The war in Iran and escalating tensions across the Middle East have triggered fresh turmoil in global energy markets. For many governments and businesses these events echo the shock that followed Russia’s invasion of Ukraine.
Securing a stable and affordable energy supply has once again jumped to the top of the agenda, prompting a scramble to diversify away from fossil fuel supply routes and to reassess long-term energy strategies.
Beyond this immediate crisis, a deeper structural shift has taken place that matters for investors. The difference this time is that renewables have become more affordable in the past few years.
On a levelized cost basis, new wind and solar projects are now cheaper than gas, coal and nuclear plants. The time it takes to bring these clean energy sources to market has shortened considerably: less than a year to build a utility-scale solar farm compared with the many years required for nuclear and fossil alternatives.
Of course, renewables’ drawbacks remain. They are an intermittent source of power, generating energy only when it’s sunny or windy. This means their average output over time is well below their installed capacity, resulting in lower load factors than conventional plants that can run all day.
But advances in batteries and other storage technologies are allowing renewables to narrow this gap, integrate more smoothly into power systems and improve their ability to match supply with demand.
This marks a turning point in the ‘energy trilemma’ challenge of balancing three, sometimes competing challenges: affordability (accessible pricing), security (having a reliable supply) and sustainability (avoiding climate change impacts).
Fossil fuels used to be seen as the default answer: relatively cheap, easy to ship and store, but clearly dirty. Renewables, by contrast, were clean but costly, subsidy-dependent and less reliable because of their variable output.
Today, that picture has flipped. Fossil fuel prices have become more volatile and less predictable, while the war has served as a reminder of the structural security risk energy importers face when they are reliant on just a handful of producers located in geopolitically sensitive areas.
At the same time, renewables’ security profile has improved, thanks to advances in storage and grid flexibility. This leaves renewables uniquely positioned to address all three sides of the energy trilemma and to become the default energy source of choice over fossil fuels.
What’s more, switching to solar and wind power, often generated within borders, allows governments to replace imported fossil fuels with home-grown power over time.
Europe’s power system, for example, has remained resilient through the latest energy shock, thanks to efforts since 2022 to cut dependence on imported gas and expand wind and solar.
For the first time, wind and solar alone generate more electricity than fossil fuels in the region. Adding hydro lifts renewables above 50% of the power mix.
No grid, no transition
For investors, an attractive way to tap into this shift is by funding the backbone of the power system – from grids to the equipment and technologies that keep an electrified economy running, rather than just investing in solar panels and wind turbines.
They include power grids and network infrastructure, electric components, heating and cooling systems and sustainable building materials – where long-term structural growth is most visible.
Grids, which deliver energy from producers to consumers, offer opportunities to invest in tangible and hard assets with well-established business models.
European grids – one of the world’s largest systems spanning 36 countries -- are due for urgent overhaul. After years of underinvestment, around 40% of them are over 40 years old.
An ageing grid and interconnectors mean higher losses and more constraints on connecting new renewables, increasing the risk of outages – a typical bottleneck for the clean energy transition.
The European Commission estimates investments of over €580bn are required to meet electricity demand, which is expected to increase by 60% by the end of the decade. A similar age profile in the US leaves the grid ill-equipped for a world of electric vehicles (EVs), digitalisation and a push for reindustrialisation.
Even before the war, tech giants such as Amazon, Google and Microsoft – Europe’s largest electricity consumers – were calling on the EU to accelerate electrification and improve the continent’s power infrastructure as grid congestion and slow connection threaten decarbonisation and industrial competitiveness.
Listed utility companies offer an attractive route for investors to tap into this trend. This is because utilities are relocating capital heavily toward networks in what could herald a multi-year investment cycle.
Spain’s Iberdola, for example, plans to allocate two-thirds of its capital spending in upgrading networks, calling the investment a “once-in-a-century opportunity”.
Similarly, electric equipment makers, which provide the nuts and bolts of energy infrastructure, should also benefit. These companies are already experiencing higher demand for products such as transformers, switchgear, cables and other components needed to reinforce and expand power grids.
The American-Irish manufacturer Eaton, for example, has seen its order backlogs multiply by 5x since 2020.
Components and energy efficiency
Responding to rising energy costs, businesses are also trying to increase energy efficiency. This makes sense as heating and cooling already account for up to 80% of household energy use and a large share of commercial building operating costs.
Companies supplying energy-efficient technologies – or heating, ventilation and air conditioning (HVAC) solutions – are well placed to see higher growth.
As a silver lining for higher and volatile energy prices, payback periods for HVAC investments are shortening. The case is illustrated by a recent retrofit of 55 Water Street in New York – one of the largest commercial buildings in the city.
Trane Technologies, which led the project, installed an advanced thermal system, which is three times more efficient than traditional heating methods, lowering overall energy intensity by nearly a fifth, cutting emissions and saving the building management $1.5m in annual utility costs.
Elsewhere, companies providing light and sustainable materials stand to benefit from a wave of reindustrialisation, where companies have announced an estimated $3trn of megaprojects globally aimed at reshoring manufacturing, expanding data centre and AI computing capacity and reinforcing physical infrastructure.
As the Gulf war exposes the security risks of relying on fossil fuels, and renewables become cheaper and quicker to roll out, the balance of the energy trilemma is shifting.
Clean power now offers stability at lower cost, making it the clear choice for governments, businesses and investors. Today’s crisis, therefore, could spur a new wave of investment in clean energy.
Jennifer Boscardin-Ching is senior client portfolio manager of thematic equities at Pictet Asset Management. The views expressed above should not be taken as investment advice.