At the onset of war in Ukraine in February 2022, some countries put net zero on the backburner and shifted their energy policies back to hydrocarbons and nuclear. Now, with the war in its fourth month and winter receding, minds are turning to the long term once again.
In this article, we examine the links between energy security and clean energy. In our view, the two are more linked than they might appear and, more importantly, their solutions are connected too.
Energy security is the priority
In the past few months, energy security has risen rapidly up the governmental agenda, especially in Europe. From Brussels to Berlin, Rome to Riga, there is an urgent drive to cut reliance on imported fossil fuels, especially from Russia. “Putin’s invasion redefined our energy security considerations in Europe,” said Fatih Birol, head of the International Energy Agency.1
Despite the temptation, reversing the net zero project is not a long-term solution. Firstly, few European countries have the option of increasing domestic fossil fuel production. So, whether they are importing from Russia or anywhere else, there is still the issue of reliance on external actors, and the vulnerability of such a position in times of stress.
Then there’s the question of nuclear power as an alternative to fossil fuels. New nuclear plants take a long time to come online – at least a decade – and are often delayed. Nuclear does not meet with unanimous support in Europe.
Pro-nuclear France, whose huge fleet of nuclear power stations was created in response to the oil crises of the 1970s, faces off against the other giant of the European Union, Germany, with its long anti-nuclear history and its plan to shutter its three remaining nuclear plants by the end of this year.
There seems to be little political will in Germany to fire up nuclear plants, especially with the Green party as part of the new governing coalition. Facing a lack of domestic fossil fuel reserves, and a lack of unanimity on nuclear power as an alternative, policymakers have been turning towards the ways renewables can help to provide energy security instead.
Re-thinking the future of energy
Russian energy supplies to Europe have been cut dramatically. In the short term, this has led to rising energy prices and given a boost to other energy exporters.
The long-term effect, however, will be “a fundamental re-think on energy security which will accelerate decarbonisation”.2
Western Europe’s energy systems rely on imported fossil fuels, but there are several ways to lessen this reliance: by reducing demand using new renewable energy, for example, by achieving better energy efficiency, or expanding electrification so that fewer cars and lorries are burning fossil fuels. Each of these choices would reduce reliance on imported fossil fuels and lower greenhouse gas emissions, supporting both energy security and net zero.3
The latest report from the Intergovernmental Panel on Climate Change (IPCC) has just urged the world to respect the net zero project. Increasing investment in alternative energy sources and electrification would help to keep countries in line with the climate goals of the Paris Agreement and improve energy security at the same time.
A $37trn investment opportunity
We believe the lasting effect of this war will be much more investment in renewable energy. European countries and indeed many other industrialised countries around the world will want to reduce their dependency on and vulnerability to oil price movements outside their control. The newly re-elected French president Emmanuel Macron has pledged a tenfold increase in solar capacity to 100GW and in offshore wind to 40GW by 2050.
Germany’s chancellor Olaf Scholz has labelled renewables “crucial for our security”, saying “the faster we push ahead with the expansion of renewable energies, the better".
According to one estimate, the “higher capital intensity of renewable power and rising importance of energy storage and networks” represent a $37trn investment opportunity on the path to net zero. Here at Amundi ETF, we refer to this global drive towards alternative energy sources, energy efficiency, electrification and battery technology as the rise of ‘new energy’.
New energy sources come with low emissions – that is their raison d'être – but now they have a huge additional benefit: renewable energy is local energy, independent and sovereign. Its prospects, already strong given the net zero project, now look set to strengthen further by the quest for energy security.
How investors can access new energy
Our Lyxor MSCI New Energy ESG Filtered UCITS ETF groups new energy companies together in a way we think offers an appropriate exposure to the theme, going beyond a traditional sector-based approach. The ETF’s index aims to represent the performance of stocks whose activities are linked to the development of products and services in the areas of alternative energy, energy efficiency, and the battery value chain.
These sectors broadly reflect the key areas where CO2 reductions are needed to achieve net zero by 2050. The goal is simple: to direct capital to the companies at the centre of the energy transition, and benefit from the opportunities they create.
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here
1. New York Times, 26 April 2022, https://www.nytimes.com/2022/04/26/business/russia-nuclear-power-europe.html
2. Frank Jotzo, head of energy at the Australian National University’s Institute for Climate, Energy
and Disaster Solutions, quoted in The Lowy Institute on 28 February 2022, https://www.lowyinstitute.org/the-interpreter/russia-s-warwill-hasten-drive-clean-energy-security
3 Source: Goldman Sachs Carbonomics, Introducing the GS net zero carbon models and sector frameworks.
Capital at risk
For complete information on risks in relation to an investment in the Lyxor MSCI New Energy ESG Filtered (DR) UCITS ETF, please refer to the dedicated “risks warning” section of the prospectus and to the Key Investor Information Document (“KIID”) both available on our websites www.amundietf.com or www.lyxoretf.com. It is important for potential investors to evaluate the risks in
the KIID and prospectus of the Lyxor MSCI New Energy ESG Filtered (DR) UCITS ETF before making an investment.
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