Why Russia’s war on Ukraine makes the power companies toast
Are we at the gates of an electrification renaissance? In-depth analysis Simone Di Biase, Head of Relationship Management at the BG Saxo Study Center
According to Bloomberg New Energy Finance, Europe's path to clean energy (net-zero) in 2050 represents a $5.3 trillion investment opportunity. In the core scenario, fossil fuel needs decrease by 28% due to a large reduction in the primary energy source of coal in power generation.
Oil demand could fall by 30% due to the adoption of electric vehicles. Demand for natural gas will only decline by 5% as that energy source is still critical to baseline power generation. According to these forecasts, wind is expected to be the main primary energy supplier, with offshore wind as the main component, driven by developments in batteries and mature hydrogen electrolysis technologies.
A new renaissance in electrification
Electricity demand is expected to increase by 82% towards 2050 thanks to the adoption of electric vehicles, heat pumps and electrified industrial processes. The residential sector accounts for around 30% of total electricity consumption, but this share is expected to increase over time.
In the report "Transformation of the European energy system" prepared by McKinsey with a horizon of 2050, the consultancy company sets out its hypotheses according to which the increase in energy demand will be "only" 40% because it is considered an annual improvement in energy efficiency by 2%.
McKinsey sees a slightly more important role for nuclear power, but confirms that renewables will lead the transition. Europe's supply and demand regions will also separate, and the consultancy expects the current energy pricing mechanism to be disrupted as the renewable energy mix increases. Electricity demand is predicted to increase by 60% to 2050 in a Nordic Energy report, so there is a wide range of electricity demand forecasts.
All of the above assumptions point to a slow and steady progression to the end point in 2050. However, technology has a tendency to surprise and our view is that electrification will accelerate at a much higher rate than predicted above.
The average domestic electricity consumption in Europe is around 3.7 MWh. A heat pump is estimated to use 4 MWh of electricity per year, and the US Department of Energy estimates that an electric vehicle requires 3.8 MWh per year of energy generation. Barring any efficiency gains, an EU household replacing gas heating with a heat pump and replacing a petrol car with an electric vehicle will increase its electricity consumption by nearly 200%. Many households have two cars that will become electric vehicles over time, so this represents yet another increase. Electricity generation will undoubtedly enter its second boom era.
Opportunities in the utility sector in Europe
We consider that the green transformation will outperform the market. That's because investors should be missing out on the biggest transformation of society since the invention of the steam engine, which led to the coal-based economy for the next 250 years.
The table below shows 29 companies in the European utility sector (excluding water utilities) including three electrical equipment manufacturers (Schneider Electric, ABB and Siemens Energy). Due to high electricity prices following Russia's invasion of Ukraine, revenue growth was very strong for electric services at 49.5% y/y. Investor demand for European utilities stocks has been robust this year, growing by 6.9% this year, and over the past five years these stocks have risen by an average of 84%, with the best performing stock Verbund, one of Europe's largest hydroelectric companies operating at the lowest marginal cost of electricity.
The utilities sector can be divided into several parts. Utilities generate most of their electricity from an energy source which can be natural gas, hydroelectricity, solar, wind or nuclear power.
Some companies are large in distribution while others also own numerous power generation facilities. Other companies are more project-oriented like Orsted, meaning they put know-how and capital into building a power generation asset like an offshore wind farm and then sell it to infrastructure investors. Finally, there are the manufacturers of electrical equipment.
One of the key features of the forecasts mentioned in the first section is the assumption that all wind power will dominate the transition, which could happen if electrolysis costs decrease allowing for large-scale green hydrogen production.
It seems many are still underestimating solar, which actually projects annual capacity growth from around 200 GW in 2022 to around 500 GW in 2026. Solar has shown vast technological improvements over wind and is less complicated to build than wind. wind power with lower maintenance costs.
In any case, the future is difficult to predict and an investor should evaluate the possibility of investing in different energy sources. As we have highlighted in other previous reports, electrification will create opportunities in other industries such as copper mining, lithium mining, electrolysis equipment, electric vehicle manufacturers, wind, solar, fuel cells, batteries and charging stations.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/elettrificazione-transizione-energetica/ on Mon, 10 Apr 2023 05:39:47 +0000.