Figure 1: Google Analytics returns for ESG phrases
Figure 2: Key RI themes increasingly mentioned in company transcripts
Source: Alphasense (left) and Morgan Stanley (right), as at April 2021.
Policies driving transformation
The plan calls for a doubling of electricity generation from renewable sources by 2030 to help meet its emissions reduction targets. This implies a major increase in European utility companies’ current rates of investment in renewable capacity and power grids. According to research carried out by the consultancy AT Kearney, annual renewables investment in Europe will rise from €60 billion in 2020 to €90 billion in 2022. By 2030, investment in European wind and solar capacity will total at least €650 billion and could reach €1 trillion.9 This is likely to boost utility valuations in Europe significantly, particularly given the big increase in demand that will result from the replacement of fossil fuels with electricity in transportation. It will also flow through to rising profits at equipment makers such as Danish turbine maker Vestas, which reported return on capital employed last year of around 20%.10
The transition to electric power for transport is a central element of the Green Deal, which stipulates that by 2030 at least 30 million zero-emission cars will be in use on Europe’s roads,11 high-speed rail travel will double across Europe and all scheduled mass transport for journeys of less than 500km should be carbon-neutral.12
There is growing interest in hydrogen as a clean energy source, although it remains expensive relative to others. The cost of so-called “green hydrogen” – made using renewable electricity to power electrolysis of water – has fallen thanks to dramatically cheaper renewable energy, but remains seven times higher than fossil fuels. Hydrogen is also difficult to store and transport.13 However, it has major potential in areas where electrification is not feasible, such as heavy industry, trucks, shipping and seasonal energy storage, and the EU aims to grow the share of hydrogen in the bloc’s energy mix from less than 2% currently to 13%- 14% by 2050.14 To realise this potential, major policy support will be necessary to encourage investment. The European Commission estimates the carbon price under the EU’s Emissions Trading Scheme will need to rise from around €30 currently to €55-€90 a tonne.15 Examples of projects getting underway include Ørsted building a 1GW green hydrogen plant in the Dutch North Sea, which is slated for operations by 2030;16 and in the UK Cadent’s HyNet North West project, which has been awarded £72 million in funding, partly from the UK government, to finance a hydrogen carbon capture and storage (CCS) project. It is hoped the fresh capital will accelerate the project to a final investment decision by 2023 in order for the initial phase to become operational by 2025.17
Around three-quarters of the 220 million buildings in the EU are deemed energy inefficient.18 The EU’s Covid-19 recovery plan will channel major investment into upgrading them, given that buildings account for 36% of the EU’s greenhouse gas emissions and 40% of energy consumption. The plan’s key targets call for a 60% reduction in greenhouse gas emissions from buildings by 2030 and a cut in energy used for heating and cooling of 18%. To achieve this it aims to double the renovation rate of buildings to 2% over the next decade, which will require investment of €275 billion a year. Energy efficiency standards will also be tightened.19
Don’t forget social!
Figure 3: Global employment in energy supply in the net-zero pathway, 2019-2030
Source: International Energy Agency, 2019.