Energy Transition Generates Potential Investment Opportunities

Equity Insights offers research and perspectives from Putnam’s equity team on market trends and opportunities.

Structural changes in the world’s energy systems represent significant investment potential across an array of sectors. Analysts on our equity research team offer insights into the impact and opportunities.

Ryan Kauppila

Analyst | Global natural resources

The decarbonization of the global energy system, also known as the energy transition, likely entails the largest infrastructure investment in human history, with hundreds of trillions of U.S. dollars at stake. The change won’t happen overnight, but past energy transitions highlight the magnitude of potential disruption ahead. It’s hard to overstate the implications. Consider the shifts from raw to cooked food, from nomadic to agrarian lifestyles, and the more recent transition from wood to hydrocarbons, which enabled urbanization and our modern lifestyle.

We believe such a monumental undertaking requires an open-minded, flexible approach to investing. The energy sources most typically associated with clean energy — such as solar and wind — will likely play a hugely critical role and will likely continue to see rapid technological progress. However, what’s underappreciated is the same can be said for legacy forms of energy like nuclear and oil and gas hydrocarbons. Over the next decade, we’ll likely see higher energy price volatility. This will be due to the interplay of inelastic energy supply, less predictable demand, the scaling of new technologies, and the implementation of policy instruments aimed at reducing the amount of carbon in energy. This expected volatility is an important lens for evaluating both legacy energy producers and next-generation energy technologies. In our view, the energy companies that best adapt to a more volatile price environment are likely to see the greatest multiple expansion over the coming decade.

The change won’t happen overnight, but past energy transitions highlight the magnitude of potential disruption ahead.

The price volatility is likely to create equity price inefficiencies when sentiment ebbs decidedly toward one solution over another, or if a company-specific aspect is poorly understood. For an acute example, both cutting-edge hydrogen fuel cell manufacturers and legacy coal miners will have roles in the energy transition, but we expect the assumptions embedded into their valuations will vary significantly over time.