Russian pipeline tensions could boost clean energy efforts

As the war in Ukraine continues to roil energy markets and generate uncertainty among investors, explosions last week at both Nordstream gas pipelines from Russia to Northern Europe only worsened the situation.

But some investors in Australia are seeing an upside amid the crisis, suggesting that pressure on fossil fuel supplies may accelerate the development of alternative energy sources.

Although energy efficiency and sustainability are arguably more desirable than ever, there is a risk that governments will fall back on coal to offset shortages of Russian natural gas.

Michael Wyrsch, chief investment officer at Melbourne-based fund Vision Super, says that in the short term, an increase in reliance on coal is likely.

“But we think current events will spur a quicker move to renewables over the decade ahead,” he told AsianInvestor. “Given high current pricing for fossil fuels, we think there’s an increased argument to reduce exposure to them. We’ll definitely see opportunities in Australia.”

Sustainability efforts among more far-sighted members of the investment community are increasing amid mounting government-level pressure around the world.

Recent Australian legislation targeting a 43% reduction in carbon emissions from 2005 levels by 2030, for instance, could result in further significant opportunities for clean energy investment.

“We’re encouraged by some of the recent changes in government policies, and we do expect this to result in opportunities to invest,” Wyrsch said.

John Pearce, chief investment officer at Australian superannuation fund UniSuper, also welcomes the commitment by the country’s Labor government, elected in May, to emissions reduction from an investment perspective.

But he told AsianInvestor: "While trillions of dollars are being directed to green investing, it isn’t without risks. Not all investments will be profitable, so discipline is required."

Pearce said UniSuper's investment team is focused on companies that support decarbonisation.

"This also means investing in industries that will facilitate the transition,” he said. “It’s impossible to decarbonise without essential metals like copper and steel, and we see companies that produce these products as part of the solution."

Gordon Noble, a research director at the Institute for Sustainable Futures in Sydney is also encouraged by the Labor administration’s increased support for net-zero emissions.

“One of the key complaints of investors has been uncertainty of climate policy settings,” he told AsianInvestor. “The Australian government’s new emissions targets address this uncertainty. We now have a situation where there is consistency between state and federal policy. This will ultimately support investment.”

The challenge for investment portfolios will be one of capacity, Noble said.

“There are structural issues in certain areas that will make transition difficult,” he explained. “An example in Australia is offshore wind, where there is now policy certainty through recently passed legislation. But the ability to access ships to install offshore wind is uncertain as Europe and the US lock in their own commitments to offshore wind.”

CARBON COMPROMISE

Vision Super has committed around A$250 million ($160 million) to clean energy over the past two years, approximately 2% of the fund’s assets. However, Wyrsch makes a number of points about the huge challenge facing investors that want to help lower CO2 emissions.

“As The Economist pointed out, state-run oil giants will make or break the energy transition,” he said. “Most production and reserves of fossil fuels are in government, not investor, hands.”

Source: US Department of Commerce National Oceanic and Atmospheric Administration Mauna Loa Observatory

Based on this data, “for all the talk and policy change, there is no discernible impact on the increase in CO2 emissions to date,” said Wyrsch.

Given the latest political setbacks, emissions targets are under even greater pressure than previously. The hope among those seeking to reduce emissions is that sufficient progress has been made that climate targets set by governments and business will not be blown out.

The war in Ukraine has prompted European governments to increase the speed and size of their investments to fund the transition to clean energy.

But Pearce said there’s also an understanding that they can’t achieve their clean energy goals by sacrificing energy security and affordability in the short term.

"To do so runs the risk of losing mainstream support essential for decarbonisation,” he said. “As environmental and social responsibilities are inextricably linked, the focus, rightly, is on a ‘just’ transition. Securing affordable energy means relying on fossil fuels in trusted jurisdictions for longer than we would like."

Wyrsch said: "Communities are increasingly experiencing the effects of climate change and are understanding the need for action, so politicians will act – it’s just a question of how much damage is already baked in.

“The backlash on climate action and alternative energy will be temporary. However, the targets are extremely challenging. It’ll be a question of getting as close to them as possible."

Noble takes the view that coal as an energy source faces structural problems that are making it uncompetitive, and that as more distributed energy is fed into power grids, regulators will introduce increasingly dynamic energy pricing.

"The combination of solar and batteries is allowing nimble players to provide energy to markets when energy prices are high during the day,” he said. “This market environment just doesn’t suit coal, which cannot respond quickly to spikes in energy prices.

"Coal plants are also breaking down when exposed to peak temperatures. The structural issues for coal aren’t going to go away, no matter what happens in Ukraine. The issue for investors is to understand the overall direction of energy innovation."