Investment in the energy transformation represents a multifaceted opportunity
The energy transition has potential for far greater impact than switching from fossil fuels to renewable energy to cut down on carbon dioxide emissions. It presents a compelling opportunity for investors to achieve investment returns and show sustainable impact.
STANLIB
The energy transition is not a new concept. Over the last two decades, fossil fuels like oil, natural gas, and coal are being replaced in various countries around the globe by renewable options such as wind, solar, and hydropower, supplemented by storage solutions such as vanadium or lithium-ion batteries. This shift is happening because of economic reasons, social pressure, and the development of new technologies and it is gaining momentum.
However, the energy transition has potential for far greater impact than switching from fossil fuels to renewable energy to cut down on carbon dioxide emissions. It presents a compelling opportunity for investors to achieve investment returns and show sustainable impact.
Pressure for the energy transition
In December 2023, participants in COP28 in Dubai explicitly agreed to end the use of fossil fuels, but did not set exact targets to phase out non-renewable energy sources. Many influential countries are still economically dependent on oil, gas and coal, making it impossible to achieve universal agreement – even while participants at the conference acknowledged that the world is not yet on track to meet the goal of containing the rise in global temperatures within 1.5° C of pre-industrial levels.
Any hope of limiting the global average temperature rise within 1.5°C will necessitate a global investment of over $5 trillion annually in energy transition technologies, surpassing the record $1.3 trillion invested in 2022. By 2030, cumulative investment in transition technologies must reach $35 trillion, according to the International Renewable Energy Agency (IRENA).
Given the obvious effects of climate change – with each year’s peak temperatures breaking new records, and climate-related disasters wiping out the livelihoods of millions of people, especially in developing countries – the impetus for transitioning away from fossil fuels is going to have to come from individuals making conscious and responsible choices.
South Africa’s responsibility
SA, which is heavily reliant on coal for its energy needs, faces heightened vulnerability to the impacts of climate change, which jeopardises not only natural ecosystems but also poses social and economic threats.
SA’s electricity minister, Kgosientsho Ramokgopa, estimated in August 2023 that the surge in load shedding would cost the economy R1.6 trillion in the production of goods and services, along with a loss of R77 billion in tax revenue. He said load shedding resulted in the loss of an estimated 1.5 million jobs in 2022 and 2023.
SA’s unemployment rate of 32.1% translates into 7.9 million people unemployed, which contributes to the country’s distinction as having the highest Gini coefficient globally. This underscores the interconnectedness of transitioning to a green economy and addressing profound social disparities. While the shift to sustainable energy sources is pivotal, it constitutes just one aspect of broader transformative change.
In addition, the Southern African Development Community (SADC) region is experiencing warming at double the global average rate. The Intergovernmental Panel on Climate Change (IPCC) predicts dire consequences, including a substantial decline in agricultural productivity and a contraction in GDP. Failing to act now could deliver a markedly bleak future, with projections of a potential 50% GDP reduction in SA by 2100 and the displacement of millions due to adverse climate conditions[i].
SA needs to find a solution to ensure that its energy transition moves beyond a mere decarbonisation strategy into a collective commitment by all citizens – including businesses, government, and individuals – to revolutionise and diversify the economy within the framework of environmental sustainability. It also needs to find a pathway to new energy sources that simultaneously addresses poverty, reduces inequality, and tackles unemployment.
The investment opportunities in the energy transition
The energy transition represents as much a fundamental change for the globe as the Industrial Revolution or the internet revolution. Just like the Industrial Revolution and the internet, the energy transition will reshape industries, communication, transportation, and societal norms. Similarly, it will significantly influence investment choices: an investment in the energy transition is a fundamental act of trust in the future. Those with the foresight to anticipate future trends often stand to gain substantial rewards.
In the emergence of new technologies, non-traditional energy sources, including water, solar power, and wind energy are being harnessed. This presents an opportunity for the private sector to engage in decentralised energy harvesting, which reduces the burden on centralised energy providers such as Eskom.
