Energy represents around 80% of global greenhouse gas emissions. Achieving any climate goal, notably the Paris Agreement’s quest to limit global warming to 1.5 degree Celsius, will require generational changes in how we produce and consume energy.
Investors will be a key determinant of the speed and direction of that change. Given the wide cone of uncertainty, Morningstar thinks investors should approach the clean energy transition with a risk/reward mentality, according to Morningstar’s equity research report, Clean Energy Transition: A Risk-Reward Approach.
Understanding the scale and scope of the energy transition is the first step to minimizing risk and maximizing investment returns. The report focuses on electricity supply and demand in the United States and examines the oil and gas industry, the rise of electric vehicles, and lithium demand growth. The report also offers Morningstar’s top picks from the utilities, energy, and basic materials sectors for investors.
Key takeaways from Morningstar’s report include:
–Utilities will control the pace of decarbonization. Eliminating carbon emissions will require huge investments in utility infrastructure to support renewable energy, electric vehicle charging, and building electrification
–Reducing fossil fuel power generation is the first step in decarbonization. In the U.S., we think clean energy, including nuclear, will grow to 65% of total power generation by 2030, up from 40% today. This is more bullish than some forecasts. The Biden administration and others are aiming for 100% by 2040, but we think that goal faces too many technical and economic hurdles.
–Decarbonizing transportation and retail energy use will increase electricity demand. We forecast 1.4% annual electricity demand growth during the next 10 years in the U.S., an acceleration from the last 15 years. This includes 1% annual core electricity demand growth plus 40 basis points of new growth from EV charging, data centers, and other electrification. This is included in our projected 2030 mix.
–Oil companies’ energy transition strategies balance stakeholders’ competing interests. Facing greater pressure, European firms have set more ambitious 2050 net-zero targets. As a result, they are investing greater amounts in low-carbon projects, particularly renewable power, than American peers. In contrast, U.S. firms Exxon and Chevron are keeping investments primarily in their legacy hydrocarbon businesses and in low-carbon areas that decarbonize their existing operations.
–Morningstar forecasts battery EV adoption will reach 40% globally by 2030, up from 10% in 2022. This will result in around 40 million auto EVs sold in 2030, up from 7.8 million in 2022. As EVs reach cost and functional parity with internal combustion engines, they will move from niche luxury vehicles to mainstream consumers, resulting in rapidly growing adoption starting in the second half of this decade.
–Lithium will be one of the largest beneficiaries of the clean energy transition. Lithium is the key energy storage component in batteries used in EVs and energy storage systems, which are large batteries built to accompany renewable energy. Rising EV sales and increased ESS batteries should drive lithium demand to more than triple to 2.5 million metric tons by 2030.
