The energy revolution is happening whether we want it or not

It’s become impossible to ignore extreme weather phenomena. In Australia, uncontrollable bushfires, storms and floods destroy people’s homes and possessions far too often.

The debate in Australia about moving to clean energy – to minimise the damage caused by climate change – can feel challenging given our economy’s reliance on the traditional energy and mining sectors.

But investors can’t ignore a megatrend that’s transforming consumer, corporate, and government behaviour worldwide. The energy revolution is happening around us whether we want it to or not.

A 2018 survey by the Edison Electric Institute found that 70% of US consumers wanted 100% renewable electricity ‘in the near future’, while 51% said they wanted it even if it raised their energy bills by 30%.

According to the Climate Group RE100 initiative, more than 260 major companies around the world have committed to 100% renewable energy. These include Google, Ikea, Apple, Facebook, Microsoft and Coca-Cola.

Governments elsewhere are listening. The Biden administration in the US has pledged to invest US$400 billion (A$527.5 billion) over 10 years in clean energy and innovation. Even China has pledged carbon neutrality by 2060.

Meanwhile, demand is redirecting investment flows. A recent survey by Octopus Renewables suggests that planned global institutional investment in renewables is set to shift some US$742.5 billion into the sector over the next decade. This number will only increase as the energy revolution gathers pace.

Renewable energy

An important way to reduce the carbon emissions behind rising temperatures is to change our primary energy sources. That means burning less ‘dirty’ fuels such as coal and oil, and relying more on renewable energy sources, such as hydro (water), geothermal (underground heat), solar and wind.

These are the ‘awesome foursome’, according to ASX-listed Mercury (ASX: MCY), a New Zealand power generator and retailer whose energy comes from 100% renewable sources.

Mercury operates nine hydro and five geothermal power stations along the Waikato River, a tributary of Lake Taupo – a body of water the size of Singapore in the caldera of an ancient volcano. It is also developing wind farms elsewhere in New Zealand.

Mercury supplies electricity to the North Island, where most of the country’s people (and electricity demand) reside. Although more expensive to build, hydro and geothermal plants are cheaper to run than coal- and gas-powered facilities. Dams allow water to be stored for release when demand, and electricity prices, are higher.

Long-term demand and supply dynamics are very much at play here. Energy demand is expected to increase in New Zealand, driven by the electrification of transportation and growth in certain industrial processes.

Energy supply, on the other hand, has stabilised following a period of industry consolidation after the 2007/08 global financial crisis. Mercury is sitting in the sweet spot created by this dynamic.

What does this mean for investors?

Mercury is a well-run firm, with a sound balance sheet, that plays an important role in New Zealand’s plans for a low-carbon future. It is a leading renewables power company in a country where some 85% of power generated comes from green sources.

Its retail strategy has been pivoting towards selling electricity to commercial and industrial clients, rather than residential customers. This means longer-term contracts and healthier profit margins.

The business has delivered better investment returns and operating margins than non-renewable energy generators and retailers in the Australasian market. With plans to invest more into wind farms, its earnings potential remains robust. Meanwhile, long-term investors have enjoyed 12 consecutive years of dividend growth.

Final thoughts…

Companies such as Mercury are crucial if countries are to have any chance of completing the tough transition to a low- or net-zero-carbon future. Economies that are powered by clean energy will form the foundation of any climate change-mitigation plan.

Fossil fuels aren’t going away overnight. But for investors wanting to take a long-term view on their portfolio, clean energy has to be in the mix.

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Head of Australian Equities
abrdn

Michelle joined abrdn in 2004. Previously, Michelle worked for Watson Wyatt as a Quant Analyst. Michelle holds a BA in Applied Finance and Commerce (Marketing) from Macquarie University, Sydney and is a CFA® charterholder.

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