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How Low Can You Go?!


Policymakers globally are increasingly supportive of the climate transition. Europe recently announced its ambitious plan to reduce emissions by 55% by 2030, in line with its plan for climate neutrality by 2050. China has committed to carbon neutrality by 2060; Japan and South Korea by 2050. More than 50% of global GDP is now covered by a net-zero commitment.

In the corporate world, the number of companies committing to net zero doubled in 2020 alone. While there continues to be a role for policy in making the net-zero transition investable, as low carbon technology becomes more economically viable, the economics are increasingly driving the case for decarbonization.

Take the trajectory of the power sector, responsible for the largest share of fossil fuel consumption – accounting for over a third of total global demand. In 2019, solar and wind reached 67% of new power capacity globally (according to Bloomberg New Energy Finance) while fossil fuels fell to 25%. The economics are becoming irrefutable – solar module prices have fallen more than 90% since 2008. Wind turbine prices have fallen 37% in the same period. In some regions, the economics have moved so sharply toward decarbonization that if policy intervention were to be pulled tomorrow, the sector would most likely simply continue.

The increasing number of corporate Power Purchase Agreements are also testament to a booming demand for clean energy. July 2020 saw the largest to-date renewables corporate Power Purchase Agreement globally between the world’s largest semiconductor foundry based in Taiwan, and a Danish sustainable energy company.

The battery sector tells a similar story. The switch to electric vehicles continues to accelerate, driven by regulation and falling battery costs. A recent report from Carbon Tracker states that costs are falling by nearly 20% for every doubling of capacity (the “learning rate”), and are beginning to reach cost-price parity with conventional car engines.

One of the largest oil companies in the world hit the headlines last week with its statement that its total oil production peaked in 2019 and will now gradually decline year on year – an increasingly common view among both companies and environmental think tanks.

The entire fossil fuel system is being disrupted by the forces of cheaper renewable technologies and more aggressive government policies. In one sector after another these are driving peak demand, which leads to lower prices, less profit, and stranded assets.” – Carbon Tracker report.

equipment price and cumulative deployment, 2010-2020

All this doesn’t mean fossil fuels will go away on their own, regulation is necessary to ensure a just transition at the pace required. But, we believe this disruption presents new, exciting opportunities for investors. 

 

CRN: 2021-0303-8993 R

The opinions and views of this commentary are that of Aegon Asset Management and are not necessarily that of Advisors Asset Management.

AAM was not involved with the preparation of the articles linked to in this post and the opinions expressed in these articles are not necessarily those of AAM.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.


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