Renewable Energy Recovery
Renewable energy stocks had a tough year in 2023 leading up to COP28, as rising interest rates and economic and geopolitical uncertainty tightened financing for clean energy projects. When the meeting began on November 30, the Invesco WilderHill Clean Energy Exchange-Traded Fund (ETF) (PBW) had declined by 29% since the beginning of the year, while the Invesco Solar ETF (TAN) lost 37%.
Since the meeting concluded on Tuesday, both Invesco ETFs have risen by 12% and 15%, respectively. Investor enthusiasm for solar and other renewable energy stocks has also been boosted this week by statements from Federal Reserve officials suggesting a potential interest rate cut next year, as solar and other renewable projects can heavily depend on the debt market.
But Fossil Fuels Won’t Disappear Anytime Soon
However, experts say that the push towards renewable energy does not necessarily mean a decline in demand for fossil fuels anytime soon. John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, noted that the Russian-Ukrainian war and its energy-related disruptions have been a painful reminder that fossil fuels are still necessary.
Pierre Conner, executive director of the Tulane Energy Institute and a management sciences professor, pointed to the reality of existing infrastructure, stating, “We have spent 120 years building infrastructure around petroleum, and it’s not going to just disappear.”
He added, “It’s one thing to make a statement, but how do you attract the required capital? There is no actual implementation of that. [Capital] has to come from somewhere. And these investments need to have some security in their return.”
Once that starts to happen, traditional energy providers can help with the transition, Conner said.
For instance, the 2.5 million miles of natural gas pipelines in the U.S. could help capture and store excess carbon, and oil field service providers could be called upon to plug abandoned wells that leak harmful methane.
A focus on increasing energy efficiency could also raise demand for fossil fuels if enhanced air conditioning efficiency encourages people to build larger homes.
Conner noted, “The more efficient the end user becomes, it does not reduce the demand for the raw material; it actually increases it. The more efficient we become, we may actually see an increase in fossil fuel use, especially in developing countries.”
Stoltzfus indicated that technology and industrial companies that can develop ways to enhance energy efficiency and create machinery to achieve that efficiency could benefit. Additionally, better fuel efficiency in the aviation industry would help, and energy producers might benefit from a greater focus on improving the grid.
Side Effects Could Add Complications
Conner suggested an often-overlooked aspect in targeting lower emissions could add complexities that lie at the intersection of food, water, and energy.
For example, growing corn to produce ethanol increases water and fertilizer use. The production of electric vehicle batteries causes pollution arising from mining rare earth metals.
Conner praised the focus of the agreement on emissions from agriculture and food production, adding, “Agriculture is the process of converting hydrocarbons into food, so some attention to this is good.”
However, Stoltzfus proposed one downside to the COP28 agreement, which is the pressure it may place on countries that may not have the financial means to “support” the transition to clean energy and agricultural practices.
He said
Many companies may also face rising costs for installing more environmentally friendly vehicles.
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