PERSPECTIVE3-5 min to read

Podcast: Has the energy transition race been run for investors?

David Boyce, CEO of Schroders Greencoat in North America, and Fund Manager Mark Lacey talk chasing bubbles, the tech race and key growth areas along with potential risks in the energy transition.

running solar


Mark Lacey
Head of Global Resource Equities
David Boyce
Private Markets Group
Adam Farstrup
Head of Multi-Asset, Americas

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You can read the full transcript of the podcast below:

[00:00:07.930] - David Brett

Welcome to the Investor Download the podcast about the themes driving markets and the economy now and in the future.

[00:00:14.560] - David Brett

Just before we begin, this is the first of a two part podcast focusing on the energy transition. In other words, everything that will go into electrifying our energy grids and decarbonising our economy. In future shows, we'll be speaking to the CEO of UK grid operator National Grid and the UK country head of energy generator RWE about the challenges and opportunities the energy transition provides. In the next two shows though, Adam Farstrup, Head of Multi Asset Americas, speaks to big investors in energy - David Boyce, CEO of Schroder's Greencoat in North America, and fund manager Mark Lacey. In the first show, they'll talk about the tech race and key growth areas in the energy transition, along with potential risks. The second show is all about opportunities. Anyway, enough of me. The next voice you'll hear is Adam Fastrup's. Enjoy the show.

[00:01:13.070] - Adam Farstrup

So I've really been looking forward to today's conversation, not only because I'm joined by tremendous experts in the field, but because energy is such a critical aspect of Schroder's 3D reset thesis. To remind everyone. Our 3D reset thesis is that we're seeing a regime shift in markets and economies driven by demographics, decarbonization and deglobalisation. One outcome of the Pandemic has been a profound shock to patterns of work globally. This combined with long term demographics has led to worker shortages. Another shock from the Pandemic was a realisation that global supply chains and energy supplies remain vulnerable to external influences and the war in Ukraine has driven home this point. In Europe, we've seen an acceleration in renewable energy spending as decarbonization moves from an environmental policy goal to also encompassing national security needs as well. In the US, utilities are investing in generation and distribution capacity to meet growing demand for electricity and renewables and renewables are really a crucial part of this response. The need to secure supply chains also feeds into the globalisation trend where companies and governments are now balancing cost and reliability as they make sourcing decisions. With energy so crucial to economies and the forces of decarbonization and deglobalisation accelerating energy spending, let's bring in David and Mark to help us break all of this down.

[00:02:44.750] - Adam Farstrup

So, if I could start with a broad question and really recent years have seen an extraordinary period for energy investors. In 2019 and 2020 we saw a massive surge in clean energy stocks, while 2021 and 2022 saw prices climb in traditional energy companies. So my question is what's an investor to think about all of that? Should they be paying more attention to the space or are they just chasing bubbles? Mark, why don't we start with you?

[00:03:14.970] - Mark Lacey

Okay, so very good question, particularly relating to obviously probably the best way to describe it is euphoria that we saw towards energy transition equities on the public market during 2020 period. We saw the sector essentially go from a massive discount relative to the broader market to a considerable premium, when I say considerable 40% premium. And what we've seen since then is basically since the end of 2020, a consistent derating in that sector. And that derating is something we would say is unbelievably healthy. While at the same time, exactly as you've pointed out, the conventional energy sector has increased almost 200% in terms of the public equity exposure in the conventional energy sector. And the reason for that is, while you've had this backdrop of an unwind in energy transition equities, from a valuation perspective, the market is really becoming aware that we have this energy crisis. And actually, when you look at the demands on the energy system over the next 10, 20 and 30 years, we're going to be short energy unless we put a lot of investment in the ground. Now, that investment in the ground is going to disproportionately go to the energy transition sectors and it's not going to be a straight line investment.

