Q&A with Mark Lewis, Chief Sustainability Strategist of BNP Paribas Asset Management

Mark Lewis, Chief Sustainability Strategist of BNP Paribas Asset Management, talks to Perspectives about electrification and why the energy transition requires new thinking.

Decarbonising the energy system depends on electrification. But is there a “killer app” that will supercharge this transition?

Electrification with renewables is going to be the main tool to achieve net zero emissions by 2050. There are two points to consider here. The first is that green hydrogen will need to be 10-20% of final energy demand in 2050 to get to net zero. This is produced using renewable electricity, so directly or indirectly, green hydrogen is all about renewables.

The second point is that electric vehicles will be absolutely key. What electric vehicles enable is a head-to-head battle between oil molecules and solar and wind electrons. That completely changes the game for the oil companies. Electric vehicle uptake is going to grow bigger – faster – than people were thinking even two years ago.

It’s going to take three decades to decarbonise Europe’s energy system. But markets price in change as soon as they see credible evidence – and that’s really what’s happened over the past 12 months. The oil companies are suddenly caught in the headlights of the oncoming electric vehicle.

Things are changing pretty fast. Why now?

The single most important factor is that the economics of renewables are now mainstream. Once renewables can compete without any need for subsidies, which is now the case, then all you need is for the cost of purchasing an electric vehicle to fall to parity with a standard gasoline or diesel vehicle. Running an electric vehicle is much cheaper than running a petrol vehicle.

There is also broader social change occurring. Millennials and Generation Z have very different attitudes and I think this will have an enormous impact as they reach positions of influence in organisations and in politics.

Electricity consumption in Europe has been static for years. Do you expect demand to start trending up again?

Absolutely. You are going to see more electrification of mobility and potentially a green hydrogen revolution. This is going to require a lot more electricity and you’re going to need to build the infrastructure. A lot of that will be offshore wind, so that will require cabling and supporting assets. There will also be a need for grid coordination. In the case of hydrogen electrolysers, some will be built at the point of electricity production but some will be built at the point of hydrogen consumption, so you will need to get the electricity from the point where it is generated to the point of use – again, there is a role for grids and distribution networks.

“ Electric vehicle uptake is going to grow bigger – faster – than people were thinking even two years ago. ”

Mark Lewis

Chief Sustainability Strategist of BNP Paribas Asset Management

What does this mean for grid operators?

It’s important to remember that the network overall in Europe has so far proved a lot more resilient and adaptable than people thought it would ten years ago. Today, you have Germany getting close to 40% of its electricity from intermittent solar and wind – yet Germany still has the most reliable grid pretty much anywhere in the world. For one of the world’s largest exporters of manufactured industrial goods, this is remarkable.

But there is still the need for improvement across Europe’s electricity industry. According to one estimate, total capex will need to be in the order of €4.8 trillion to achieve net zero by 2050. Half of that needs to go on strengthening the grid.

There is clearly a huge opportunity for investors. This infrastructure is attractive because you get decent rates of return on a risk-adjusted basis: it’s a safe business and it’s got growth potential.

Investors are waking up to this, which is why we’re seeing the kind of valuations that we’re getting in the market for anything that’s renewable or linked to the energy transition. You have a rare combination of high growth prospects and low risk. Those kinds of investment opportunities don’t come along very often.

What kind of targets are investors looking at?

All of the action in energy markets is perceived as being upstream. If you think of the oil and gas industry, for instance, all the glamour stories are around oil rigs in the North Sea or the Gulf of Mexico.

It’s the same with renewable energy. The market pays a lot of attention to production facilities such as wind and solar farms. But not so much attention has been focused on grids that are going to be transporting the renewable electricity.

Yet the grid is one of the really big capex opportunities – and it has not really received the same degree of attention. I think it’s partly a question of getting the market to focus on the valuation opportunity. That’s not to say that the grid companies are massively undervalued, it’s simply to say that they have been overshadowed to some extent. The capex growth story for grids is now coming into view – and it will be a very big story over the next decade.

Why invest in grids?

