectations for market size and market growth (not exhaustive), 2022-2030
Source: LOIM research estimates. Not exhaustive, numbers are rounded. There is no guarantee that a target objective will be reached. 1 IEA, NZE (2023). For illustrative purposes only.
Greening demand
Greening demand focuses on buildings, mobility and industry. Opportunities exist in buildings where renovation is required to improve thermal energy efficiency through solutions like insulation and heat pumps; mobility, including EVs and their infrastructure; and industry, with the likes of green hydrogen and industrial-scale heat pumps alongside other electrified heating technologies.
As the figures below show, we expect the share of electricity in each of these markets to rapidly become dominant from today until 2050.3
• Buildings: from 35% of energy use to 83%
• Mobility: from 1% to 70%
• Industry: from 22% to 55%
Lower costs for renewable energy are enabling the switch away from fossil fuels on the demand side while creating powerful feedback loops and disruptive forces. For example, when households combine their rooftop solar with a heat pump and an EV, the energy savings can compensate for half of the cost of their rooftop solar installation. In turn, this eliminates the role of the electricity supplier, the gas distribution network and the gas station.
Greening supply
To meet rapidly increasing demand, the supply of renewable power, electricity transmission capacity and distribution, and energy storage must surge. By 2030:
- Wind and solar power’s share of electricity generation will more than triple
- Battery storage capacity will rise 41x
- 21 million kilometres of additional transmission and distribution networks will be installed
Enabling solutions
New cross-cutting solutions will be required to enable the transition of these sectors. These ‘enablers’ range from raw materials to build the batteries and cables used in electric vehicles to the semiconductors used to manage the current flow of electrified products. That will attract significant capex for industries supporting mass electrification and boost demand for the necessary raw materials, in our view.
An investment window
An energy system based on mass electrification rather than fossil fuels is coming – it is part of the transition to a CLIC® economy that is circular, lean, inclusive and clean.
The resulting move to a decentralised energy model – with lower costs, increased efficiency and widespread applications – will create new profit pools and shift existing ones, offering the potential for major financial upside. LOIM’s Future Electrification strategy accesses such seismic shifts by focusing on three themes: the greening of energy demand and supply, and the solutions that enable them.
Our strategy uses these three themes to create an investment universe and select companies best positioned for green alpha.2 We believe these themes are crucial growth drivers for mass electrification and reflect the fact that the electrification story is about more than just EVs, solar panels and wind turbines. It encompasses the transformation of an entire system.
The transition will be a multi-decade process, but prime investment opportunities are coming onstream now. Revenue pools are often shifting much faster than the market anticipates, creating windows of opportunity for forward-looking investors. Our goal is to understand the changes taking place and deliver a high-conviction portfolio of quality companies strongly aligned to the transition and accessed at attractive valuations.
Sources.
[1] Making Clean Electrification Possible, Energy Transitions Commission, April 2021
[2] We refer to `green alpha’ where companies are likely to perform better financially in an environmentally aligned scenario, compared with consensus. To assess green alpha, we assess market tipping points linked to emerging regulation, cost-down curves and the pricing in of environmental externalities. Based on this analysis, we aim to describe, quantitatively or qualitatively, total addressable market (TAM) potential. Where companies are exposed to TAMs that are likely materially in excess of market consensus, we consider such companies to be exposed to green alpha. Although we believe there are investable opportunities related to these transitions, there can therefore be no guarantee of excess performance.
[3] Source: LOIM analysis.
[4] The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund's past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future.
Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document. Past performance is not indicative of future results
[5] The semiconductor decade: A trillion-dollar industry | McKinsey
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