In the latest edition of our Big Debates miniseries, Morgan
Stanley Research analysts discuss the factors that will shape the
global energy market in 2025 and beyond, and where to look for
investment opportunities.
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the
Market. I'm Michelle Weaver, U.S. thematic and Equity strategist
at Morgan Stanley.
Devin McDermott: I'm Devin McDermott, Head
of Morgan Stanley's North America Energy Team.
Mike Canfield: And I'm Mike Canfield, Head
of the Europe Sustainability Team,
Michelle Weaver: This is the second episode
of our special miniseries, Big Debates, where we cover key
investment debates for 2025. Today, we'll look at where we are in
the energy transition and some key investment opportunities.
It's Monday, January 13th at 10am in New York.
Mike Canfield: And 3pm in London.
Michelle Weaver: Since 2005, U.S. carbon
emissions have fallen by about 15 percent. Nearly all of this has
been tied to the power sector. Natural gas has been displacing
coal. Renewable resources have seen higher penetration. When you
look outside the power sector, though, progress has been a lot
more limited.
Let me come to you first, Devin. What is behind these trends, and
where are we right now in terms of the energy transition in the
U.S.?
Devin McDermott: Over the last 20 years
now, it's actually been a pretty steady trend for overall U.S.
emissions. There's been gradual annual declines, ratcheting lower
through much of this period. [There’s] really two primary
drivers.
The first is, the displacement of coal by natural gas, which is
driven about 60 percent of this reduction over the period. And
the remainder is higher penetration of renewable resources, which
drive the remaining 40 percent. And this ratio between these two
drivers -- net gas displacing coal, renewables adding to the
power sector -- really hasn't changed all that much. It's been
pretty consistent even in this post COVID recovery relative to
the 15 years prior.
Outside of power, there's been almost no progress, and it doesn't
vary much depending on which end market you're looking at.
Industrial missions, manufacturing, PetChem -- all
relatively stable. And then the transport sector, which for the
U.S. in particular, relative to many other markets and the rest
of the world, is a big driver transport, a big driver of
emissions. And there it's a mix of different factors. The biggest
of which, though, driving the slow uptick in alternatives is the
lack of viable economic options to decarbonize outside of fossil
fuels. And the fact that in the U.S. specifically, there is a
very abundant, low-cost base of natural gas; which is a low
carbon, the lowest carbon fossil fuel, but still does have carbon
intensity tied to it.
Michelle Weaver: You've also argued that
the domestic natural gas market is positioned for growth. What's
your outlook for this year and beyond?
Devin McDermott: The natural gas market has
been a story of growth for a while now, but these last few years
have had a bit of a pause on major expansion.
From 2010 to 2020, that's when you saw the biggest uptick in
natural gas penetration as a portion of primary energy in the
U.S. The domestic market doubled in size over that 10-year
period, and you saw growth in really every major end market power
and decarbonization. There was a big piece of it. But the U.S.
also transitioned from a major importer of LNG, which stands for
liquefied natural gas, to one of the world's largest exporters by
the end of last decade. And you had a lot of industrial and
petrochemical growth, which uses natural gas as a feedstock.
Over the last several years, globally, gas markets have faced a
series of shocks, the biggest of which is the Russia-Ukraine
conflict and Europe's loss of a significant portion of their gas
supply, which historically had come on pipelines from Russia. To
replace that, Europe bought a lot more LNG, drove up global
prices, and in response to higher global prices, you saw a wave
of new project sanctioning activity around the world. The U.S. is
a key driver of that expansion cycle.
The U.S. over the next five years will double; roughly double, I
should say, its export capacity. And that is an unprecedented
amount of volume growth domestically, as well as globally, and
will drive a significant uptick in domestic consumption.
So that the additional exports is pillar number one; and pillar
number two, which I'd say is more of an emerging trend, is the
rise of incremental power consumption. For the last 15 years,
U.S. electricity consumption on a weather adjusted basis has not
grown. But if you look out at forecasts from utilities, from
various market operators in the country, you're now seeing a
trend of growth for the balance of this decade and beyond tied to
three key things.
