Surge in Power Demand, Green Energy Transition Fuel Investor Opportunities, PGIM Research Finds

Rhea-AI Summary

PGIM, Prudential Financial's $1.3 trillion investment management business, has published new research highlighting investment opportunities and risks in the evolving global energy landscape. The report, titled 'Fueling the Future: Investing Across the Global Energy Landscape,' emphasizes the growth in power demand driven by AI, middle-class expansion in emerging markets, geopolitical tensions, and the push for decarbonization. It notes that the energy transition won't happen uniformly and cautions against simplistic 'green' vs 'brown' investment strategies. Key investment opportunities include renewable infrastructure, lower-carbon fossil fuels like natural gas, and specific regional markets. On the other hand, speculative technologies and failing to adapt to the evolving energy mix pose risks. The research also points to attractive debt opportunities in mature markets and significant potential in emerging markets such as India and Latin America.

Positive

• PGIM's $1.3 trillion in assets under management provides credibility and resources for substantive research.
• Surge in power demand driven by artificial intelligence and middle-class growth in emerging economies creates investment opportunities.
• Renewable power generation is rising globally, with significant demand for infrastructure and critical metals like copper.
• Natural gas demand is expected to grow by over 50% by 2040, displacing coal in key regions such as China and South Asia.
• Emerging markets like India and Latin America present significant growth opportunities in renewable power.
• Debt opportunities in mature markets like Europe and the U.S. may be more lucrative than equity in renewable projects.
• Renewable projects in hydro and geothermal energy face less competition and obsolescence risk, particularly in Scandinavia and Latin America.

Negative

• Energy transition is uneven across different regions, posing investment timing risks.
• Speculative green technologies like hydrogen power, nuclear fusion, and carbon capture face significant challenges to operationalize and scale.
• Trend of green tech startups may not displace incumbent global energy players, adding uncertainty to investments.
• Oil majors that fail to adapt to the energy transition risk becoming obsolete.
• Debt financing is less plentiful for renewable projects in mature markets, posing a challenge for investors.
• The hype around certain green technologies may lead to overvaluation and investment losses.

Insights

Financial Analyst

PGIM's research emphasizes the strategic investment shifts necessary due to the evolving energy landscape. From a financial perspective, several key opportunities and risks are apparent. Debt opportunities in renewable energy projects, especially in mature markets like Europe and the U.S., present a less crowded and potentially lucrative investment path compared to equity investments. These projects often offer stable returns and lower risk, making them attractive for risk-averse investors.

Additionally, the projected 50% increase in global demand for liquid natural gas by 2040 highlights a significant opportunity in the natural gas sector, which might serve as a bridge during the transition to renewables. However, the financial viability of emergent green technologies, such as hydrogen power and nuclear fusion, remains speculative due to their high operational costs and scalability issues. Investors should be wary of overcommitting to these areas until technological advancements provide more certainty.

Rating: 1 (positive)

Energy Market Analyst

The energy market is undergoing a profound transformation driven by decarbonization and rising energy demands. Key insights from PGIM's research suggest that companies engaged in critical infrastructure for renewable energy—such as power storage and transmission—are poised for significant growth. Emerging markets like India and Latin America are highlighted as areas with abundant opportunities, primarily due to their burgeoning energy needs and expanding renewable sectors.

Moreover, companies that can adapt and incorporate lower-carbon fossil fuels, like natural gas, will likely be pivotal during the transition period. This transitionary strategy helps balance immediate energy demands while renewable infrastructures expand. However, caution is advised when investing in speculative green technologies; the hype around these technologies often surpasses their current practical applications.

Rating: 1 (positive)

Environmental Policy Expert

This research sheds light on the necessity for a nuanced understanding of the energy transition. The global energy mix cannot pivot instantly and investing based on a strict 'green vs. brown' dichotomy is overly simplistic. Investors should identify 'big oil' companies that are proactively engaging in the transition, as they are likely to remain relevant and profitable. The research underscores the importance of supporting companies involved in sustainable practices while being wary of those that are relying on outdated methods.

Furthermore, hydro and geothermal projects are presented as stable investments with less competition and obsolescence risk compared to more popular renewable sources like wind and solar. These projects, especially in regions like Scandinavia and Latin America, offer potentially attractive returns on debt investments while contributing to sustainable energy goals.

Rating: 1 (positive)

NEWARK, N.J.--(BUSINESS WIRE)-- A surge in power demand fueled by artificial intelligence, the growing energy demands of a rising middle class in emerging market economies, rising geopolitical tensions, and the push to decarbonization are combining to dramatically reshape the global energy system. For investors, this new energy landscape offers both opportunities and hidden risks across a variety of sectors and asset classes, as well as wide-ranging portfolio implications, according to new research from PGIM, the $1.3 trillion global investment management business of Prudential Financial, Inc. (NYSE: PRU).

“No source of energy and electricity is perfect… it’s critical investors understand which companies will power us through the energy transition and which technologies may not live up to the hype.” — Shehriyar Antia, Head of Thematic Research, PGIM (Photo: Business Wire)

In “Fueling the Future: Investing Across the Global Energy Landscape,” the latest in PGIM’s Megatrends research series, 30 investment professionals from across PGIM’s fixed income, equity, real estate, and private alternatives managers lift the veil on their investment strategies amid the shift toward electrification and a low-carbon energy mix.

The research finds that despite the urgency of the Paris Climate Agreement and ambitious plans for green energy growth, the energy transition cannot happen everywhere all at once, and a simplistic strategy that divides the investment world into “brown” villains and “green” heroes will not be an effective approach to achieve environmental or fiduciary objectives.

