We expect major upheavals in the financial markets over the next few years. In this article we explain our cyclical framework for these challenging times and why you should invest in commodities now.
Published: 16th of June, 2021
t o r c k c a p i t a l m a n a g e m e n t
Energy Revolution – Part 2
The Political Push for an "Energy Revolution"
7th of September, 2021 - torck capital management AG
Following on from our article on „The Need for an ‘Energy Revolution‘“ last week, today’s article is going to discuss where three major economies, namely China, the EU and the US, stand in terms of climate policy, how they have recognised the need for more climate action and what their plans are to push for an “Energy Revolution” that sets them on a path to net-zero emissions.
Generally, the problems caused by fossil fuels – including widespread air, water and soil pollution and climate change which we discussed in our first article – have led governments, businesses, investors and the public to recognize the need to decarbonize the global economy. Currently China, the US and the EU are responsible for 8%, 15% and 28% of the world’s greenhouse gas emissions, respectively. They are all signatories to the Paris Agreement and have committed to reduce emissions through nationally determined contributions (NDCs).
But it is not only a change in public opinion and the need to decarbonise the energy sector that have, amongst others, induced China, the US and the EU, to raising their ambitions and taking steps to accelerate their deployment of clean energy technology. A point in case is also the strengthened business case of clean energy solutions. These have seen steep cost declines since the Paris Agreement came into effect. Estimates by SYSTEMIQ, suggest that by 2030 clean energy solutions could become competitive in sectors representing 70% of global emissions relative to 25% today. Pushing for national emission reductions allows Chinese, US and EU companies to become pioneers in clean energy technology and for the countries/regions to enhance their leadership positions:
No country has put itself in a better position to become the world’s renewable energy superpower than China. This is one of the reasons we are able to deploy cheaper and cheaper clean technology, which emerges from a report on the geopolitics of energy transformation by IRENA. In aggregate, China has become the world’s leading manufacturer of clean energy technologies, whereby it controls many of the raw materials crucial for clean-tech supply chains. Today, it produces more than 70% of all solar photovoltaic panels, half of the world’s EVs, a third of its wind power and is the biggest battery producer, placing it at the forefront of the global energy transition. Figure 1, which shows the total clean energy manufacturing value added by four technologies in 2014, confirms that China is by far the largest global manufacturer of these clean energy technologies. But China is also a significant exporter of clean energy components with $21.4bn in exports and an overall positive balance of trade of $7.8bn in 2014.
Clean technologies were first embraced by China to tackle health issues that arose from air pollution of the country’s massive coal use. Coal, which accounted for 69% of China’s electricity production in 2019 corresponding to more than half the world's capacity, was simply the easiest way to fuel its strong economic growth. However, without big emission reductions in China, the world cannot put a break on climate change. In this regard, China’s leadership in the manufacture and export is key. Yue Cao of the Overseas Development Institute is confident that “China is already leading the global energy transition,” as cited by the BBC.
A draft of the next Five-Year Plan (2021-2025) released in March 2021 showed that the government headed by president Xi Jinping has now set the aim for emissions to reach their highest point before 2030 and for carbon neutrality to be achieved by 2060. Apparently, this includes a phasing down of coal from 2026. The BBC writes that observers expect the proportion of its energy generated from non-fossil fuel sources to reach 25% even before 2030. Thereby, the nation will promote the construction of nuclear power plants as the most reliable source of clean energy and aims to increase their generation capacity by 40% by 2025. China could become the world’s biggest nuclear generator this decade and “by 2035, nuclear plants in operation should reach around 180 GW”, according to Luo Qi of China’s Atomic Energy Research Initiative, which will be more nuclear than the United States and France combined.
Among major economies, the EU is also heavily dependent on fossil fuel imports but holds a strong position in renewable technologies. Now the EU Commission introduced the Green Deal – the most ambitious road map for change globally – which aims to further strengthen its position and transform the 27-country bloc from a high- to a low-carbon economy. At the core of the Green Deal is the goal of achieving net zero carbon emissions by 2050, and to cut emissions by 55% by 2030 compared with 1990 levels. The EU is currently looking to fund its programme with €1tn. Most notably, the proposed laws would ban the sale of gas and diesel cars by 2035, require most industries to pay for the emissions they produce through the EU’s Emissions Trading System and impose a tax on imports from countries with less stringent climate policies.
Unlike attempts by the EU to disincentivise and cap carbon emissions through carbon pricing and taxes, the Biden administration has proposed a considerable short-term macroeconomic stimulus package to facilitate the energy transition in form of a $1tn infrastructure bill. The bill apportions $73bn for building new transmission lines, public transit and electric-car charging stations. Meanwhile, the separate $3.5tn budget reconciliation bill, which the White House is trying to pass in tandem with the infrastructure bill, includes more far-reaching measures: import fees on polluters and tax breaks for renewables and EVs. Most crucially to the Energy Revolution, electricity providers could be required to use clean energy sources.
The turnaround in climate policy by the US, which was absent form climate negotiations during president Donald Trump’s term of office, occurred at the beginning of this year when President Joe Biden recommitted to the Paris Agreement on his first day in office. President Biden unveiled a plan to more than halve US greenhouse gas emissions from 2005 levels by 2030 on a path to 100% carbon-free electricity by 2035 and net-zero greenhouse gas emissions by 2050.
Despite opposing standpoints on climate policy, Democrats and Republicans have finally re-aligned their stance on nuclear energy. The US are the world’s leading nuclear energy producer with double the capacity of China, but have only built few new reactors during the past 30 years while almost one third have been shut down. The re-positioning of Democrats recognises the criticality of uranium to the country’s energy security. After all, 20% of its electrical power and most of its non-fossil sources are provided by nuclear energy. To revive and expand domestic uranium production, which has been unable to compete with less-expensive imports, the government has established a $150M Uranium Reserve programme. This is a positive market signal which the sector has long been waiting for and a step to re-establish the country’s leadership in nuclear energy, as well as clean energy technology.
The IEA’s “Stated Policies Scenario” analyses where today’s policy measures and plans might lead the energy sector. The outcomes of this analysis fall short of the world’s shared sustainability goals and are estimated to only cut emissions by 35% by 2050. Total capital investment in the energy sector would need to rise to $5tn by 2030 based on a joint analysis with the International Monetary Fund. Thus, there is still potential for a further acceleration of the Energy Revolution.
In our next article you will learn about how the Energy Revolution creates positive momentum for mineral demand as fuel-intensive energy systems transition to more material-intensive energy systems that are powered by clean energy technology. As such, there is large scope for mining and refining companies to contribute to orderly clean energy transitions by ensuring adequate supply of minerals and create an interesting investment opportunity.
Continue reading with part 3 here.
About torck capital management
torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – set to launch at the end of September – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.
Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.