Where Renewables Fit in the Electrification Megatrend
As climate change prompts us to transition to a more sustainable energy equation, a new investment megatrend is powering up across the planet. Electrification involves the transformation of existing industries and technologies that have historically used fossil fuel generation to instead run on electricity.
Surging onto the scene
This shift is well underway, with well-recognized examples such as global electric vehicle adoption and the increasing use of off-shore wind and solar to aid in the mass-decarbonization of fossil-fuel-reliant industries.
The International Energy Agency (IEA) predicts renewable energy systems to be the leading source behind global electricity generation as soon as 2026.[1] As illustrated in the chart above,[2] there is a staggering volume of decarbonization projects that will underpin the expansion of electrification.
As the transition picks up speed, the research team at Reynders, McVeigh Capital Management is focused on companies that are positioned for this trend, providing investors a pathway to sustainable growth sectors. This includes high-profile companies that lead the way in many respects, but equally as important are those that are strengthening the backbone of the transition amidst lesser fanfare.
To learn more about where we see opportunities for value, check out our recent discussion paper breaking down the electrification megatrend.
Novel tech underscores opportunity for renewables
As electrification gains a foothold internationally, the fossil fuel industry will continue to grapple with its rapidly declining market share. In its 2024 annual report on the state of electricity, the IEA sees a precipitous drop in oil-demand growth over the next four years.[3]
There is a wrinkle, however: with the constant advent of new artificial intelligence (AI) technologies, renewables suddenly have a larger demand bill to satisfy.
AI burst into the mainstream over the last two years, and it quickly transformed several facets of society. AI has catalyzed progress, be it through medical innovations and scientific research or merely in the realm of building efficiencies into data-heavy processing tasks.
With this world-changing development comes some growing pains. As reported by the New York Times, the data centers that process and execute the millions upon millions of AI prompts every hour are disrupting the electricity demand equation across the board.[4] Put simply, AI is an electricity glutton, and our increased use is ratcheting up the world’s demand forecast.
Fossil fuel players are already seeking to parlay AI needs into a “life preserver” of sorts. When it comes to ramping up supply, new natural gas plants are a path of less resistance than renewables. This push would result in an energy strategy that misses a significant opportunity: to respond to the urgency of increased demand to upgrade the existing grid and integrate a wider array of renewable sources.
The discourse revolves around a crucial debate on the feasibility of satisfying the suddenly steep electricity demand forecast through less conventional, more sustainable avenues. At this key moment, actionable policy and direction from relevant regulatory bodies may be needed to ease reliance on fossil fuels.
Companies continue to move the needle on electrification
Corporates, too, are instrumental in guiding electrification to fruition. Currently, more than half of the world’s largest publicly traded companies by revenue have at least made a net-zero pledge a priority in their corporate strategy.[5]
While regulatory bodies are certainly ramping up the pressure on firms to disclose climate data, a major subset (i.e., U.S. firms) did so on a voluntary basis. With more regulation arriving, such as the latest proposed rules on climate disclosures from the Securities and Exchange Commission,[6] these pledges will evolve into formal commitments. In sum, the corporate world understands the untenability of a carbon-based energy system, and this push will spur continued electrification across the value chain.
The path forward demands a reevaluation of our energy priorities while embracing innovation, as well as policy incentives like those in the 2022 to steer towards a sustainable, reliable, and clean energy future.
At this critical inflection point, Reynders, McVeigh is focused on investments that are thoughtfully considered in the context of electrification and other macro trends. Get in touch with our team today.
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[1] iea.org/reports/electricity-2024/executive-summary
[2] iea.org/reports/electricity-2024/executive-summary
[3] https://www.iea.org/reports/electricity-2024/executive-summary
[4] https://www.nytimes.com/interactive/2024/03/13/climate/electric-power-climate-change.html