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How do recent events in Europe affect the opportunities in transitional energy?

Julien Girault, March 2022

Active is: Sharing insights How do recent events in Europe affect the opportunities in transitional energy? March 2022 The invasion of Ukraine by Russian armed forces has destabilised security in Europe, creating a humanitarian crisis and market turmoil. With half of Europe’s oil and 30% to 40% of its gas imported from Russia, the invasion has escalated concerns over what Europe’s existing and long-term energy mix will look like in providing the region with dependable, affordable and climate-friendly access to energy. Here, we look at some considerations for Julien Girault investors assessing the energy market. Sustainability Research Analyst In recent decades, Europe has grown highly dependent on Russian oil and natural gas, Key takeaways and the invasion of Ukraine by Russian armed – The implications of the current forces has put Europe in a difficult position. crisis extend beyond fossil fuels The price of energy has soared even as Europe into renewable energy and feels growing pressure to increase economic climate solutions sanctions against Russia. This has reignited a discussion about Europe’s energy mix, the – Europe needs to remedy the impact of rising costs and how to make a faster significant underinvestment in transition to clean energy. energy infrastructure to counter – The energy mix: Europe has been grappling a risk of sustained energy poverty with a sustained, widening gap between – The decline in fossil fuel use is its investment in energy infrastructure and likely to be slower, so opportunities its dependence on energy – a trend that is exist in carbon capture and energy replicated globally (see Exhibits 1 and 2). storage solutions, energy efficiency Since 1990, Europe’s total energy supply has technologies and local sourcing of contracted overall. And while its dependence strategic metals and minerals on coal, oil and natural gas has fallen from 84% to 71% since 1990, its use of gas has risen from 20% to 26%. it is now cheaper for many power stations – The impact of rising costs: Given the to burn coal than gas. And costs aside, to disruptions to the supply chain caused by maintain current energy levels while burning events in Ukraine, the impact on energy pricing less Russian gas, it may be necessary to burn is already very evident. At current price levels, more coal – hardly a sustainable proposition. Value. Shared.

How do recent events in Europe affect the opportunities in transitional energy? – Investing in clean energy: Given this backdrop, European Commission has already commented that European governments are under pressure to increase “terminating our dangerous overdependence on fossil the use of clean energy and accelerate the delivery fuels from Russia can be achieved well before 2030”. of green technologies. They are also assessing where But getting there may involve acting on several fronts. nuclear power stands in the long-term energy mix, – Reclassifying nuclear as “green”. Nuclear power’s and they are looking to invest in carbon capture contribution to Europe’s energy mix has risen only technologies to compensate for slow progress in marginally in the last 30 years, to 12.5% in 2019. The reducing carbon emissions. European Commission had already approved draft How Europe plans to speed up the transition rules for classifying nuclear (along with gas) as to clean energy “green” in the EU taxonomy – a classification system Rising energy costs are making the already politically for environmentally sustainable economic activities. charged topic of energy even more political. However, the greater acceptance of nuclear as a possible Policymakers must find a balance between making core clean energy source (albeit with waste disposal energy affordable in the near term and investing in issues) was put to the test with the shelling of Ukraine’s alternative energy sources over the long term. The Zaporizhzhia nuclear plant by Russian armed forces. Exhibit 1: Fossil fuels are still a major source of the global energy supply World total energy supply by source versus real GDP (1990-2019) 900 250 800 GDP USD (indexed) (millions) 700 200 600 500 150 400 100 Exajoules (EJ) 300 200 50 100 0 0 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Coal Oil Natural gas Nuclear Hydro Biofuels and waste Other Real GDP Note: The exajoule (EJ) is equal to 1018 (one quintillion) joules. Source: IEA, World Bank. Data as at 2019. Exhibit 2: Europe is more dependent on natural gas than 30 years ago, while the overall energy supply has fallen Europe total energy supply by source versus real GDP (1990-2019) 160 1.8 140 1.6 GDP USD (indexed) (millions) 120 1.4 100 1.2 1.0 80 0.8 Exajoules (EJ)60 0.6 40 0.4 20 0.2 0 0 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Coal Natural gas Oil Nuclear Renewables Real GDP Note: The exajoule (EJ) is equal to 1018 (one quintillion) joules. Source: IEA, World Bank. Data as at 2019. 2

How do recent events in Europe affect the opportunities in transitional energy? – Expanding renewable energy sources. Europe’s previously shuttered mines outside of Russia and China renewable energy expansion appears on track, but may be able to restart and profitably provide local sourcing. will need to accelerate to respond to the current crisis. This is a longer-term change, but it could significantly Its contribution to the European mix reached 22.1% in improve the scope for renewable energy development. 1 2 2020 compared with only 4.3% in 1990. The European Look into carbon capture solutions Union has targets of 32% and 60% market share for During our AllianzGI 2021 Sustainability Days conference, renewables for 2030 and 2050, respectively. we heard from Professor Johan Rockström, a director – Investing in “clean tech”. An ambitious pathway to of the Potsdam Institute for Climate Impact Research in achieving “net zero” carbon emissions by 2050 includes Germany and one of the world’s most influential Earth the significant expansion of renewable energy sources, scientists. Professor Rockström highlighted the importance increased carbon capture technologies and better of “carbon sinks” to achieving net zero. (Carbon sinks are energy storage. natural or human-made systems that can trap and store What it may mean for investors carbon emissions.) This is where the opportunity sits in Clean tech is evolving rapidly – and needs investment carbon capture utilisation and storage (CCUS) solutions Even before the situation in Ukraine brought energy issues and technologies and energy storage. According to recent to the fore, clean-tech investments were already a critical International Energy Agency (IEA) estimates: solution for the climate crisis. Companies that help enable – CCUS facilities in operation more than tripled between both climate mitigation and adaptation may benefit 2010-2021, with the ability to capture 43.7 million tonnes significantly from Europe’s energy transition. This includes of CO2. firms that work on rapidly evolving technologies like energy – Global CO2 emission reductions from CCUS retrofits storage, green and blue hydrogen, and grid technology, in power generation and heavy industries could reach as well as more mainstream forms of renewables eg, solar more than 2 gigatonnes CO2 annually by 2050. and wind. Be mindful of shrinking availability of “rare earths” – The global CCUS market was USD 1.9 billion in 2020, and other raw materials with the capacity to grow to USD 7 billion by 2030. The current crisis touches upon the access to key strategic The current crisis has raised risks to energy security, metals and minerals required for the production of affordability and the expansion of renewable energy renewable energy solutions. Rare-earth elements are sources. But it has also highlighted the necessity for essential for capturing wind power; magnesium is a key accelerated investment in the European – and indeed component of fuel cells, plus wind and photovoltaic global – energy infrastructure and mix, which provides technology; and cobalt and natural graphite are critical a breadth and depth of opportunities. These extend for batteries and fuel-cell technology. China and Russia across carbon capture and energy storage solutions, are responsible for most of the EU’s imports of these metals energy efficiency technologies, and local sourcing of and minerals. As such, given ongoing geopolitical tensions, strategic metals and minerals. Many solutions exist but it is difficult to ignore the scope for supply chain disruption. need investment to achieve scalability – the growth At the same time, as prices rise for these raw materials, opportunities are significant. 1. Source: EEA. Data as at 4 March 2022 2. Source: IEA World Bank. Data as at March 2022. 3

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