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Energy Transition for a Sustainable Future

Insight by Larry Wieseneck Co-President of Cowen & Company, LLC and R. Adam Miller Managing Director, Sustainability & Energy Innovation, Intrepid Partners

…the world is diversifying energy sources, known as the “energy transition.”

Counting Carbon: Navigating the Energy Transition

Over the past several years, a sea change has occurred, lowering the cost of alternative energy sources. As renewables have become economically viable, the energy transition continues to gain traction. Now, the global energy sector is gradually shifting away from fossil fuels toward more sustainable sources of energy.

Cost is certainly a factor in the energy transition, as evidenced by the fact that wind and solar energy generation are cost effective in 60% of countries around the world, without subsidies. But there are other influences that, like spokes in a wheel, help maintain the pace of change toward a more sustainable “net-zero,” or in some cases “carbon neutral,” future.

Key factors accelerating the de-carbonized energy transition including investor pressure, social, technological, government / regulatory and economic.

Below is an overview of the influences behind the energy transition and how they will come together to propel both energy supply and demand toward greater sustainability.

Combating Climate Change

At the global level, the signs and impacts of global warming are accelerating. In response, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) has set a goal to reduce greenhouse gas emissions by 50% by 2030 and more than 90% by 2050 (oil and gas companies account for about 50% of greenhouse gas emissions). Further, in a landmark move to combat climate change, the Paris Agreement has brought together several nations (most recently, with the U.S. rejoining the agreement) with the aim of curtailing the global temperature rise this century below 2 degrees Celsius—ideally, limiting it 1.5 degrees Celsius.

Shifting Focus at Integrated Oil Companies

Increasingly, integrated oil companies are on the front lines of the energy transition, moving from conventional energy sources and into alternative, renewable sources. Oil companies in Europe are the first movers to capitalize on this growth potential, while their U.S. counterparts are not far behind. Over time, companies will need to reshape their strategies to align with a decarbonizing world. Initially, this will mean leveraging their base assets and operating expertise, while increasing participation and investment in renewables. Examples include BP, Total, Shell and Chevron, which have made visible moves from traditional energy sources to renewable energy such as hydrogen, solar, and electric vehicle charging. Going forward, we see further industry expansion into clean-tech initiatives as well as carbon monetization through carbon credits to promote net emission reductions.

Economics Change the Energy Landscape

As noted earlier, one of the biggest drivers in the energy transition is economic viability. Without cost effectiveness on an energy equivalent basis, alternatives cannot supplement traditional fossil fuels. Today, that shift is happening. Solar and wind have become the lowest-cost forms of electricity in two-thirds of the globe—often at prices lower than new natural gas plants and, in many cases, existing coal facilities. This will allow solar and wind to increase market share. In addition, hydrogen fuel cells are growing in familiarity and use, particularly in carbon-heavy transportation such as trucks, buses, and marine transport. Overall, as renewables become the most cost-effective source of power generation, utilities will need to embrace “decarbonated” energy. Looking ahead, regulatory changes also could spur greater adoption of clean tech in energy to reduce emissions.

Electrifying Transportation

Electric vehicles are everywhere—and their adoption continues to increase. This movement is being powered (no pun intended) by declines in battery costs, which account for about 30-35% of an electric vehicle’s cost, down from nearly 50% in 2017. The improved economics, coupled with increased costs for internal combustion engines to meet greenhouse gas and fuel efficiency requirements, should result in electric vehicles being cheaper than traditionally powered vehicles starting in about 2023. However, internal combustion engines won’t disappear anytime soon. Our forecasts call for electric vehicles to account for about 9.5% of all vehicles sold globally in 2025. In 2023, about 78% of vehicles will still have a traditional engine, although many will be partially electrified as hybrids.

Moving Away from “Carbon-Intensive” Portfolios

With greater interest in promoting climate neutrality, many institutional investors are choosing environment, social and governance (ESG) as part of their portfolio decisions. In fact, we at Cowen expect ESG and mitigating climate change will play a material role in how the underlying risks and upside potential of investments are assessed. As evidence of this shift, ESG and sustainability have attracted record capital flows in 2020 and companies across multiple industries are accelerating the transition to an environmentally sustainable economy by addressing pollution, waste, and resource constraints.

Promoting ESG Scores

Finally, the focus on ESG is prompting many corporations across multiple industries to commit to cleaner ways of operating. For example, Walmart, Facebook, Amazon, Apple, and AT&T are among the major companies with clean energy supply agreements, including wind and solar. Many companies (including Cowen) are also working to improve their ESG scores. In fact, nearly one-quarter of the Fortune 500 have made public commitments to become carbon neutral through 100% renewable power or to meet an emission reduction target.

The energy transition is a monumental shift, and it requires continued action in multiple areas: regulatory policy, corporate governance, investor engagement, consumer and social focus, and breakthrough technological advancement. It is a process that will take place gradually and then seemingly happen all at once across multiple sectors and industries. At Cowen, we are focused on the importance of energy transition for our clients, investors, and partners—because we know it is the right thing to do.