[00:04:36.040] - Mark Lacey

You're going to have very, very lumpy investments. But ultimately, the magnitude of the investments in the energy transition sector are almost as much as five times the historic run rate of fossil fuel capital expenditure on a go forward basis. So this is going to lead to investors becoming aware that this is actually not a stagnant sector to invest, it's actually coming in a growth sector. Now, the role of the conventional energy company such as Exxon, Shell or BP, I'll use those simple ones along with Baker Hughes and Schlumberger, is that you'll see these companies adapt their business model to basically cater for those huge growth in those new energy transition technologies. So we have had a mini bubble in energy transition equities. From this point onwards, though, the valuations look extremely attractive relative to the forward growth rates. But if you look at the energy complex as a whole, we've got a huge investment period ahead of us, starting from an unbelievably low valuation.

[00:05:35.090] - Adam Farstrup

So David, you're investing in operating assets in the renewable space. How does this play out for you?

[00:05:43.220] - David Boyce

Well, I mean, just to pick up on some of the themes that Mark was outlining, the macro trend is absolutely there. We are in a transition of how we think about power globally, and certainly that's the case in my business, specifically in the US. So the macro trend is there. There is an increasing demand for electricity. There's old plant retiring. I mean, just the basics are there, let alone thinking about carbon or pollution layered on top of it. So in terms of any kind of short term blip, the underpinnings of this. It's certainly not a short term, it's kind of a long term transition. And I think that kind of long term is the way to think about it and nor should it be expected to be kind of a tech blip, right, that runs up super fast and then it runs right back down super fast. That's not the characteristics we're talking about here. We are transitioning how we use energy in the world.

[00:06:53.610] - David Boyce

There's no silver bullet, there's no magic wand, there's no one technology that's going to accomplish it at all. It's made up of all kinds of different inputs. And in terms of deployment, this transition is not going to happen overnight. It just simply can't. You can't replace, for example, the entire infrastructure for how we fuel cars or how we generate electricity that just simply, even with the best of intentions, can't happen overnight. So I don't look at it really as a short term. I think it's a long term opportunity. Now, on renewable energy and specifically kind of wind and solar. I would say we have seen some robust valuations, certainly.

[00:07:45.470] - David Boyce

And a lot of people have benefited from that run up. And I think with inflationary pressures, underlying capital costs, we're seeing some of those valuations needing to adjust, but they will adjust and it will stabilise, and we will see that kind of show up in power prices for so. I think the margins and the economics people can expect are going to hold subject to some to and fro.

[00:08:18.410] - Announcer

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[00:08:26.970] - Adam Farstrup

I mean, that's such an interesting point, David. And it brings me back to something I wanted to ask Mark, which know this dynamic that you highlighted where you say this is not tech investing, but there is particularly in public markets, right? We see this sort of bubble mania in some of the renewable sectors in particular that comes and goes, that makes it feel like a technology race. But David's making the argument this is basic infrastructure investing. Does that matter to you as a public markets investor, Mark?

[00:08:58.700] - Mark Lacey

No, it doesn't. And it's a good question because obviously our approach across the conventional and the energy transition space is we run a diversified and a wide universe approach to investing. There are times when hydrogen stocks, which we've had in the past, the valuations, have looked nothing short of mad in terms of the multiples you'd pay for these sorts of companies if they have actually need profit to put a multiple on. And so we've been very underweight that sector for some time. But given the retracement and given you're that much closer to now profitability inflecting, we can move the portfolio into this area just like in the conventional energy space. We've actually had this tilt towards gas weighted names for quite a long time, which has obviously paid dividends for investors in that strategy, rather than being basically long oil, even though the oil market tightened. The reason for that is we see gas as a very, very important transition fuel. As David rightly pointed out, this is not going to be switched off overnight, you're not going to see power generation in markets such as the US suddenly switch from gas to renewables overnight.

[00:10:07.850] - Mark Lacey

Gas is going to be one of the most important fuels for balancing the grid while we go through this transition. And there's a huge amount of value in those players right now that hold these key assets. So for us, a diversified approach has paid dividends so far through this mini bubble that you rightly highlighted right at the start. And it's an approach we'll just continue to have for our client base on a go forward basis to protect their capital when you have these periods of retracement in those individual subsectors.

