The old faith is dying. As Canada aims to further diversify its energy output on a superpower scale, the faith around the world that the global supply of traditional energy will return to relative predictability is waning. Even the more conservative voices say so.
“Governments will review their energy strategies. There will be a significant boost to renewables and nuclear power and a further shift towards a more electrified future,” noted Fatih Birol, executive director of the International Energy Agency, to The Guardian newspaper recently.
In other words, “the damage is done.” The U.S.-Iran war (the Strait of Hormuz blockage), the weakening of OPEC (with the departure of the United Arab Emirates) and instability in Venezuela have collectively created a crisis with “permanent consequences for the global energy markets for years to come,” Birol told The Guardian.
What’s accelerating instead, analysts and clean energy proponents emphasize, is the rush to renewables, not just as an alternative, but as a cornerstone of energy supply. For investors, it means keeping pace with the fast transition underway.
Renewables race
“From my perspective, the current pressure on renewables is not about maturing the underlying technology,” says Thomas Walker, professor of finance and a specialist in sustainability at Concordia University’s John Molson School of Business. He notes that the maturation process has already happened. Rather, the pressure now is to upscale “supply chains, permitting processes and grid infrastructure quickly enough to meet surging global demand.”
Canada’s goal is “to double the size of our clean energy capacity,” Prime Minister Mark Carney said in his Forward Guidance speech in April. At the top of Ottawa’s list are commitments to critical mineral mining to support clean energy’s supply chains. Yet, Canadian energy is also being eyed by fossil fuel giants, as seen with Shell’s recent acquisition of Calgary-based ARC Resources, one of the country’s largest natural gas producers.
Although natural gas is labelled by some as a transition fuel, there’s the danger that heavily investing in new fossil fuel infrastructure today creates a risk of stranded assets tomorrow, Walker argues.
“As the global energy transition accelerates and major markets decarbonize, aggregate demand for fossil fuels is projected to decline,” says Walker. If Canada tries to be all things to all energy markets, there’s the risk of overly allocating capital “to a sunsetting industry while underinvesting in the low-carbon technologies that will define the future global economy.”
Energy politics
In more tranquil times (although when has energy politics ever been tranquil?), energy shares generally rise and fall with the overall market. So, investing in traditional fossil fuel energy typically isn’t the most effective way to diversify risk, “because it’s very highly correlated to many other industries,” says Olaf Weber, professor at York University’s Schulich School of Business, CIBC Chair in Sustainable Finance and director of the Centre of Excellence in Responsible Business.
Today, the story has sped up, the outlook more volatile and varied. A family may decide to invest in renewables for environmental reasons, yet much of sustainable energy’s attraction is also its low price, thereby fuelling demand. Weber’s research includes a study of a group of large U.S. pension funds, which found that they would have performed on average 13 per cent better had they divested oil and gas 10 years prior.
“If you think about some of the renewables, especially wind and solar, they are now the most economical way to get energy online,” says Stephanie Tsui, chief sustainability officer and portfolio manager at Genus Capital Management in Vancouver. “They are the fastest, and they are the cheapest now. So, from an economic point of view, it just makes sense to invest more and to get more capacity from renewable energy.
“Capital flows, they don’t lie,” she adds.
A recent report by the Canadian Renewable Energy Association (CanREA) sees Canada well placed to attract investment with its regulatory stability and growing use of wind and solar energy and storage—the equivalent of up to $200 billion in new investment over 10 years, the report says.
Yet, because renewable energy is expected to propel other key policy goals, such as housing construction, electric-powered transportation and advanced manufacturing, there’s a sense of urgency to keep pace with demand. According to the CanREA report, renewable energy has shifted from a climate policy instrument to core economic infrastructure, and its delivery conditions now affect outcomes well beyond the power system itself.
Tweaks to investment approaches
Investment approaches are also changing, such as Ontario Teachers’ Pension Plan moving away from emissions targets to what it calls Climate Transition Aligned private investment assets.
Their rationale is, instead of having stringent emission targets that they are trying to achieve from their portfolio, they feel that they should actually look at the real impact of the investments, not just by looking at one metric.
Stephanie Tsui, chief sustainability officer and portfolio manager at Genus Capital Management in Vancouver
This may seem like investors rolling back emissions commitments, Tsui acknowledges, but investment targets offer a different way to measure climate action. “Merely looking at the emission target may not tell you the full picture of how you’re really catalyzing innovations that could help achieve net zero, or achieving a more clean energy future faster,” she argues.
Installing turbines and solar panels is still a central focus, but investments geared toward enlarging sustainable capacity is also of course about keeping pace with demand. “Forward-looking capital is increasingly targeting the critical bottlenecks of the energy transition: energy storage and grid modernization,” says Walker.
Because the costs of solar and wind farms are concentrated upfront, it’s important to have a regulatory environment that keeps that initial investment secure over time. “Once a wind or solar farm is built, the marginal cost of its fuel is zero,” says Walker. “The most important market conditions investors should look out for are robust, long-term policy frameworks that de-risk capital deployment.”
In short, he adds, “I believe that the chaos in the fossil fuel markets over the past few years has proven that accelerating the energy transition is no longer just an environmental imperative; it is an economic and national security necessity.”
Guy Dixon began his career at Dow Jones Newswires in New York before joining the Globe and Mail, covering financial markets, business news, the arts and other topics over the years. He has written for the CBC and The Walrus among other publications.
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