The Lollapalooza Effect or a Further Tailwind for Clean Energy?


Q2 2022

6th May | 5 mins

Key takeaways

  • For the Clean Energy theme to really take off, which stars must align? 
  • Historically, when fossil fuel prices have risen, consumers have started to take EVs and clean energy alternatives more seriously.
  • Following Russia’s invasion of Ukraine, oil prices reached $120 a barrel. We ask, would oil reaching $150 or $200 accelerate the world’s transition to clean energy?
  • We believe that the smart money today could be on investments such as the NASDAQ® Clean Edge® Green Energy Index.

2021 really was a year of firsts for the Clean Energy theme.

We saw record volumes of new capital deployed to support the transition to a lower-carbon economy, a record number of EVs sold (up 26% compared to last year, rising to 6.4million units1), record contributions to the power grid from zero-carbon renewable sources of power, and concrete government support following the COP26 event.

Still, might the missing piece of the Clean Energy jigsaw be high oil prices?

The Lollapalooza Effect, coined by one of the greatest investors on this planet, Charlie Munger, describes when different biases layer and dovetail to sway a particular course of action.

Some investors are forever searching for that positive catalyst, however tenuous, to help propel their own investment thesis. Similarly, investors will be familiar with headwinds which can do the opposite.

For thematic investors, interest rates have acted as a pretty robust headwind in recent months. However, should the Federal Reserve signal a stop to any interest rate rises for the next two years, you’d imagine this would be a positive catalyst for growth stocks (and subsequently the technology sector).

So let’s take clean energy, what needs to be in place for this theme to work? Some of the positive long-term tailwinds include the need for a cleaner future and ultimately a less polluted planet as well as global energy security.

But what about the shorter-term catalysts? Historically, when fossil fuel prices have risen, consumers have started to take EVs and clean energy alternatives more seriously – not solely for their environmental benefits but in the hope of eventually saving money.

We saw this back in 2008, when oil nearly broke the $150 a barrel mark, subsequently boosting investment in renewable energy capacity.

Brent Crude Oil Prices vs Renewable Energy Sources




Shifting to today, oil prices skyrocketed to over $120 per barrel in the wake of Russia’s invasion of Ukraine and the resulting international backlash.

Could this be just the beginning of a massive energy crisis?

Russia is the world’s largest exporter of oil to global markets.

As the world (particularly Europe) attempts to wean itself off Russian oil, it might have to deal with an emerging energy crisis. Further, the market’s dramatic reaction to Moscow’s invasion of Ukraine seems to point to a potentially larger issue: the importance of the U.S., the EU and others working together to confront the climate crisis while taking global security into account. Transitioning to clean energy may also help avoid future wars and move beyond the era of fossil fuels in favour of renewable energy, storage and the electrification of everything.

In response to Russia’s invasion, a number of European countries are speeding up their energy transition. Germany, in a historic move2, has turbocharged its transition by moving forward its plans to be 100% renewable by 15 years, to 2035 – moving them in line with both US and UK.

The German government wants 80% of power to come from renewables as soon as 20302.

So theoretically, would oil reaching $150 or $200 a barrel accelerate the world’s transition to clean energy? Historically, when oil has been “cheap”, the case for clean energy is that little bit harder to make, but could higher oil prices be the catalyst for clean energy solutions, or is this just part of the lollapalooza effect?

The short answer is, we don’t know yet.

We do believe that rising oil (or even highly volatile prices) should quicken the pace of electrification of the transport sector and also accelerate the transition to clean energy sources. Even before the Ukraine crisis, solar PV was the cheapest source of electricity in history3.

However, with some of the big oil companies currently enjoying the financial rewards of the high prices of fossil fuels, governments and major players could well play the “long game”; further boosting their investments into clean energy. For instance, BP – upon announcing its highest annual profit in eight years, stated it would increase spending on low-carbon energy to 40% of total spending by 2025 and 50% by 20304. Elsewhere, ExxonMobil announced a 45% increase in its budget for drilling and other activities this year5.

Finally, as the world battles with the spectre of inflation, it’s worth noting that green energy has the ability to help bring down energy and power prices. We know the elements (sun & wind) don’t charge for an increase in the unit of energy, and as mentioned above, the cost of producing power from solar and wind has dropped dramatically in recent years. In contrast, from 1970 to today, the price of oil has gone up roughly 30x.

Aside from technological advances, we believe that higher oil and gas prices are the most effective positive catalysts for change in demand-side behaviour and ultimately the clean energy space.

The smart money today could be on investments such as the NASDAQ® Clean Edge® Green Energy Index.

Investors should look at the whole picture of the clean-energy economy, allocating to those companies that are manufacturers, developers, distributors, and/or installers of clean-energy technologies.

However, amid this energy inflation and heightening oil price, we, the average Joe can only plug in our EV/Hybrid and install some solar panels to lessen the pain. While the EV subsector has some tasty valuations, solar doesn’t. The NASDAQ® Clean Edge® Green Energy Index allocates one third of its portfolio to both the EV and Solar PV space6, playing the demand and supply sides of the clean energy equation.

Plus, we see decent valuations of the clean energy space following a tough 2021, which is acting as a useful catalyst for a potential rally this year.

Sources:
1 https://www.greencars.com/post/how-many-electric-vehicles-sold-in-2021

2 https://www.reuters.com/business/sustainable-business/germany-aims-get-100-energy-renewable-sources-by-2035-2022-02-28/

3 https://www.carbonbrief.org/solar-is-now-cheapest-electricity-in-history-confirms-iea

4 https://www.reuters.com/business/energy/bp-records-highest-profit-eight-years-2021-2022-02-08/#:~:text=While%20maintaining%20its%20plan%20to,2025%20and%2050%25%20by%202030

5 https://qz.com/2119520/exxonmobil-plans-to-boost-spending-on-oil-drilling-45-percent-in-2022/

6 First Trust as at 27th March 2022

References to specific companies should not be construed as a recommendation to buy or sell shares or other financial instruments issued by those companies, and neither should they be assumed profitable. You should consider the fund’s investment objectives, risks, and charges and expenses carefully before investing.

"MAJOR DISTURBANCES AND UNUSUAL OCCURANCES" ON US GRID
2000 to 2021

Latest thinking

Turning our latest rigorous research into
insights and advice.

View all

×

Sign up to our mailing list

Keep up to date on the latest news and fund developments in the world of thematic investing.

×

Request a callback

Complete your details below and a member of First Trust will be in touch.