[00:10:37.910] - Adam Farstrup

So for both of you on this point about technology, though, do you worry that the technologies being deployed today are vulnerable to disruption from other technology coming down the road? And here I'm thinking about could be cheaper nuclear, nuclear fission, green hydrogen. How do you think about the impact of that as a long term investor on the decisions you're making today?

[00:11:03.360] - David Boyce

Well, I would say often people ask me that question as if there is lurking out there some, again, magic technology that is just going to revolutionise the planet. And not only that, it exists and can be deployed and does everything we want from a cost and reliability and environmental perspective. But of course, then it can also be applied at global scale overnight. What I said before, I think still holds there's just no magic bullet out there. The reality is I think there will be more technologies coming out. Nuclear is a good one.

[00:11:45.920] - David Boyce

Nuclear could have a role in the future of how electricity is generated. But do I think we're going to deploy nuclear globally that just kind of replaces all of these other things? And I think the common sense man would tell you, no, I can't see nuclear being deployed on that scale because of all of the negatives around nuclear power and dangers and risks. Can those be managed? Sure, but they still exist and you're still going to find resistance. I do think, again, there's going to be an evolution we're talking about long time frames here. But I think you're going to see new technologies come on and sit side by side with existing technologies. And I think we're going to be again in that transition as we move shift from one to another for an awful long time as this whole thing unfolds.

[00:12:47.870] - Mark Lacey

It's funny, isn't it, that everyone goes straight to nuclear as the potential disruptor. But as David said, let me just give you some basic facts behind nuclear. When you look at the levelized cost of energy, which is a typical standardised unit of measuring the efficiency of these technologies in terms of their total cost delivered to the consumer, what we've seen is nothing but a shift up in nuclear costs over the last ten years. In fact, in the last five years, when you take we have a project in the UK called Hinckley Point, it makes your eyes water in terms of how quickly it's jumped up. I mean, the total cost is going to be 100% above what they originally expected. So that leads us on to small module reactors, which from our perspective, small module reactors could be an exciting technology. You have a company in the US called New Scale which has a small 77 megawatt small modular reactor. Or you have companies in the RollsRoyce which are established in the nuclear industry with a 470 megawatt reactor. You have to put that in perspective. As David said, that is not coming onto the market overnight.

[00:13:55.820] - Mark Lacey

Your best case scenario is 2029 for a small modular reactor to sit side by side with basically wind and solar. And wind and solar have both undergone huge technology change and development in terms of efficiency over the last ten years alone. We wouldn't expect the same rates of efficiency gains on a go forward basis. But don't write off the fact that you're probably going to continue to see more efficiency gains on a go forward basis. So that puts more pressure for these technologies which are out there, or as potential competing technologies to really eat into that market. The key growth area will be hydrogen storage and using that as a storage vehicle for excess wind and excess solar and obviously batteries. As you, if you take Tesla's forecast of the battery storage market globally, then you end up with over a terawatt hour of storage. That's not going to happen, but it shows you the potential for that market to grow.

[00:14:58.390] - Announcer

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[00:15:11.450] - Adam Farstrup

What other risks do you see investors being exposed to in the energy transition? Are there areas that investors should be shying away from or should they be thinking about this in a very specific sense?

[00:15:28.770] - David Boyce

Well, some of the things that we see are and I think when people ask me about kind of the energy transition 1.0 in the 2000s, which kind of didn't meet expectations and again, I think there's a lot of the then kind of recent learnings from tech and how fast things could move and people were really thinking about this energy transition and expecting it to go extremely fast. One caution I would kind of put out there, and the example I always talk about are smart grids, right? that's very tech based and there's just a lot of interesting things you can.

