At a time when news headlines are dominated by the negative impact of human activity on the environment, it may be a pleasant surprise to learn that the hole in the ozone layer is under repair. According to the United Nations Environment Programme, this stratum of the atmosphere which plays an essential role in protecting the Earth from harmful solar radiation is on track to recover fully within the next four decades. While this is dependent on our continued compliance with the Montreal Protocol of 1989 outlawing the use of ozone-depleting substances, it is still a hugely positive development.
On the flipside, it is looking increasingly unlikely that the target to limit global warming to a maximum increase of 1.5C set at the 2015 Paris Climate Agreement will be achieved.
Record high temperatures are reached on a seemingly regular basis and there are few now that would argue that human action is not changing the climate of our only planet. The consequences of this are predicted to be severely negative with the added possibility that we may breach tipping points which will take us into uncharted climate territory.
The energy transition has not stalled, however, and is making positive progress. And central to this progress is encouraging companies to decarbonise and investing in businesses that can deliver meaningful change in the way energy is produced and consumed.
A clear example of a positive development within energy transition is the use of coal, which is plentiful, but also dirty and dangerous. In the UK, its share of the electricity generating mix has fallen from 66% to just 2% over the last 30 years. In the US, usage has dropped from 55% to 20%. It is being replaced by cheaper and easier to deploy clean wind and solar power. This latter source of energy is consistently more cost efficient than new coal or gas-fired plants in most countries, and solar projects now offer some of the lowest cost electricity ever seen with the price of panels falling by around 95% in the last 10 years.
The war in Ukraine has been a major catalyst in weaning Europe off politically risky hydrocarbons, natural gas from Russia in particular. This has placed an even greater emphasis on energy efficiency, reducing levels of wasted energy, and replacing fossil fuel electricity generation with economically competitive renewables. As evidence of this, wind turbines and solar panels overtook fossil fuels to generate 30% of the EU’s electricity in the first half of 2024.
The genie is out of the bottle for renewables. The International Energy Agency observed that 2023 was a record year for the installation of renewables producing 507 gigawatts, an increase of almost 50% on the previous year. This is about 10 times the UK generating capacity.
It is clear, therefore, that the era of burning hydrocarbons for energy is coming to an end. It is equally clear that it is naïve to invest in the incumbent oil, coal and gas industries given they are going to struggle to compete economically as well as being diametrically opposed to the aim of a drastic reduction in carbon emissions.
A much more compelling investment opportunity lies in the technology needed to reduce emissions. This technology is available and cost competitive today, driving the transition to clean, low carbon energy. However, to benefit as investors, we need to understand which companies will experience long-term structural growth from this trend, as well as whether that growth will be profitable and sustainable.
The Sustainable Energy Efficiency Income Trust is an example of an investment opportunity offering exposure to exceptional projects in energy efficiency and waste streams. One such project lies in the Spanish olive oil industry. Only 10% of an olive is used to produce extra virgin olive oil, with the other 90% going to waste. The Sustainable Energy Efficiency Income Trust project takes this waste – olive pomace – to produce a lower quality olive oil called orujo. All that is left is a biomass which in turn is used to generate the electricity and heat required in olive oil production. At the end of the process, only electricity and olive oil remain, with no waste, providing an excellent example of a circular economy. Furthermore, this pattern of increasing production, minimising waste and reducing the consumption of electricity can be replicated across other areas of the food industry.
Another example of a fund at the vanguard of energy transition is Atrato Onsite Energy plc. In 2023, this funded the development of a solar farm spread across some 100 acres in a former Northamptonshire quarry. Atrato obtained the necessary planning permissions and a grid connection and over the course of the last year, installed around 55,000 panels. The plant was energised in January 2024 and now supplies Britvic, the drinks company, decarbonising the firm’s UK operations by 75%.
Every 0.1°C increase in world temperatures avoided is critical to the survival of the planet. Investing in innovative firms which develop technologies to tackle the climate crisis can be hugely influential in accelerating the transition to clean energy production.
