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August 22, 2022  |  13 Minute Read

Vikrum Vora

Portfolio Manager and Senior Research Analyst, Liquid Real Assets

Vikrum Vora


Key Takeaways

  • New geopolitical and energy market realities have accelerated the quest for long-term affordable, clean and secure energy—the energy transition trinity.
  • From a public markets investment perspective, we expect both traditional and alternative energy providers to benefit in a sustained environment of high fossil fuel prices, rapid deployment of clean technology, and the reshoring of energy supply.
  • To make the energy transition possible, we believe the world needs to see continued action from policymakers along with significant capital investment in underinvested areas of decarbonization.



There’s little doubt that our fight against climate change has driven remarkable shifts in technological development, regulations, consumer preferences and investor sentiment as we transition to a low-carbon economy. More recently, however, new geopolitical and energy market realities have emerged. The Russia-Ukraine conflict, while deeply upsetting on a human level, has sent fossil fuel prices even higher, led to the temporary emergency re-introduction of dormant fossil fuel infrastructure in parts of Europe, and highlighted the dangers of over-reliance on any single country as an energy supplier. These factors have only intensified the quest for long-term affordable, clean and secure energy—what we think of as the energy transition trinity. Achieving this trinity is a herculean task, and it won't happen overnight. To get there, we believe continued policy action is needed to mitigate and adapt to climate change, build support for what will be a difficult and costly transition and incentivize significant capital in underinvested areas of clean energy value chains.



Energy Sector Trends


Before we consider what might be required to make the trinity possible, we need to put the current energy market environment into context and examine the major trends in motion: high fossil fuel prices, the accelerated rollout of cheap, clean technology and the reshoring of energy. Each trend has an impact on the world’s journey towards affordable, clean and secure energy and, as investors in public markets, we believe they could prove to be long-lasting themes benefiting both traditional and alternative energy providers.


Trend 1: Sustained High Fossil Fuel Prices

Major energy benchmarks are up between 50% and 550% since 2020. Natural gas prices are higher due to faster demand recovery coming out of COVID-19 as well as tight gas fundamentals driven by supply outages in the global gas value chain and years of underinvestment. Europe is relatively worse off than the U.S. due to the region’s dependence on Russian gas and having less storage of gas needed for winter months. 



Oil & Gas and Power Prices Have Seen a Dramatic Increase Since the End of 2020


Source: Goldman Sachs Asset Management and Bloomberg. Data as of June 30, 2022. European natural gas prices: Generic 1st TTF Natural Gas Base Load Monthly Futures. European Power Prices: Germany Power Baseload Forward Year 1. U.S. Power Prices: PJM Western Hub Day Ahead LMP 24HR Average. Key Energy Transition Minerals: reflect an average price return of Nickel, Cobalt, Copper, and Aluminum; excludes lithium due to data availability. All prices denominated in U.S. dollar.



In deregulated or liberalized power markets like the U.S. and Europe, natural gas sets power prices which is why we see high prices for electricity. Brent crude, the global oil benchmark, has increased for similar reasons of strong demand recovery and tight supply. Prices of minerals like copper, nickel, cobalt and aluminum—key inputs for renewables, power grids and electric vehicles—are also up because of pandemic-related capacity outages, supply chain bottlenecks and higher transport costs. For prices to ease, markets would need to see either demand destruction or new supply. And while we do see some new supply coming on for energy transition minerals, we believe it’s likely that fossil fuel prices will remain elevated as most producers have investors looking for return of capital and/or have logistical constraints. Barring more stringent government policies, the more likely case for fossil fuel demand destruction would be due to continued high prices as opposed to a switch to greener alternatives.


Trend 2: Rapid Deployment of Cheap, Clean Tech

Higher fossil fuel prices serve as a signal that can speed up the transition to green energy. While we believe it’s well understood that the cost of new build renewables is cheaper than new build energy sources, what we think is less appreciated is that even with the cost inflation we’ve seen in 2022, the spread between new build renewables and existing electricity prices is wide. For example, when we look at the blended solar and wind pricing in Europe, it’s 65% cheaper than current electricity prices. This demonstrates that in spite of inflation, converting to renewable electricity is still “in the money,” especially given the rally in gas and power prices. In fact, many clean energy companies are now saying that global renewables development is a seller’s market, a trend we think will continue given the massive renewable buildout needed over the next few decades.



Renewables Are Now Cheaper Than Traditional Energy Sources


Sources: Goldman Sachs Asset Management, Bloomberg, and Lazard. Latest full year data as of June 30, 2022. *German baseload 1 year forward prices as of Q1 2022. Past performance does not guarantee future results, which may vary.


