Christopher Kaminker PhD, head of sustainable investment research and analytics at BlackRock Investment Institute within the portfolio management group discusses renewables, nuclear power and the risks facing investors in energy transition.
What were the topline findings in your research for Positioning for the evolving energy transition?
We increasingly view the energy system as sitting at the cross-currents of mega forces such as AI, geopolitical fragmentation, and the low-carbon transition. As the energy system continues to evolve, we see opportunities for investors to weave energy transition considerations into the core of their portfolios across a number of themes.
Global power demand is soaring, driven by factors including the proliferation of power-hungry AI data centres, electrification of transportation, buildings and industry that is increasingly reshoring; with rising cooling needs especially in emerging markets. The growing global appetite for affordable, reliable, secure and low-carbon energy is creating opportunities across renewables, storage, natural gas, and nuclear, as well as their supply chains.
Simultaneously, the energy transition’s evolution is increasing dispersion in related assets. Global competition in AI and energy technologies shows that geopolitics of energy is no longer limited to hydrocarbons. A resurgence of industrial and trade policies supporting domestic companies has also led to economic distortions, with surging supply of batteries, solar cells and electric vehicles (EVs) in excess of short term demand; leading to further price compression. We see growing opportunities in energy efficiency, clean transportation, and critical minerals and metals and lean into selective opportunities in Europe, which is driving the energy transition forward.
See also: Q&A with BlackRock’s Hume: ‘We are most positive on energy transition’
How are renewables increasing their share of the global power mix?
Policy and cost-down technology learning curves continue to support the buildout of green infrastructure and manufacturing across many geographies, with notable funding pledges from the EU and Germany. Globally, renewable energy is expected to meet around 95% of the electricity demand growth over the next three years. Additionally, the decentralisation of the energy grid – as some households and companies look for ways to cut costs, enhance resilience and explore alternative solutions to mainstream energy grids – could provide a further tailwind for distributed renewables and energy storage.
Where are you seeing innovation in terms of renewables?
One of the primary challenges for renewable energy sources such as solar and wind is their variability. Innovation in energy storage systems, including large scale and distributed battery storage, have been offering solutions, enabling excess energy generated during peak production times to be stored and released when production is low, thus stabilising the grid. There is now the prospect of fleets of electric vehicles acting as a smart and flexible super-battery when enabled with vehicle-to-grid technology with appropriate policy measures.
What are the opportunities in energy storage and infrastructure?
Expanding demand for energy is also driving demand for infrastructure, with strong tailwinds for both listed infrastructure and private assets. Listed infrastructure provides ready access to a traditionally low-volatility asset class that we see benefitting from reshoring and the new build required for long-running mega forces such as the AI buildout and the low-carbon transition. Global infrastructure investment needs are projected to rise to $68trn by 2040, driven by AI, supply chain reshoring, and energy security.
We also see opportunities in the green bond market, which has experienced remarkable growth over the past decade, transforming from a niche segment of the financial ecosystem into an essential pillar for funding sustainable infrastructure and energy transition initiatives. This year, one in every six corporate bonds issued in Europe has been a green bond, taking the global market to over $3trn outstanding, from over 3,500 issuers in over 50 countries.
Nuclear power can be controversial – what’s your take?
As demand for reliable, low-carbon energy grows, we see nuclear power re-emerging as a scalable solution. It’s now the second-largest source of low-emissions electricity after hydropower, accounting for just under 10% of global generation. Support from policymakers in a wide swathe of countries – including Italy, the UK, France, the US, and Japan – is driving further growth. Hyperscalers are investing in next generation nuclear technology that will help to pull forward the entire technology frontier in the 2030s.
Where are the risks for investors choosing to invest in energy transition? What do they need to be mindful of?
We believe it is crucial for investors navigating the granular opportunities presented by the energy transition to adopt an active approach – through precision ETFs and alpha seeking fundamental or systematic strategies – with competing policy objectives, geopolitics, and strained grids generating nuanced stories that vary by market. Infrastructure and private companies represent a notably deep opportunity set which can be harnessed across private debt and equity asset classes.
A series of cascading geopolitical shocks, most notably Russia’s invasion of Ukraine, has spurred a recalibration of energy policy priorities. The order of priority of various energy policy components – decarbonisation, security, affordability, and reliability – is evolving and becoming increasingly differentiated across countries and regions.
Geopolitical tensions and trade protectionism are reshaping markets for energy technology and critical commodities. For example, China’s industrial policies and focus on energy security have resulted in significant domestic investments in renewable energy as part of the broader energy mix.
Meanwhile, increasingly frequent extreme weather events and greater complexity in grid management amid the energy boom have put energy resilience in the spotlight. As countries and regions balance resilience with other objectives and supply chains shift, this may lead to increased dispersion, while presenting opportunities in resilience solutions providers.
Lastly, the past several years has shown shifts in investor sentiment as different energy themes have outperformed at different times.
Which asset classes or funds are the best way for investors to access the energy transition?
Potential investment opportunities abound but we suggest a selective and active approach given the complexity – combining alpha-seeking, targeted index exposures. For institutional clients we would also add private markets exposures to that opportunity set.
For broad exposure across the sustainable energy stack, we look to the BGF Sustainable Energy fund, which targets upstream and cyclical exposure to renewable energy across three themes – clean power, energy efficiency, and clean transportation. Other funds can offer regional and thematic exposures to the energy transition.
These include the BGF European Equity Transition fund, which aims to capitalise on alpha opportunities in Europe through companies exposed to the energy transition theme, and the BlackRock Brown to Green Materials fund, which offers exposure to a variety of energy transition-enabling critical metals and materials.