The first is onshore manufacturing. The second is power demand
tied to data centers and AI. And the third is this broader trend
of electrification. So, a little bit from EV's, more electric
appliances, which fit into this decarbonization theme more
broadly. We're looking at now an outlet, this is our base case of
U.S. electricity demand growing at just shy of 2 percent per year
over the next five years. That is a growth rate that we have not
seen this century. And natural gas, which generates about 40
percent of U.S. power today, will continue to be a key player in
meeting this incremental demand. And that becomes then a second
pillar of consumption growth for the domestic market.
Michelle Weaver: And we're coming up on the
inauguration here, and I think one really important question for
investors is what's going to happen to the energy sector and to
renewables when Trump takes office? What are you thinking here?
Devin McDermott: Yes. Well, the policy that
supports renewable development in the U.S., wind and solar
specifically, has survived many different administrations, both
Republican and Democratic. And there's actually several examples
over the last 10 to 15 years of Republican controlled Congress
extending both the production tax credit and investment tax
credit for wind and solar.
So, our base case is no major change on deployments, but also
unlikely to see any incremental supportive policy for these
technologies. Instead, I think the focus will be on some of the
other major themes that we've been talking about here.
One, there's currently a pause on new LNG export permits under
the Biden administration that should be lifted shortly post
Trump's inauguration. Second, there are greenhouse gas intensity
limits on new power plant and existing power plant construction
in the U.S. that will likely be lifted, under the incoming Trump
administration. So, gas takes a larger share of incremental power
needs under Trump than it would have under the prior status quo.
And then lastly. Consistently over the last few years,
penetration of electric vehicles and low carbon vehicles in
general in the United States have fallen short of expectations.
And interestingly, if you look at just the composition of new
vehicles sold in the U.S. over the past years, nearly two-thirds
were SUVs or heavier light duty vehicles that offset some of the
other underlying trends of some uptick in EV penetration.
Under the prior Trump administration, there was a rollback of
initiatives to improve the fuel economy of both light duty and
heavy-duty transport. I would not be surprised if we see that
same thing happen again, which means you have more longevity to
gasoline, diesel, other fossil-based transport fuels. Which kind
of put this all together -- significant growth for natural gas
that could accelerate under Trump, more longevity to legacy
businesses like gasoline and diesel for these incumbent energy
companies is not a bad backdrop.
Trade's still at double its historical discount versus the
broader market. So, not a bad setup when you put it all together.
Michelle Weaver: Great. Thank you, Devin.
Mike, new policies under the second Trump administration will
likely have an impact far beyond the U.S. And with a potential
withdrawal of the U.S. from the Paris Agreement and increased
greenhushing, many investors are starting to question whether
companies may walk back or delay their sustainability ambitions.
Will decarbonization still be a corporate priority or will the
pace of the energy transition in Europe slow in 2025?
Mike Canfield: Yeah, that's the big
question. The core issues for EU policymakers at the moment
include things like competitiveness, climate change, security,
digitalization, migration and the cost of living.
At the same time, Mario Draghi highlighted in his report entitled
“The Future of European Competitiveness” that there are three
transformations Europe has to contend with: to become more
innovative and competitive; to complete its energy transition;
and to adapt to a backdrop of less stable geopolitics where
dependencies are becoming vulnerabilities, to use his phrase.
We do still expect the EU's direction of travel on things like
the Fit for 55 goals, its targets to address critical mineral
supplies, and the overall net zero transition to remain
consistent. And the UK's Labour Party has advocated for Clean
Power 2030 goals of 95 percent clean generation sources.
At the same time, it's fair to say some commentators have pointed
to the higher regulatory burden on EU corporates as a potentially
damaging factor in competitiveness, suggesting that regulations
are costly and can be overcomplicated, particularly for smaller
companies. While we've already had a delay in the implementation
of the EU's deforestation regulation, some questions do remain
over other rules, including things like the corporate
sustainability, due diligence directive, and the design of the
carbon border adjustment mechanism or CBAM.
We're closely watching corporates themselves to see whether
they'll reevaluate their investment plans or targets. One example
we've actually already seen is in the metals and mining space
where decarbonisation investment plans were adjusted because of
inadequate green hydrogen infrastructure and policy concerns,
such as the effectiveness of the CBAM.
