Regardless of the falling cost of installing renewable capacity, we think the likelihood of replacing much of the existing system with a more intermittent and dispersed generation method, and then either overbuilding capacity or building storage to enhance system stability, will lead to higher energy costs. Alternatively, building a handful of nuclear reactors will inevitably cost multiples of what is originally costed. Either way, power prices rise.

Portfolio Implications

Paying for energy is a net drag on the global economy, a pure supply side constraint. The main consequence of higher energy costs is higher inflation and lower economic growth. This theme is reflected in this year’s Strategic Asset Allocation Review, where all of our capital market assumption scenarios are modelled to incorporate varying degrees of inflation persistence. Importantly, this assumption doesn’t just reflect higher energy prices. Structurally higher government spending (defence and vote buying) and ageing populations are also factors.

Otherwise, it is important to recognise the potential for an upside scenario. If the renewables optimists are correct, and the price of producing renewable energy continues to fall, perhaps the energy transition we are undertaking will be a net positive for global economic growth. At this stage, this scenario isn’t likely enough to form part of our capital market modelling, but is worth considering as an upside risk.

From an investment perspective, the most impacted asset class from the energy transition will be infrastructure. Within the asset class, there will clearly be winners and losers. The losers will be the ones holding stranded assets which are rendered uneconomic by climate change legislation. The winners will be the ones who can covert the (potentially) trillions of dollars into a return on shareholder equity. Data centres within the real estate asset class also represent an in-demand area for those who can supply well located facilities, ideally with a low cost and reliable power supply.

Advice Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).