February 14th, World Energy Day

World Energy Day is celebrated on February 14th, a very relevant date nowadays due to the energy crisis threatening Europe. That is why today we wanted to know what this day means for two fund managers, and what they believe will be the basis for the energy transition. This is what Pictet AM and Aurea Capital have told us.

Patricia Arriaga, Deputy Managing Director of Pictet AM in Spain

In 1949, February 14 was established as World Energy Day to raise awareness of the importance of responsible and efficient use of energy resources. Already at the 1998 International Conference in Austria, the energy crisis and possible solutions were discussed. But currently, according to the United Nations, more than one third of the world's population does not have access to advanced forms of energy. The 30 most developed countries, with 15% of the population, are users of 60% of the new forms of energy.

So the Sustainable Development Goals for 2030 have been developed, which include "Ensure access to affordable, secure, sustainable and modern energy for all".

The fact is that we are at a key moment in the energy transition, trying to change the energy generation mix by 2030. Indeed, the objectives in Europe involve increasing renewables to 45% of energy and quadrupling photovoltaic power by then. We are talking about electric vehicles, automation and shifting almost all energy sources and almost all electricity generation to renewables.

At the same time, developed and developing country governments and businesses around the world have committed to reducing net greenhouse gas emissions to zero to prevent a global temperature increase to less than 2°C above the pre-industrial era. In fact, today there are 2,671 laws on climate change. It should be noted that most of the countries most vulnerable to climate change are emerging countries, which are very important for the energy transition.

Annual investments of two to five trillion by 2030

So annual investments in corresponding engineering and infrastructure products should increase from two to five trillion dollars globally by 2030, which requires speed and scale. Investments in cheaper, environmentally better renewables, which solve the geopolitical problem of home-grown energy - the war in Ukraine accelerates the process - will increase, and dislocations in energy markets will continue to stimulate business investments in energy-saving technologies. It should also be noted that the agri-food industry is responsible for one-third of greenhouse gas emissions.

In addition, factories are increasingly using sophisticated design and engineering software to save energy. Added to this is the demand for low-emission buildings through efficient devices, backed by stricter standards. Residential and commercial energy consumption accounts for approximately 40% of global consumption, and savings can be achieved with better insulation, heating and air conditioning systems, LED lighting, and smart buildings and architecture. The quest for greater efficiency is driven by the explosion in data storage needs, which may increase 50-fold by 2020 and require better cooling, design and more efficient microprocessors.

Electrification and power semiconductors

In any case, this transition involves electrification of fossil fuel-dependent activity, with opportunities in the power semiconductor value chain. The cost of energy storage, which has been reduced by one-third, is expected to be reduced by another third by 2030. By that year the share of electric cars may be 20%. For electric vehicles to replace combustion vehicles, easily accessible charging stations and trained maintenance technicians are required. Moreover, European standards leave no choice but mass electrification of the automotive sector. Transportation accounts for 80% of oil consumption and with regulatory pressure manufacturers have additional incentive to develop more efficient engines, which benefits efficient battery companies with large storage capacity, automation technologies and smart grids.

China, India and Southeast Asia

The fact is that solar and wind power will be the main sources of the new electricity supply due to cost competitiveness. Already in 2019 renewables were the cheapest way to generate electricity. Currently a new wind or PV farm is cheaper than generating electricity with the combined cycle plant created ten or 20 years ago.

With greater wealth and substantially lower costs, demand for renewables is resurgent in markets that could not afford the technology, such as China, India and Southeast Asia, especially in countries whose weather conditions favor wind and solar. China, the world's largest emitter of greenhouse gases, has been the world's largest wind market since 2010 and is on track to become the largest solar market by new capacity. China's renewable equipment manufacturers have proven to be more resilient than Europe's, thanks to more efficient and cost-effective next-generation wind technology, with more than a third of key components being sourced in China itself. The share of wind power in its electricity generation could increase fivefold in the coming decades, to 30% of its energy mix.

Green hydrogen, on the other hand, needs subsidies and depends on regulation, which adds volatility. The best way to be exposed to green hydrogen is through the renewables needed to generate it: offshore wind, onshore wind and photovoltaics. In fact, to turn all the hydrogen produced for industrial, fertilizer and other uses "green" would require a dedicated renewable fleet twice as large as the one that exists in the world. Carbon capture and disposal tools must also be taken into account.

Pictet Clean Energy Transition

One solution is Pictet Clean Energy Transition, a thematic fund with a 16-year track record, which takes advantage of these opportunities over the medium to long term. It selects companies with a strong position in their industry, capable of generating profitable growth, with favorable cash flows relative to valuation. It includes companies with exposure to renewables such as Iberdrola, semiconductor manufacturers such as NXP Semiconductors, automotive industry suppliers such as Tesla and efficient manufacturing, with industrial software companies such as Autodesk or for "green" buildings, such as Kingspan in insulation. These are companies not present in standard indexes, less analyzed, which provide diversification.

It is a fund under Article 9 of the (EU) Regulation on sustainability disclosures whose investments contribute to climate change mitigation or adaptation. It takes into account companies' exposure to activities with significant adverse effects on the environment or society. Voting rights are exercised and, where appropriate, dialogue is generated with companies on environmental, social and governance issues, including collaborative initiatives with institutional investors.

Carlos Bendito Prieto, CEO from Aurea Capital 

Today, February 14, in addition to Valentine's Day, is World Energy Day, which has been celebrated since 1949 with the aim of promoting responsible and sustainable use of energy resources and raising awareness of the importance of ensuring universal access to energy - it is worth remembering that 13% of the world's population still does not have access to electricity.

Energy is basic to any economic activity and today we are painfully aware of the remarkable impact of its scarcity. The current energy crisis has put the EU on the ropes, especially the countries of the North, which have been forced to increase production of conventional energies such as coal. In the face of gas market volatility and geopolitical tensions, energy independence, security and stability have become a strategic priority for states.

Added to this challenge is the greatest energy challenge in history: transforming the economy based on fossil fuels to one based on renewable sources that ensure cheap and abundant energy. In global terms, we are not on the wrong track. According to BloombergNEF, 2022 was the year in which investment in clean energy matched global investment in fossil fuels for the first time, approaching $500 billion, up 25% from the previous year. Despite this new record, there are still great inequalities between continents and countries, and those leading investment in renewables still have a long way to go to implement a truly sustainable energy model.

In this energy revolution, Spain is among the ten countries in the world with the greatest renewable energy capacity and, what is more, it is at the forefront in solar photovoltaic and wind energy. Furthermore, the country has enormous potential to develop other energy alternatives such as biogas: they are the third country, behind France and Germany, with the greatest potential for the production and distribution of this energy source, and if they had fully developed this potential by 2022, we would have saved 4,000 million euros in energy bills and avoided the emission of 8.3 million tons of methane, according to the Spanish Gas Association.

Today is therefore a day to raise awareness of the urgent need to accelerate the transformation towards a sustainable, resilient economy based on clean and efficient energy sources. All stakeholders - investors, companies, governments and citizens - must commit to making this opportunity a reality.