Pricing Power Driven by Security, Costs, and Clean Mandates


Sources: Goldman Sachs Asset Management, BloombergNEF, and LevelTen Energy. Latest data available as of June 30, 2022. PPA: power purchase agreements. A power purchase agreement, or electricity power agreement, is a contract between two parties, one which generates electricity and one which is looking to purchase electricity. 1. German baseload 1 year forward prices as of Q1 2022. Past performance does not guarantee future results, which may vary.


"The transition, however, isn’t just about solar and wind. It requires a step change in investment and deployment of clean technologies."


Traditional energy companies will likely play a major role, since they have decades of experience in research and development and managing capital intensive projects, and also benefit from improving balance sheets with rising levels of free cash flow available to invest. Over the last three years, about $1tn per year has been spent on the transition across public and private markets. But to get to net zero by 2050, we would need to see a significant increase in investment to about $4tn1 per year on power generation, energy efficiency, renewable fuel switching and carbon capture.



Around $4 Trillion of Clean Energy Investment Is Needed Globally Per Year to Reach Net Zero


Source: Goldman Sachs Asset Management and IRENA. Data as of December 31, 2021. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this article.



Trend 3: Reshoring of Energy

Energy is now a security issue for many nations and some of the world’s largest economies have a short- to medium-term focus on “reshoring” energy supply (i.e., away from Russian gas and coal supplies). In Europe, for example, the REPowerEU plan outlines steps to reduce Europe's dependency on Russian fossil fuels which in the near term is about diversification of fossil fuel supply along with a focus on deploying clean technologies and reducing consumption longer term. More broadly, most major economies are aiming to accelerate their transition not just with more solar and wind, but also carbon capture for hard-to-abate emissions as well as backup power technologies like nuclear, renewable natural gas, batteries and hydrogen. One challenge in shifting to renewables, however, is the concentration of critically-needed minerals in select countries—a problem that could mean the world is exchanging the reliance on petro-states for electro-states, which is likely to occur unless we have scalable technologies that rely on more abundant elements. In the battery space, this would mean minerals like iron or manganese displacing lithium, nickel and cobalt.



Energy Policy Responses in Light of Russia-Ukraine Conflict


European Union

  • Paradigm shift to energy autonomy focused on ending fossil fuel imports and increasing solar + wind and heat pump deployment.
  • Short-term "all of the above" strategy to curb energy crisis with coal, nuclear and non-Russian gas (targeting 2/3rd) reduction by YE22), which currently accounts for 39% of E.U. gas supply.*
  • Long-term focus on accelerating, renewables, hydrogen and power market reform.


United States

  • Although the U.S. is not a major Russian energy importer, focus is supplying the E.U. with U.S. gas and reshoring renewable manufacturing.
  • "Securing a Made in America Supply Chain for Critical Minerals" that are an essential part of the energy transition.
  • Although time is running out ahead of a September 30, 2022 reconciliation deadline, focus remains on the potential passage of climate-related provisions in the Build Back Better Act.



  • Given coal and natural gas shortages in 2021, China is boosting domestic natural gas and coal production.
  • New coal mines and plants have been approved by the state planner with a goal to boost domestic production capacity by 300mm tons annually and build a 620mm ton stockpile.*
  • Still remains committed to 2060 net zero target, 1200 GW of renewables + peak emissions by 2030 and renewable manufacturing leadership.*


Source: Goldman Sachs Asset Management, Bloomberg, Energy Information Administration (EIA). Data as of June 30, 2022. *Inevitable Policy Response: Quarterly Forecast Tracker Q1 2022—Update of global energy/land policy and technology developments. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Past performance does not guarantee future results, which may vary.


Making the Energy Trinity Possible


While we are seeing some progress towards achieving the climate goals and targets set by various countries, we think the transition is still in the early stages of multi-decade change given the sheer scope of entirely rebuilding the world’s energy systems and creating the infrastructure to support it. As the energy transition progresses, we believe both additional policy action and capital is needed across the traditional and clean energy value chains.


Climate Leadership—It’s Now or Never

The quest for long-term affordable, secure and clean energy starts with action from policymakers. We’re seeing steps in the right direction with growing global political consensus on the importance of reaching net zero, though it’s worth highlighting that China and India—who collectively account for about one third of global emissions—have net zero targets that extend beyond 2050. Targets need to be followed up with implementation plans or legislative mandates at the country or corporate level, and should signal that if heavy industries don’t transition to a low-carbon economy they’ll be left out of the marketplace. Moreover, from a scientific perspective, the latest assessment report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) states that it’s “now or never” to act in order to limit the world’s warming to 1.5°C and hit peak emissions by 2025. While this may be unlikely, especially given that China is targeting peak emissions in 2030, it’s an alarm bell.


