A senior figure at Schroders discusses the rising need for energy security and what this means for the energy transition movement, both in conventional and renewable energy.

Geopolitical instability and deglobalisation have increased the need for local energy sources, argues Schroders, the UK-listed wealth and investment house.

Instability - highlighted by wars in Ukraine, Gaza, the Red Sea and elsewhere - has laid bare the risks of interconnectedness or globalisation, particularly when it comes to energy, Mark Lacey, head of thematic equities at the firm, said in a note. The conflicts in Europe and the Middle East have threatened the supply of oil and gas, with the COVID-19 pandemic being the start of a continuing period of global disruption, dislocation and bottlenecks, he continued.

The strategist laid out broad themes in the energy market, and the forces affecting it, in a commentary suggesting how investors should be positioned. The energy market remains a key investment area for wealth managers. This news service recently interviewed  Augusta Investment Management, a UK organisation, about power purchase agreements as a way to tap into the space, for example.

Disruption and changes to global supply chains - hastened by the pandemic and West-East trade tensions, also play into the story, Lacey said. 

Dynamic
This deglobalisation dynamic – seen as part of the 3D Reset [deglobalisation, decarbonisation and demographics] – has hastened the need for governments and populations to quickly identify secure energy sources with low geopolitical risk i.e. conventional supplies which are closer to home or located in stable, democratic regimes. 

As a result, the need for energy security – how to obtain, transport, and store energy in a way that is resilient, safe, and affordable – has risen to the fore. It’s a complex near- and long-term economic as well as a fraught political question, both domestically and globally, he said. At a domestic level, the need for self-reliance in relation to energy supply is growing. Governments are using policy to promote local energy production and reduce dependence on global energy supply chains.

Lacey highlighted how diversification and energy security have risen to the top of government agendas. It’s about accelerating energy transition from a climate need perspective, rather than being left behind from an energy security perspective, he continued. These are the twin drivers.

In the short term, energy security and locking in various methods of supply via renewables will be rolled out over the coming years.

There is a series of overlapping, intertwined factors that bear some level of responsibility for these heightened concerns. For example, underinvestment has caused reduced spare capacity, while increased demand for energy in both developed and emerging countries has accelerated, Lacey said. Decarbonisation is another key factor in this rush for energy security, although it comes with a longer timeframe. Sustainability and resiliency can go hand in hand when it comes to energy because decarbonising and electrifying the energy system is a way of ending energy reliance whilst aiming for net zero emissions, he said.

As part of countries’ efforts to decarbonise, Lacey thinks that growth in well-established industries will increase such as wind, solar, and the grid as well as newer technologies such as battery storage, carbon capture, hydrogen and nuclear power. Grid infrastructure is also needed to cope with increased intermittent electricity load from renewables.

As certain traditional methods of power generation are being phased out for – for example coal plants built in the 1950s are winding down – there is a need for new sources to fill the gap, he continued. Lacey thinks that renewables, such as wind and solar, will have to be stepped up, requiring serious levels of investment. The added benefit of renewables – which are different from oil and gas – is that oil and gas assets have typically been found in inaccessible or geopolitically difficult regions. Most countries which have access to wind or solar, can own those assets themselves: this is highly attractive from an energy security point of view, he said.

In conclusion, Lacey believes that developing a domestic renewable energy supply could be far less susceptible to geopolitical tremors such as war, terrorism, and global health events than the status quo. However, it may require committed upfront capital on a scale that has never been seen before, he said.

A hybrid approach is needed
The structural measures are all about the energy transition: hastening the renewable build-out, electrifying heating through the rollout of heat pumps, increasing the short-term targets on green hydrogen, and addressing the energy efficiency of buildings. These markets can’t be accelerated overnight – for example, it takes five to 10 years to develop an offshore wind farm – but there now seems to be real push to clear the procedural hurdles that have been slowing these trends.

The decision of how to pursue energy security isn’t a binary one, he said. It’s not a question of conventional or renewable. Instead, it needs to be a hybrid approach. From Lacey's point of view, leading conventional energy companies are an important part of the solution, rather than part of the problem and, with the momentum of the decarbonisation trend, these businesses will have to display their ability to adapt accordingly to fast-growing, sustainable areas.

Lacey thinks the risks of a chaotic world will not lessen any time soon. As such, energy security will remain a significant concern for governments, populations, and investors alike. He thinks that the way forward will likely require both tactical and strategic steps – ones to address immediate needs while factoring in long-term trends, such as decarbonisation and deglobalisation.

To overcome the shortfall in current energy markets, achieving greater energy security will take significant investment across a wide range of fields and many years, Lacey concluded.