How investors can benefit from new efforts to
achieve energy independence

The energy transition at a time of energy insecurity

• War in Ukraine puts energy security back into the spotlight for governments, businesses and households

• Diversification and an accelerated shift to green energy can reduce dependency and open up new opportunities

• Potential beneficiaries: selected companies from the industrial, energy, utility and tech sectors

New world order puts energy security back on the agenda

Russia’s pipelines supplied Europe with nearly 170 billion cubic meters of gas in 2020. A gargantuan amount. This gas was not only used to heat buildings, but – critically – it also facilitated all manner of industrial processes. The supply routes were established, the gas flowed non-stop. And the new Nord Stream 2 pipeline was meant to cement what was a mutually profitable arrangement for decades to come.

But when Russia invaded Ukraine, everything changed. Europe’s heavy reliance on Russian fossil fuels was brutally exposed, pushing energy security to the very top of the agenda for governments, businesses and consumers. After all, Russia could turn off the gas taps at any time – plunging Europe’s economy into a deep recession. Meanwhile, revenues from gas exports, a key driver of the Russian economy, are helping to fund the country’s war of aggression.

Up until February, many countries – Germany included – did not view their reliance on Russian energy as a problem. But they are now facing acute pressure to act. A fundamental course correction in energy policy will play a key role in this. It was already urgently needed to combat climate change and has taken on even greater importance in light of recent events. And it will transform the playing field for businesses. Some will benefit, others will fall behind. Below, we outline the types of company – including specific examples – that stand to gain in this new economic order.

Gas – diversification and acceleration of the energy transition

It is clear that the nearly 170 billion cubic metres of gas that Russia supplies annually to Europe – more than 50 billion of which flows to Germany – cannot be replaced with other sources overnight. Not only do the theoretical alternatives have insufficient capacity but, more importantly, the necessary infrastructure is absent too. Natural gas is far more costly and difficult to transport around the world than oil.

Faced with this reality and a need to reduce their reliance on energy from unstable parts of the world, governments are now ramping up their infrastructure investments. Liquefied natural gas, or LNG, is one of the solutions they are pinning their hopes on. If processed natural gas is cooled to around minus 160 degrees Celsius, it changes its physical state and becomes a liquid. This presents a critical advantage, as LNG takes up around 600 times less space than gas in its gaseous state. Because of this enormous reduction in volume, and because it is a liquid, LNG can be transported and stored without the use of pipelines. Ships from the US and the Middle East, for example, are able to deliver LNG to European ports. But while countries such as the Netherlands, Spain, Portugal and France all have at least one LNG terminal, there is a complete absence of such infrastructure in Germany. This is now set to change thanks to Germany’s first floating LNG terminals, although these are not expected to dock until the end of the year at the earliest.

Companies that could have an important role to play in this development include US energy firm Cheniere, an operator of terminals and pipelines used to transport LNG, and US company Chart Industries, which executes construction projects for LNG terminals. France’s TotalEnergies is also active in the market for LNG. These companies, and others like them, could hold the key to reducing European reliance on Russian gas.

Goldman Sachs Research estimates that taking these steps towards diversification could, by the end of the decade, replace around 100 billion cubic metres of the gas that is currently imported annually from Russia. Half of this could be provided by imports of liquefied natural gas from the US.

Replacing pipeline gas with LNG would obviously be a major step forward. But measures to accelerate the energy transition could also help to reduce dependencies. Up to 50 billion cubic metres of gas could be saved every year by using electricity for heating, for example. And not just on a small scale, with conventional gas boilers for homes replaced by heat pumps, but also in industrial heating processes. The US multinational Ametek would be a candidate to supply the relevant electrical systems. Other key players in the value chain would include Johnson Controls and Japan’s Daikin Industries, with the latter’s products used not just in heating but also in building engineering and ventilation.

There is also potential in the cutting-edge field of green hydrogen, i.e. hydrogen produced with methods powered exclusively by renewable energies. Familiar names illustrative of the kind of companies involved in this technology include gas multinationals Linde and AirLiquide. Both are already heavily engaged in this field, with a view to substituting natural gas with hydrogen in certain industrial processes. Companies such as Plug Power, a US manufacturer of systems for the production, storage and use of green hydrogen, for example in fuel cells, could also have a role to play.

Efforts to break free of Russian gas imports are creating a tailwind for the energy transition

Efforts to break free of Russian gas imports are creating a tailwind for the energy transition
Sources: Goldman Sachs Global Investment Research, Union Investment.

