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While the “great” energy transition is still in the early stages, it has garnered more political and investor support in the past two years than it has at any point in the previous decade. While many Canadian asset owners have already crafted their own sustainable investing strategies to help guide their decision making, big pension funds like CDPQ, CPPIB, and OMERS have also made public commitments to reach net zero in their portfolios by 2050. That goal will be supported, at least in part, by more investment in green and transition assets like renewable energy sources.
The good news is that, for Canadian asset owners focused on sustainable investing, there is now a large and growing set of opportunities to invest in transition assets that support the global shift to net zero, especially in sectors poised to address exponential growth in electricity demand.
In Mackenzie’s 2022 Environmental Outlook, we dig deeper into what some of these sectors are and assess how they’re likely to fare in the years ahead from an investment standpoint.
Here are three sectors we’re watching:
Renewable utilities
Larger, integrated utilities offer better value out of the spectrum of developers and operators of renewable energy, particularly in Europe. Why? Because these companies often come with firm dates to shutter legacy assets such as coal in order to meet net zero commitments. While investors focused on reducing their carbon footprint might not be satisfied with renewable utilities, it’s important to be pragmatic when it comes to the pace of transition. Given time, these companies will be better positioned in the future to install even more renewables than their competitors - and that means higher multiples down the road.
Solar
We believe solar will continue to be the leading renewable technology over the next decade, driven by ease of installation and integration, output predictability, and relative economics. At the same time, manufacturers will continue to consolidate. While this sector will bump up against global supply chain problems and rising costs through 2022, grid systems are now preparing to handle far more solar capacity than anyone could have imagined even a few years ago. Moreover, the improving economics of solar and storage combinations make it cheaper than other grid balancing alternatives such as gas peaking plants. At less than 3% of current global energy output, there is significant potential for solar growth.
Wind
While the investment rates of return in wind power have been marginally higher than those of solar, wind power now faces barriers to widespread adoption. Much of the growth outlook for wind was based on economic improvements for offshore installations, but erecting these massive structures in deep waters has turned out to be much more challenging and expensive than expected. Another drag on wind power is the availability of specialized ships required to install those offshore turbines - there are currently only 16 whereas double that number would be required to meet most offshore wind installation targets. Given the choice, we believe wind eventually becomes less appealing to grid operators.
Want to learn more about the sectors driving the great energy transition?