Utilities have long been perceived as slow growing, defensive stocks within a portfolio. We believe we are on the cusp of a change here.
COP 26 to be held in Glasgow at the start of November, aims to reinforce the global net zero agenda, which has been given fresh impetus as a tool for governments to drive economic recovery post COVID-19.
This is without doubt an ambitious target, but it will kickstart a 30-year phase of structural growth that involves a significant step up in investment across almost every industry. The electrification of everything is the most profound change and as such, utilities the most obvious beneficiary from a stock market perspective.
We expect the net zero agenda to drive a step change in the growth profile of utilities, not fully appreciated by the market. Moreover, the EU Green Deal positions Europe as the clear global front runner which, if successful, can be used as a blueprint. European utilities can leverage their strong global position to drive further growth.
Outside of utilities, we see the emergence of similar businesses within European oil majors as potential drivers of value creation. They too can benefit from the EU Green Deal.
What is net zero?
Net zero consists of 4 main steps. By far the largest components involve the decarbonisation of power and the electrification of the economy. This will be predominantly achieved by shifting to renewable power generation.
Currently, within the EU renewables are 43% of power generation and electricity is currently 20% of final energy consumption. This will need to shift considerably. Clearly, we are still in the foothills of this change. The recent collapse in costs has made a faster rate of penetration possible as fossil fuels are no longer competitive.