The forecasts imply that world leaders and policymakers need to ramp up credible step-by-step plans to reach their net zero goals to build confidence among investors, industry, citizens and other countries. The task will be difficult and costly, but necessary. In our view, it would be desirable for policymakers to have a clear focus on lowering green premiums—the additional cost of choosing a clean technology over one that emits a greater amount of greenhouse gases— so decarbonization technologies can gain scale. We’ve already seen this play out with mature renewable technologies like wind and solar, but we believe more government incentives and mandates are needed to jumpstart momentum in newer solutions and technologies.


We believe green hydrogen and carbon capture are two areas in most need of continued action from policymakers. In the U.S., for example, the 45Q tax credit is the main policy driving the adoption of carbon capture, with plans to increase the tax credit from the current $50 per ton of carbon dioxide captured to $85 per ton.2 There are also plans for a separate green hydrogen tax credit. Although governments will have to be mindful of “greenflation”—the sharp rise in the price of materials and minerals used in the creation of renewable technologies—we believe policy action and financing from both governments and capital market participants is essential. We also expect regulatory efforts that seek to incorporate sustainability metrics in financial markets—such as those made by the E.U. Sustainable Finance Disclosure Regulation (SFDR) and the E.U. Taxonomy as well as U.S. Securities and Exchange Commission (SEC) proposals—to increasingly have an impact on capital allocation.


Where Is Capital Being Committed?

Across public markets, we see notable energy transition investments being made, including equity financing of climate tech (i.e., green innovation), growing sustainable fixed income issuance and efforts by traditional energy providers to diversify their business models and decarbonize.


In 2021, two-thirds ($111bn) of all climate-tech investment came from public equity markets, driven by a strong pipeline of initial public offerings (IPOs), according to BloombergNEF. Wind and solar construction and energy equipment were the most popular companies for public equity investors, particularly IPOs and secondary offerings. Across private markets, climate-tech startups raised $53.7bn.3 Firms building electric vehicles, electric airplanes, e-scooters and batteries have been popular with both public and private investors lately, as companies look to raise large amounts to build manufacturing hubs. Looking further ahead, we believe clean energy companies, backup power technologies (natural gas, nuclear, batteries, hydrogen, etc.) and non-Russian commodity suppliers could emerge as the long-term energy transition winners across public equity markets.


It’s also worth highlighting then that the world’s 40 largest oil and gas producers and refiners spent $21bn on clean energy in 2021, a record year and a jump of 53% from 2020. Wind and solar make up the majority of spending for oil and gas companies, but investment has diversified across new technologies such as energy storage and hydrogen in recent years. Many traditional energy providers are also striving to cut their own emissions in more innovative ways by using technology to reduce methane emissions, for example. Ultimately, unless there are significant shifts in current government policies and breakthroughs in clean energy technologies, from a public markets perspective we believe both traditional and clean energy sectors will need to coexist for multiple decades before the world can rely fully on alternative sources of energy and, as such, the traditional fossil fuel value chain should be decarbonized as much as possible.


In the fixed income world, a deepening pool of sustainable bond issuance—both corporate and sovereign—is allowing investors to direct capital towards energy transition, and we expect this pattern to persist. Green bonds have become the most popular variety of sustainable debt, and issuance of green bonds doubled in 2021 to land at $621bn. Europe is still the most prolific market of all for green bond issuance, but Asia grew the fastest as entities there went from issuing just 14% of the green bond market in 2020 to 24% in 2021. As the move towards affordable, clean and secure energy progresses, we believe well-balanced fixed income portfolios need to take into consideration left-tail downside risks related to the energy transition and climate events—for example, a country’s emissions gap at the sovereign level—while also identifying right-tail investment opportunities in companies and countries that are well positioned for the transition.


Where Is Capital Needed?

