Jaime Ramos Martin, portfolio manager of Aviva Investors’ climate transition strategy, and Rick Stathers, Aviva Investors’ climate lead, look at three themes that will shape the outlook in 2021.
1. Oil and gas companies are under even more pressure to define their future and what role they want to play in the energy transition.
After initially slow progress with the global climate agenda, 2021 feels as if it could be an important turning point. While the effects of the distinctive weather patterns brought by La Niña will fade after the early months 2021, meteorologists believe that could pave the way for another year of record-breaking temperatures.
A key focus will be how oil and gas companies define the role they plan to play in the energy transition
On the corporate side, a key focus will be how oil and gas companies define the role they plan to play in the energy transition. More companies chose to put their cards on the table in 2020, with companies like BP declaring plans to target net zero carbon in oil and gas production on an absolute basis by 2050 and to cut the carbon intensity of products sold.
But the vast majority - those controlling around 90 per cent of oil and gas output, according to the International Energy Agency - have made no such commitment. Are they going to buy into the vision for net zero or not? There will be more scrutiny of saying and doing. In a lagging sector, those choices could have implications, in terms of the cost of finance for companies and the risk of future asset stranding.
2. Demand for electric vehicles (EVs) continues to grow, with total cost of ownership reaching parity with internal combustion in more markets.
Despite the short-term impact of COVID-19, which caused sales of EVs to drop sharply in the early part of 2020, overall appetite continues to grow. Prior to the pandemic, sales of battery EVs and hybrids had been rising, but they still make up just a small part of all new vehicle sales, less than three per cent.
We expect more markets to reach that important crossover point, where an EV holds the cost advantage
One of the key factors inhibiting consumers is cost: the total cost of ownership of an EV has tended to be higher than a car with a conventional internal combustion engine. In 2021, we expect more markets to reach that important crossover point, where an EV holds the cost advantage.
More generous subsidies are part of the story. In France, for example, support for EV buyers was increased to €7,000 as part of the national COVID recovery plan announced in June. There are also plans to make the tax treatment of conventional cars with high fuel consumption and emissions much tougher. In Germany, for instance, the Climate Protection Surcharge is expected to increase substantially for high emitters.
Meanwhile, practical challenges are gradually being addressed. The UK has committed to speed up the transition to EVs by prohibiting sales of new conventional vehicles to 2030, and several governments will spin out new charging infrastructure as part of their stimulus programmes. Ultimately, this will make the experience of sourcing and owning an EV easier.
3. Developments in energy storage mean the prospect of grid stability from renewables is becoming a reality.
The lack of viable, large-scale energy storage has long been a critical issue inhibiting the scaling up of renewables. Recent developments in storage technology suggest part of the problem could be overcome, by bridging the inevitable peaks and troughs that arise during day-night cycles. By coupling renewables with large-scale energy storage, excess energy can be absorbed in peak times, retained for a period, then fed back into the grid.
Demand for battery storage will continue to grow
As the amount of installed renewable capacity increases, we expect demand for battery storage to continue to grow. The change is rapid - analysts are looking for compound growth of more than 30 per cent between 2021 and 2023, for example. This is likely to result in a need for upgrades in the electricity grid to manage distributor flows. We believe the investment needed to run the system safely and efficiently may have been underestimated.
Oil and gas companies that have dragged their feet on net zero commitments will face increasing scrutiny in 2021. EV demand is set to increase as costs come down, while positive developments in energy storage will enhance the prospect of grid stability from renewables. These could be defining themes for the climate transition in 2021.