[00:16:14.610] - David Boyce

Do with controlling our grid, getting information from the grid, and really making some improvements to how you operate a grid. But the one thing people forget is while all those things are wonderful and you can envision and have seen models for how these grids could operate, there's also kind of a resistance. You've got utilities that earn a regulated rate of return and you need that acceptance, right? The technology could be great, but you've got a very conservative group of customers and a finite group of customers and who's going to make the investment number one, transition their whole grid over and take that risk when their number one job, quite frankly, is reliability, right? So you've got to make that case, that cost benefit case for utilities.

[00:17:11.610] - David Boyce

And I think people somewhat forget that just because some of these things can work, they've actually got to work in the real world for people. And I would say that extends absolutely across the board. And Mark just pointed out the tech gains in wind and solar. My background is in power plant development. And I tried to sell solar power to utilities ten years ago. That was very expensive power. Did solar power work? Is it a clean technology? Does it deliver on peak power? Yeah, it does all of those things, but you still need that acceptance factor. And I think people need to be mindful of what makes any technology acceptable.

[00:17:59.590] - David Boyce

And in the case of solar, it's just simply the panels became much cheaper and much more efficient given a solar resource. And guess what? It's now cost effective power that competes with fossil fuel. That's really what's driving acceptance of solar, for example. And so I think anything you're talking about nuclear or anything, you also have to think about kind of that acceptance. And you're not necessarily selling to the public at large, you're selling to the load serving entities, the utilities that need to provide reliable and inexpensive power to customers.

[00:18:37.530] - Mark Lacey

When you mentioned risks as well, Adam, where do I start? This is investing and we have to look at risks from all angles. And there are lots of risks investing in the energy sector. I mean, take the energy transition sector, and David's touched on this to a certain extent, but we have so many developers that come through our door saying we've got this and this project in our pipeline. And then when you back it up with basically the grid connections, you say, where are you sitting on grid connections? And they can't access the grid. And so you have to be very careful about where you deploy the capital into those companies that actually have that access. And grid connection is going to be a big problem globally for a long in the US. There's already growing queues of grid connections for solar and for wind. Now much slower in wind because obviously you start from a lower base. But solar is a big problem in the UK. It's a massive problem in terms of grid connections. So that's one of the highlight. And risks, I would say, is the quickest way to destroy the net present value of any project is to delay it by one or two years.

[00:19:45.860] - Mark Lacey

Trust me, investors just don't like that from a return perspective. The other risk is obviously as we go through the energy transition space, you're going to have mineral intensity going up, and the mineral intensity will come from, obviously, lithium availability at first, and then obviously other metals, such as potentially copper. You could come under constraints as well. And this will cause delays in projects which will obviously cause pricing and profitability erosion in certain areas. So they're the two obvious areas that we can highlight as risks. But obviously that's why you need active management in this space. I don't think the last three years is an anomaly. I think you're going to continue to see these mini cycles as we go through the next 10, 15, 20 years of basically of rollout of the energy transition technologies and increasing investment rates.

[00:20:39.400] - Speaker 2

Don't forget to tune into part two next Thursday, which is all about the opportunities in energy transition.

[00:20:45.340] - Mark Lacey

Never has the energy market, from a public perspective or a private perspective, ever seen this much capital that's needed going into it in a 30 year period.

[00:20:56.810] - David Brett

Well, that was the show. We very much hope you enjoyed it. If you want to find out more, please head to and we're endeavouring to record as many of these shows in the studio, on video and if you want to watch them in their full unabridged version, then go to Schroder's YouTube channel. If you want to get in touch with us, it's And remember, you can listen, subscribe and review the Investor Download wherever you get your podcasts. New shows drop every Thursday at 05:00 p.m. UK time. But above all, keep safe and go well. Cheers.

[00:21:33.170] - Announcer

The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a guide to future performance. The information is not an offer, solicitation or recommendation of any funds, services or products, or to adopt any investment strategy.


Mark Lacey
Head of Global Resource Equities
David Boyce
Private Markets Group
Adam Farstrup
Head of Multi-Asset, Americas


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David Brett
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