Transformation of the energy grid as well as increased investment in renewables will result in an opportunity for investors spanning multiple decades as companies start executing on their net zero promises.
The redeployment of capital by utilities companies to fund renewable energy projects and improve resilience in the electricity grid represents a substantial multi-decade opportunity for investors.
But it’s up to investors in these companies making net zero pledges to better understand the decarbonisation pathways to find the best opportunities.
Working with companies to understand net zero pathways can help determine whether intentions pledged by companies are genuine, or indeed if decarbonisation pathways can be accelerated.
The mainstreaming of net zero
Making a net zero commitment, we believe, is the norm now, particularly for infrastructure companies that account for the largest producers and consumers of energy.
What’s important for investors – beyond setting of long term targets – is turning ‘net zero by 2050 pledges’ into short and medium term targets.
Investors are increasingly pressing companies for supporting evidence on their net zero pledges.
Evidence of commitment to the decarbonisation pathway has expanded to include executive incentives and remuneration being aligned to the short and medium targets set by a company, as well as the measurement of scope 3 emissions (ie those that result indirectly from company activities but that are not directly owned or controlled by the company).
The push for greater transparency from companies relating to their net zero ambitions is not only being driven by investors. It’s also being driven by customers who are increasingly demanding companies provide more sustainable solutions. Customers want companies to offer products that allow them to access more renewables, allow them to increase their energy efficiency and allow them to operate more within a circular economy.
Utilities at the forefront
Net zero refers to the balancing of emissions between what’s being produced and what’s being taken out of the atmosphere in an effort to halt climate change.
Net zero commitments will come from one of three sectors in the infrastructure context: power generation, transportation and the industrial sector.
As renewables technology improves and costs come down, the case for utilities to invest more into this area - while decommissioning old and inefficient coal plants - becomes stronger.
While the power generation sector has been decarbonising for the best part of the last decade, many of the companies in the transportation and industrials sectors are only just embarking on a net zero journey.
The multi-decade opportunity
Within the power generation sector, utilities companies really are at the forefront of the energy transition. It’s these companies that will fundamentally shift and change the way that electricity is generated, transmitted, and ultimately distributed to customers over the decades to come.
While utilities companies have historically had more defensive, stable and low growth characteristics, the role these companies play in the transformation of power generation means they’re changing their characteristics.
It’s in the redeployment of excess free cash flow over time towards new sources of energy generation and the building of resilience into the grid where the return profile of these companies can really change.
An example of this is United States Minneapolis-based Xcel Energy,* which has earmarked around $US2.5 billion to 2031 for EV infrastructure, according to its June 2022 investor presentations. While Xcel could be considered to be at the forefront of allocating capital to future energy consumption and distribution, other companies are expected to follow.
US Virginia-based Dominion Energy* has earmarked around $US2 billion in renewable natural gas, the company’s 2021 Climate Report outlined. Spanish multinational electric utility company, Iberdrola,* meanwhile, is another example of a company investing significant capital towards understanding hydrogen and its uses within the production of green steel, as a fuel source for freight railways and as an alternative to natural gas.
Decarbonisation is a multi-decade opportunity for listed infrastructure companies that, we believe, will lead to significant earnings growth in the long term.
*References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced may or may not form part of the holdings of First Sentier Investors' portfolios at a certain point in time, and the holdings may change over time.
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