According to Morningstar Equity’s research report, investors need to approach the clean energy transition with a risk/reward mentality. Morningstar’s Clean Energy Transition report focuses on electricity supply and demand in the United States and examines the oil and gas industry, the rise of electric vehicles, and lithium demand growth. The report also offers Morningstar’s top picks from the utilities, energy, and basic materials sectors for investors.
Key takeaways include:
- Utilities will control the pace of decarbonisation. Eliminating carbon emissions will require huge investments in utility infrastructure to support renewable energy, electric vehicle charging, and building electrification
- Reducing fossil fuel power generation is the first step in decarbonisation. In the US, Morningstar projects anticipates thatclean energy, including nuclear, will grow to 65 per cent of total power generation by 2030, up from 40 per cent today. This is more bullish than some forecasts. The Biden administration and others are aiming for 100 per cent by 2040, but report finds that goal faces too many technical and economic hurdles.
- Decarbonising transportation and retail energy use will increase electricity demand. Morningstar forecast 1.4 per cent annual electricity demand growth during the next 10 years in the US, an acceleration from the last 15 years. This includes 1 per cent annual core electricity demand growth plus 40 basis points of new growth from EV charging, data centers, and other electrification.
- Oil companies’ energy transition strategies balance stakeholders’ competing interests. Facing greater pressure, European firms have set more ambitious 2050 net-zero targets. As a result, they are investing greater amounts in low-carbon projects, particularly renewable power, than American peers. In contrast, US firms Exxon and Chevron are keeping investments primarily in their legacy hydrocarbon businesses and in low-carbon areas that decarbonize their existing operations.
- Morningstar forecasts battery EV adoption will reach 40 per cent globally by 2030, up from 10 per cent in 2022. This will result in around 40 million auto EVs sold in 2030, up from 7.8 million in 2022. As EVs reach cost and functional parity with internal combustion engines, they will move from niche luxury vehicles to mainstream consumers, resulting in rapidly growing adoption starting in the second half of this decade.
- Lithium will be one of the largest beneficiaries of the clean energy transition. Lithium is the key energy storage component in batteries used in EVs and energy storage systems, which are large batteries built to accompany renewable energy. Rising EV sales and increased ESS batteries should drive lithium demand to more than triple to 2.5 million metric tons by 2030.
