IN FOCUS6-8 min read

Is the “unstoppable” green energy transition now financially viable?

As the IEA this week hails the irresistible rise of renewable energy, our research into the supply side of the energy transition finds that what is good for the planet can also be good for profits.

10-25-2023
windfarm

Authors

Samar Khanna
Environmental Economist

This week the International Energy Agency (IEA) concluded in its latest World Energy Outlook that the global shift to renewable energy is now “unstoppable”.

Commenting on the report, IEA Executive Director Fatih Birol said: “The transition to clean energy is happening worldwide and it’s unstoppable. It’s not a question of ‘if’, it’s just a matter of ‘how soon’ – and the sooner the better for all of us. Governments, companies and investors need to get behind clean energy transitions rather than hindering them. There are immense benefits on offer, including new industrial opportunities and jobs, greater energy security, cleaner air, universal energy access and a safer climate for everyone.”

But what does it mean for investors and companies operating in the sector?

Our research paper - The green energy transition: Examining the supply side – takes a deep dive into the economics of the energy revolution.

Here’s a summary of our findings:

Viewing renewable energy as a technological revolution not only helps us understand the impressive cost and deployment trajectories we have witnessed over the past few years but enables us to make more accurate assessments of what the future energy landscape might look like. Renewable energy is not only dominating new power generation but is increasingly undercutting fossil-fuel fired plants as its costs continue to decline exponentially.

What does this mean for investors and policymakers?

  1. Underestimating the exponential rise of renewables increases the risk of capital misallocation: either in the form of underinvestment in the green energy technological revolution (losing out on potential returns) or because of over investment/locking-in capital in expensive, high-carbon emitting projects (increasing the risk of stranded assets).
  2. Stranded assets due to technological obsolescence are different from those brought on by regulation: The improving cost competitiveness of renewables implies that it will continue to undercut fossil fuel-fired power generation – in line with the theory of creative destruction – continuous innovation replaces the efficient ‘new’ with the costly ‘old’ before their anticipated lifetimes. Consider the example of the shift from vinyl records to cassettes, CDs, and eventually digital streaming. Investors should reflect on whether they choose to hold onto cassettes when the world is moving onto digital streaming. In addition, as fossil fuel infrastructure depreciates over its lifetime, it can be replaced with cheaper and more efficient renewables – which means that the current estimates of stranded assets are likely too high.
  3. Decarbonising energy demand represents a huge opportunity: From the exponential rise in sales of electric vehicles to technological advancements in energy efficiency and new fuels, the way we consume energy is undergoing a fundamental change. Building investment strategies which are aligned to the new, zero-emissions economy will not only allow investors to better manage transition risks but will make them better positioned to gain from ‘positive’ tipping points in technological revolutions.

What is good for the planet, can be good for profits too.

Our full paper can be found here.

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Authors

Samar Khanna
Environmental Economist

Topics

3D Reset
Decarbonisation
Energy transition
Economics
Economic views
Sustainability
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