Fiscal policy as a key driver

However, the energy transition is not only being driven by efforts to make Europe more energy independent and thus energy secure. Even before Russia invaded Ukraine, various fiscal policy initiatives had been launched, some of which were of considerable financial scope. Up to one trillion euros will be invested in public and private-sector projects as part of the European Commission’s Green Deal, for example. Its broad package of measures aims to make the continent climate-neutral by 2050, with zero net emissions of greenhouse gases. By 2030, the goal is to cut greenhouse gas emissions by 55 per cent relative to 1990. They were down by 24 per cent in 2019, and by as much as 36 per cent in 2020, a comparison qualified of course by the impact of the pandemic.

If these medium-term goals are to be achieved, there needs to be a massive increase in the amount of electricity that is generated from renewable energies. Under the European Green Deal, wind power capacity is expected to more than double by 2030 compared to 2019. Solar plant capacity is set to triple. The aim is for the share of renewables in the electricity generation mix to rise from its 2020 level of around 22 per cent to up to 45 per cent in 2030. These capacity increases are critical to this and are also needed to realise Europe’s ambitious plans for the sale of electric cars, for which new registrations are set to rise from 10 per cent today to nearly 40 per cent by 2030. Of course, EVs only make sense from an environmental perspective if enough of the electricity that powers them comes from green sources.

Although the timetable could shift somewhat due to the fallout from the Ukraine war and the speed at which Europe is now looking to wean itself off Russian energy1, further electrification of the economy seems increasingly inevitable. And this is a global phenomenon. Programmes like Europe’s have also been launched in both China and the US. In some cases, they are even more extensive in scope and are likely to further accelerate a worldwide transition in energy policy.

Industrial companies from various sectors also stand to gain from this increasing electrification. France’s Schneider Electric, for example, makes products such as chargers, sensors, switches and cables, as do Legrand, also from France, and the US company Emerson Electric. The US firm Quanta Services, based in Houston, Texas, is primarily active in grid infrastructure. As well as high-voltage power lines, its portfolio of services includes connecting large wind and solar farms with the charging infrastructure for electric cars, for example along motorways. Italy’s Prysmian, meanwhile, operates in similar fields and claims to be the world’s largest cable manufacturer. The transmission of electric power, for example from offshore wind farms to consumers, is becoming an increasingly important factor as new ways of generating energy come to the fore.

As the generation of electricity becomes ever more decentralised, thanks not least to the many solar panels now found on residential buildings, the management, storage and feed-in of power are taking on greater significance. Enphase Energy and Aspen Technology are examples of the kind of tech companies that could play a pivotal role here. California-based battery builder Enphase Energy also makes microinverters that can convert solar power into usable alternating current more directly and therefore more efficiently.

The energy transition will also ask a lot of utilities. They themselves have to transform, in some cases radically, in order to make the switch from coal-fired power to renewables, for example. There are already specialised suppliers today that focus exclusively on the generation and distribution of ‘green electricity’. US multinational AES Corporation is one of them. NextEra Energy, meanwhile, is well under way with its own transformation. The Florida-based energy company already generates nearly half of its electricity through solar and wind, though gas, nuclear energy and coal are still used for the other half. Germany’s RWE also aims to generate most of its electricity from renewable sources after its strategic realignment. E.ON, however, has now almost completely withdrawn from electricity generation and is instead focusing on energy networks and distribution. Iberdrola, a utility operating in Spain, Portugal, the UK, the US and Latin America, is also increasingly focusing on renewable energies, primarily wind power. By continuing to invest in wind farms, but also solar thermal energy, hydroelectric power, biomass and photovoltaics, the company is aiming to become carbon-neutral in Europe by 2030.

Conclusion

“An accelerated energy transition is critical if we are to have an affordable, non-dependent and secure energy supply,” said Robert Habeck, Germany’s Federal Minister for Economic Affairs and Climate Action in his recent summary of the challenges facing energy policymakers. On the one hand, the increased focus on security of supply could hold back the energy transition. Witness, for example, the current discussions about prolonging the use of coal and nuclear power. On the other hand, the accelerated adoption of renewable energies – which can be produced on a decentralised basis and more or less on our own doorstep – can provide precisely the kind of independence that we are looking for when it comes to having to import energy from unfriendly countries.

This trend, which is playing out in similar ways across the globe and is supported by massive fiscal programmes, will of course benefit some sectors more than others. Opportunities could arise, for example, in selected companies from the industrial sector in particular but also energy, tech and utility firms. The focus will be on LNG, electrification of the economy and the associated expansion of the use of renewable energies.

Please note: References to individual securities or companies are made for illustration purposes only and do not constitute a recommendation for the purchase or sale of such securities. The companies mentioned are not necessarily represented in Union Investment’s portfolios. Assessments can change at any time and companies may have already taken action in response to changes.

  1. 1 See proposition 3 in our paper ‘A new world order’ from April 2022.

Authors:

Moritz Bauer, Janis Blaum, Patrick Schuchter, Felix Schröder and Dr. Thomas Deser

 

As at 17 May 2022.

More capital market news