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Nuances in the energy debate create a window to profit

A disconnect between policies to manage the transition to cleaner energy and rising demand for fuel and power means the sector is a challenging place to invest, but disagreement and potential policy miss-steps could spell an opportunity.
Nuances in the energy debate create a window to profit
  • Incoherent energy strategies will hurt capacity and exacerbate the boom and bust nature of supply and prices.
  • Energy firms must balance climate commitments with sustaining output and returning cash to shareholders.
  • Cost of capital will be affected; however, this equates to an investor's implied rate of return if risks skew to the upside.

Back in 2015, the then Bank of England governor, Mark Carney, warned of the dangers of “stranded assets” – those assets tied to fossil fuels that are no longer able to generate an economic return because of changes associated with decarbonisation. If nothing else, his comments represented a stark warning to anyone with a stake in the energy industry, but investors need to be wary whenever wishful thinking starts to inform public policy. 

Nearly seven years on, the integration of environmental, social and governance (ESG) mandates seems to be progressing nicely. Tesla Inc (US: TSLA) has just booked a quarterly delivery record, some 308,600 vehicles worldwide, while investment from venture capital and private equity is pouring into climate tech development. (PricewaterhouseCoopers estimates $87.5bn over the 12 months through to June 2021). In the political realm, Joe Biden’s first move in office was to cancel the Keystone XL crude oil pipeline, along with thousands of jobs in the process. And as if to crown our shift away from fossil fuels, the trade body that represents UK oil and gas companies is expunging the words “oil and gas” from its name to reflect the ongoing rise of renewable energy.

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