Most public and private capital has fed into renewables and transport over the last decade, resulting in underinvestment in key areas including energy security, carbon removal technology, and end-of-life waste management. Importantly, we believe each industry could still benefit from capex spend on decarbonization, reshoring, and supply chain simplification. For countries to ensure energy security and successfully reshore energy supply—providing an uninterrupted availability of energy sources at an affordable price—and decarbonize power markets, we believe two key technologies will likely contribute to solving the energy storage challenge: utility-scale batteries and hydrogen. Each can have a complementary role, with batteries addressing intermittency and hydrogen addressing seasonality. While batteries, super-capacitors and compressed air can also support balancing, they lack the power capacity or the storage timespan needed to address seasonal imbalances. Hydrogen could therefore eventually emerge as the preferred solution for long-term energy storage required to balance the seasonal variation of power generation demand.4 But until the relevant energy storage infrastructure (networks and smart grids) and technologies (utility-scale batteries and hydrogen) are ready to support an increasingly electrified energy economy, both natural gas and nuclear power have a significant role to play to enable a smooth energy transition.


We also see underinvestment in technologies designed to reduce emissions in hard-to-abate sectors, such as cement and steel production. Despite the momentum we saw in 2021 as more carbon capture and storage projects were announced than ever before, last year did not see a rise in investment. Total carbon capture and storage funding is sensitive to large projects being financed, and BloombergNEF didn’t record any investments larger than $1bn.5 However, we see select examples of carbon capture technology providers working with factories to develop full-scale carbon capture, conditioning, compression, heat integration and storage facilities, dramatically reducing emissions from industrial plants around the world. Some are using thermocatalytic processes, reacting the CO₂ with hydrogen to make synthetic liquid fuels; others are offering carbon capture as a service using water and solvent as agents. But ultimately, we need to see more of this. Eventually we expect carbon capture costs to decline and believe that the sector will grow into a major global industry, playing an important role to reach net zero by 2050.


Another area in need of capital is recycling waste from end-of-life solar panels and batteries. Solar panels typically last no longer than 30 years before heading to landfill. But new efforts to recycle panels could reduce both the amount of waste produced and new material mined. This also applies to batteries, as battery energy storage systems require a thorough disassembly of the battery packs to extract the valuable materials (e.g., cobalt, nickel, lithium and manganese) from the cathode. These materials are not as easy to extract as the large metal plate in a lead-acid battery, and utility-sized battery storage units are large. Wind energy is also difficult—turbines are enormous and require logistical feats just to transport them to and from the installation site. Landfilling renewables removes valuable materials from the ecosystem, so we expect companies that can solve this challenge will benefit.


Finally, we believe the magnitude of demand for raw materials is underappreciated and the supply chain scale-up required to meet energy transition goals is greater than many people comprehend. For example, demand for lithium, nickel, manganese, cobalt and graphite—ingredients in lithium-ion batteries—may grow by as much as 10x in the next decade. An added layer of complexity is the location of the raw materials and the broader supply chain. Today, many of these raw materials are mined in places that may not be reliable sources for North American and European manufacturers in the long term. We think manufacturers on these two continents will push to localize, increase control of their supply chains and make batteries from alternative, more abundant minerals where possible.


"We regard energy security, carbon removal technology and end-of-life waste management as underinvested areas of the value chain."


Looking Ahead


Delivering energy that’s not only cheaper and cleaner but also more secure is a monumental challenge, but achieving this energy trinity is at the heart of the solution to climate change. To get there, we believe we need to see continued action from policymakers and incentives from governments that help scale up investments and innovation in areas ranging from energy security and carbon removal technology to end-of-life waste management. We expect the coming decades to be a period of ingenuity in the energy sector, which will offer a wide spectrum of potential opportunities to investors. While numerous ideas will inevitably fail, other groundbreaking technologies may offer significant investor upside. The economics have to work and policymakers will have to agree on a path to execution. Ultimately, the journey towards achieving the energy trinity will require discipline, patience and foresight—all hallmarks of astute investing.

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Goldman Sachs Global Investment Research. GS SUSTAIN Green Capex: Making infrastructure happen. As of October 2021.

S&P Global Market Intelligence. As of February 23, 2022.

BloombergNEF. Energy Transition Investment Trends 2022. As of January 2022.

Goldman Sachs Global Investment Research. The clean hydrogen revolution. As of February 2022.

BloombergNEF. Energy Transition Investment Trends 2022. As of January 2022.


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Esta presentación es estrictamente privada y confidencial, y no podrá ser reproducida o utilizada para cualquier propósito diferente a la evaluación de una inversión potencial en los productos de Goldman Sachs Asset Management o la contratación de sus servicios por parte del destinatario de esta presentación, no podrá ser proporcionada a una persona diferente del destinatario de esta presentación.

No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Date of First Use: August 4, 2022. 281175-OTU-1634104

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