Efficiently run grid companies offer significant value creation possibilities at a fair risk-adjusted rate of return. That is a very attractive proposition, particularly for long-term investors. You are looking at an investment opportunity here that stretches out all the way to 2050. That matches very nicely the liabilities profile of a pension fund.

Then I think there will be higher value-added activities around the backbone of the network. If you think of the grid as the skeletal framework and the value-added services around it as the nervous system, you can’t function as a living organism without both. But clearly, it’s the central nervous system that provides the higher value-added activities.

Given the increasing role that electrification is going to play in our lives, these higher value-added services are going to be a very competitive market. There is going to be massive scope to create value from optimising the way consumers use energy. Digital services, smart grids and smart meters offer enormous scope to create value.

“ You have a rare combination of high growth prospects and low risk. Those kinds of investment opportunities don’t come along very often. ”

Mark Lewis

Chief Sustainability Strategist of BNP Paribas Asset Management

How important is private sector investment in delivering the energy transition?

It’s key. But it needs to be catalysed. Improving the resilience of the grid is pretty straightforward. You incentivise private sector investment with appropriate risk-adjusted returns. In the context of pension funds and other investors, there should be a ready appetite for that kind of capex.

If you’re then talking about making the grid more agile and flexible as well, inevitably, that’s a private sector game. And it’s a disruptive game that will attract venture capital initially, private equity or the big disruptors such as Google, Microsoft and Amazon. And others we’ve never heard of before will see the opportunity.

What are the challenges and opportunities for grid operators?

Disruptive technologies are disruptive precisely because incumbent players never go out to disrupt their own businesses – the disruption comes from outside. I’m not saying the disruptors are coming in to create instability to the electrical system. But they are going to create a lot of tremors.

That’s not to say that traditional operators can’t form partnerships or joint ventures with the innovators – there is obviously scope for this. But anybody who’s observed the impact that renewable energy has had over the last 15 years would be derelict in their duty if they did not think through the implications of disruptions in their industry. Disruption is coming whether they like it or not.

How are environmental, social and governance (ESG) criteria shaping the investment agenda?

By the end of the year, with a fair wind, we’re going to have a legally-binding target for net zero by 2050 under the European Climate Law. So it’s not just going to be an appetite for low-carbon investment in Europe, it’s going to be a legal requirement.

Any company that is not thinking about how it gets its business model to net zero by 2050 is failing in its fiduciary duty to its shareholders once that law is passed. The economic logic is already there. There’s going to be a legal imperative. There’s also a generational shift happening. All of these things are pushing in the same direction.

Where there is a potential problem is governments being a bit too slow to take subsidies away from fossil fuels. And there’s a drag effect from fossil fuel companies thinking they can go for just one more round of big investments in oil and gas.

“ The capex growth story for grids is now coming into view – and it will be a very big story over the next decade. ”

Mark Lewis

Chief Sustainability Strategist of BNP Paribas Asset Management

Do we need to change the way we think about long-term investment?

The one thing we know is that the carbon price has to reach a level that enables the European Union to get to net zero at some point between now and 2050. From an investment perspective, that means you need to start thinking from the future back to today, rather than from today to the future.

We should be thinking about what carbon price is needed for green hydrogen to be competitive versus natural gas and oil. And what market price is needed for green hydrogen to be competitive against grey hydrogen as an industrial feedstock.

I came to the conclusion that if we want to reach the EU’s interim target of producing 10 million tonnes of green hydrogen a year by 2030, then we will need a carbon price of anywhere between €80 and €100 a tonne by 2030.

You have to assume that the EU will do whatever it takes to deliver a low-carbon future. So in Europe at least, I’m quite confident that 10 to 15 years down the line we will have a competitive green hydrogen industry that is on its way to becoming competitive with natural gas and petroleum products.

What does the shift to renewables mean for energy costs?

The thing that always strikes me when you compare renewable energy with fossil fuel energy is the inherently inflationary nature of fossil fuels. You deplete the easiest-to-access resources first, so you’re forced to go up the cost curve all the time.

By contrast, renewable energy is inherently deflationary. It doesn’t have an upstream component, it’s just infrastructure. And that means it’s a pure economies of scale business with technology improvements on top. Far from being too expensive, renewable energy brings us into a new age of abundant and cheap energy.

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