It does remain committed to its long-term net zero goals. But the
company has acknowledged that practical hurdles may delay
achievement of its 2030 climate ambitions. We wouldn't be
surprised to see other companies take an arguably more pragmatic,
in inverted commas, approach to their goals, accepting that
technology, infrastructure and policy might not really be ready
in time to reach 2030 targets.
Michelle Weaver: Do you believe there are
still areas where the end markets will grow significantly and
where companies still offer compelling opportunities?
Mike Canfield: Yeah, absolutely. We think
sustainable investing continues to evolve and that, as with last
year, stock selection will be key to generating alpha from the
energy transition. We do see really attractive opportunities in
enabling technologies across decarbonisation, whether that's
segments like grid transmission and distribution, or in things
like Industry 4.0.
We'd recommend focusing on companies with clear competitive moats
and avoiding the relatively commoditized areas, as well as
looking for strong pricing power, and those entities offering
mission critical products or services for the transition. We do
anticipate a continued investment focus on data center power
dynamics in 2025 with cooling technology increasingly a topic of
investor interest.
Beyond the power generation component, the urgent need for
investment in everything from electrical equipment to grid
technologies, smart grid software and hardware solutions, and
even cables is now increasingly apparent. We expect secular
growth in these markets to continue apace in 2025.
Within Industry 4.0, we do think adoption of automation,
robotics, machine learning, and the industrial Internet of Things
is set to grow strongly this year as well. We also see further
growth potential in other areas like energetic modernization in
buildings, climate resilience, and the circular economy.
Michelle Weaver: And with the current level
of policy uncertainty has enthusiasm for green investing or the
‘E’ environmental pillar of ESG declined
Mike Canfield: I think evolved might be a
fairer expression to use than declined. Certainly, reasonable to
say that performance in some of the segments of the E pillar has
been very challenging in the last 12 to 24 months -- with the
headwinds from geopolitics, from the higher interest rate
backdrop and inflation. At the same time, we have seen a
transition towards improver investment strategies, and they're
continuing to gain in popularity around the world.
As investors recognize that often the most attractive alpha
opportunities are in the momentum, or direction of travel rather
than simple, so-called positive screening for existing leaders in
various spaces. To this end, the investors that we speak to are
often focused on things like Capex trends for businesses as a way
to determine how companies might actually be investing to deliver
on their sustainability ambitions.
Beyond those traditional E, areas like renewables or electric
vehicles, we have therefore seen investors try to diversify
exposures. So, broadening out to include things like the
transition enablers, the grid technologies, HVAC -- that's
heating, ventilation and cooling, products supporting energy
efficiency in buildings, green construction and emerging
technologies even, like small modular nuclear reactors alongside
things like industrial automation.
Michelle Weaver: And, given this evolution
of the e pillar, do you think that creates an opportunity for the
S or G, the social or governance components of ESG?
Mike Canfield: We do think the backdrop for
socially focused investing is very strong. We see compelling
opportunities in longevity across a lot of elements, things like
advanced diagnostics, healthier foods, as well as digitalization,
responsible AI, personal mobility, and even parts of social
infrastructure. So things as basic as access to water,
sanitation, and hygiene.
One topic we as a team have written extensively on in the last
few months It's preventative health care, for example. So, while
current health systems are typically built to focus on acute
conditions and react to complications with pharmaceuticals or
clinical care, a focus on preventative care would, at its most
fundamental, address the underlying causes of illnesses to avoid
problems from arising in the first place.
We argue that the economic benefits of a more effective health
system is self evident, whether that's in terms of reducing the
overall burden on the system, boosting the workforce or
increasing productivity. Within preventative healthcare, we point
to fascinating investment opportunities across innovative
biopharma, things like smart chemotherapy, for example, alongside
solutions like integrated diagnostics, effective use of AI and
sophisticated telemedicine advances -- all of which are emerging
to support healthy longevity and a much more personalized
targeted health system.
Michelle Weaver: Devin and Mike, thank you
for taking the time to talk, and to our listeners, thanks for
listening. If you enjoy Thoughts on the Market, please leave us a
review wherever you listen to the show and share the podcast with
a friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.