By diversifying sources of energy production, the private sector can contribute to more resilient and sustainable energy infrastructure, reducing the strain on traditional power grids and fostering greater energy independence. This shift towards decentralised energy production not only promotes innovation and investment in renewable energy, but also holds the potential to enhance energy security and mitigate the economic and social impact of centralised energy disruptions such as load shedding.
As a result of these advancements in technology, the costs per kilowatt hour of energy have steadily decreased. In fact, they are now significantly lower than even the most affordable and modern coal generation, making it a cost-effective solution for meeting the growing energy demands of both businesses and households. This has made renewable energy increasingly competitive and financially viable, further incentivising the adoption of non-traditional energy sources. This represents a pivotal shift in the energy landscape, offering the potential to drive economic growth, create employment opportunities, and contribute to a more environmentally sustainable future.
Levelised cost of electricity (LCOE) generation
The energy transition has become a disruptive technological revolution. It is having a far-reaching impact which supersedes individual views on the viability of greener energy sources and their environmental or social implications. This shift underscores the inevitability of embracing transformative energy technologies and the imperative to adapt to a rapidly-evolving energy landscape.
For investors considering energy transition investment themes, these developments hold considerable promise. Not only can they anticipate favourable returns on their investments, characterised by high potential, diversification, and suitability in light of associated risks, but they can also derive satisfaction from the positive downstream environmental and social impacts. This convergence of financial incentives and societal benefits underscores the compelling nature of energy transition investments and their potential to drive both economic prosperity and sustainable progress.
The immediate ESG challenge
Corporate boards play a pivotal role in overseeing ESG initiatives and ensuring that environmental, social, and governance considerations are integrated into an organisation’s strategic direction. This oversight involves setting clear ESG objectives, monitoring progress, and holding management accountable for achieving ESG-related targets.
The challenge that ESG custodians face is that some investment opportunities in the energy transition may initially appear non-ESG due to their association with traditional energy sources or resource extraction. For example, minerals like lithium, nickel, and cobalt are integral to the batteries powering electric vehicles and storing energy from solar mini-grids. Rare earth elements contribute to the magnets used in wind turbines and electric motors, while significant quantities of copper and aluminium are utilised in power transmission lines. Mining and processing these minerals can have negative consequences, including deforestation, dewatering, biodiversity loss, greenhouse gas emissions, and human rights violations. Competition for these resources could escalate geopolitical conflict.
However, these consequences can be mitigated. Supporting the extraction and processing of critical minerals for renewable technologies is essential for building a more resilient and sustainable supply chain. Investments in gas as a transition fuel can facilitate the gradual phasing out of more carbon-intensive fuels, paving the way for a smoother transition to a low-carbon economy. Green hydrogen investments offer a promising avenue for storing renewable energy and decarbonising hard-to-abate sectors. Investing in the transportation revolution, particularly in electric vehicles and sustainable mobility solutions, can significantly reduce emissions and enhance transport efficiency.
By pursuing these seemingly non-ESG investment opportunities, investors can play a crucial role in driving long-term sustainability, fostering innovation, and accelerating the transition to a greener and more resilient future.
The energy transition can uplift society
The greatest need in the energy transition is funding – and this is also the greatest opportunity for social impact. Africa’s need for energy is substantial. McKinsey reports that Africa’s energy requirements could double by 2050 due to anticipated population growth over the next three decades. Currently, approximately 600 million Africans lack access to electricity, representing about half of the total population. This figure is expected to rise to 1.2 billion by 2050.
While Africa cannot fund this energy expansion and provide energy security on its own, the funding and financing options available from developed world financiers bring their own complications. There is a need for innovative financing solutions, preferably drawing on domestic resources such as retirement savings. Renewable energy projects, which typically have a lifespan of 20 years or longer and predictable revenue offtake, are ideal for retirement funds.
SA’s objectives in its energy transition, or more correctly, just energy, includes: “A just transition contributes to the goals of decent work for all, social inclusion, and the eradication of poverty. A just transition puts people at the centre of decision-making, especially those most impacted, the poor, women, people with disabilities, and the youth, empowering and equipping them for new opportunities of the future.”
Overlaying these pillars is the principle of distributive, restorative, and procedural justice (the ‘just’ in ‘Just Transition’), ensuring fairness and empowerment for all.