“No source of energy and electricity is perfect,” said Shehriyar Antia, PGIM’s head of Thematic Research. “Whether an investor has decarbonization objectives or not, it’s critical they understand which companies will power us through the energy transition and which technologies may not live up to the hype.”

INVESTING IN ENABLERS OF THE ENERGY TRANSITION

Through each evolution of the energy system, legacy fuel sources have been supplemented, rather than completely replaced. Companies that supply, facilitate and adapt throughout the transition will offer the best investment opportunities:

• Critical components for renewable power infrastructure – Renewable power generation is soaring in every region. The global need for complementary infrastructure — like power storage and transmission — should drive demand for critical metals like copper and grid components. Additionally, emerging markets where renewables are just taking off, like India and Latin America, can present opportunities.
• Leaning into lower-carbon fossil fuels – There is a need to meet rising demand for energy while renewable power infrastructure is being built. Natural gas — especially where it displaces high carbon-emitting coal — is a key fuel source in this transitionary period. Indeed, global demand for liquid natural gas is expected to grow by over 50% by 2040 as the coal-to-gas transition expands in China and South Asia.
• Avoiding overhyped technology – Some speculative green technologies like hydrogen power, nuclear fusion and carbon capture hold great promise but face immense challenges to operationalize and scale in the near term. Furthermore, trendy green tech startups are not likely to displace incumbent global energy players. In fact, some research suggests traditional energy firms may actually be leaders in select areas of innovative green tech.
• ‘Big oil’ adaptors – Oil majors that are leaning into the energy transition — finding ways to remain energy providers regardless of what the primary energy sources might be — are more likely to emerge as winners. Peers that rely on the extended sunset of fossil fuels, meanwhile, run the risk of being rendered obsolete by efficiency gains and better infrastructure in renewables.

OPPORTUNITIES ACROSS THE GLOBE

Renewables have increasingly become the first choice for new power generation around the world. However, the energy transition is playing out at different paces in different places:

• Debt opportunities in mature markets – Across renewable power projects in Europe and the U.S., there may be better opportunities in debt rather than equity, as debt financing tends to be less plentiful.
• Hydro and geothermal projects – These projects typically face less competition and obsolescence risk than wind and solar projects, and their debt can be very attractive — specifically recapitalization of hydro projects in Scandinavia and Italy — as well as rebuild of legacy infrastructure in Chile, Peru, Brazil, and other parts of Latin America.
• Renewable power in emerging markets – India is already the world’s fourth-largest electricity consumer and third-largest renewable power producer. In this landscape of incredible growth, companies with a track record of execution on large-scale projects and relationships with local regulatory authorities can be attractive.
• Critical metals – Metals and minerals are key to renewables and their infrastructure. For example, Australia, which supplies about half of the world’s raw lithium, is expanding its capacity to process and export battery-ready minerals.

“How we can meet rising global demand for energy reliably, affordably and in a way that avoids environmental harm is one of the biggest challenges of our lifetimes,” said Taimur Hyat, PGIM’s chief operating officer, “Resolving these challenges will create several important long-term investment opportunities while requiring rigorous discipline in over-hyped areas where the rhetoric exceeds the attractive and accessible investment opportunity set.”

To learn more, read the full paper “Fueling the Future: Investing Across the Global Energy Landscape,” or visit PGIM’s Megatrends microsite for additional insights for investors.

ABOUT PGIM

PGIM is the global asset management business of Prudential Financial, Inc. (PFI). PFI has a history that dates back over 145 years and through more than 30 market cycles. With 41 offices in 19 different countries (as of March 31, 2024), our more than 1,450 investment professionals are located in key financial centers around the world.

Our firm comprises multi-managers that collaborate with each other and specialize in a particular asset class with a focused investment approach. This gives our clients diversified solutions with global depth and scale across public and private asset classes, including fixed income, equities, real estate, private credit, and other alternatives. As a leading global asset manager with $1.34 trillion in assets under management (as of March 31, 2024), PGIM is built on a foundation of strength, stability and disciplined risk management.

For more information, visit pgim.com.

Prudential Financial, Inc. (PFI) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom, or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. For more information please visit news.prudential.com.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240516250895/en/

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MEDIA

U.S.

Alyssa McMahon

+1 973-204-5808

alyssa.mcmahon@pgim.com

UK

Sharan Kaur

+44 (0) 786 615 4772

sharan.kaur@pgim.com

Source: PGIM

FAQ

What opportunities does the PGIM report highlight for investors?

The PGIM report highlights opportunities in renewable infrastructure, lower-carbon fossil fuels like natural gas, and specific regional markets like India and Latin America.

What risks does the PGIM report identify in the energy transition?

The PGIM report identifies risks such as the uneven pace of energy transition across regions, challenges in scaling speculative green technologies, and potential obsolescence of oil majors that fail to adapt.

How is natural gas expected to perform according to the PGIM report?

The PGIM report expects global demand for natural gas to grow by over 50% by 2040, particularly as it displaces coal in regions like China and South Asia.

What does the PGIM report say about renewable power opportunities in emerging markets?

The PGIM report notes significant opportunities in renewable power in emerging markets such as India, which is the world's fourth-largest electricity consumer and third-largest renewable power producer.

What investment strategy does the PGIM report caution against?

The PGIM report cautions against a simplistic investment strategy that divides the investment world into 'green' heroes and 'brown' villains, as it is not effective for achieving environmental or fiduciary objectives.