Changing the narrative from ‘energy transition’ to ‘energy addition’

Changing the narrative from ‘energy transition’ to ‘energy addition’

Tyler Rosenlicht

Portfolio Manager, Global Infrastructure

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29 minute read

April 2024


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Aggregate energy demand will continue to increase in the coming decades, which is creating attractive investment opportunities across both the traditional and alternative energy landscape.


  • Energy demand will continue to increase
    Even as the global economy becomes more energy efficient, population and economic growth will drive increasing global energy consumption through 2040 and beyond.
  • Both traditional and alternative energy will play meaningful roles
    Alternative energy market share is projected to double over the next two decades, but traditional energy will also see an increase in consumption, with traditional (ex-coal) volumes increasing 12% in aggregate, according to our forecasts.
  • Pairing traditional and alternatives creates superior investment outcomes
    The energy industry is changing dramatically, with new technologies coming to market, old technologies facing obsolescence, and companies reacting to significant disruption. The old definition of energy is now obsolete.

Working together

Conversations surrounding the world’s energy resources have become exceptionally controversial. Global consumers have a desire for clean, cheap, on-demand energy to fuel growth—and energy markets will get there one day—just later than many pundits expect, in our view.

The expectation that alternatives, such as wind and solar, are ready to fully meet the world’s rising energy demands on their own is premature at this stage. At the same time, the demise of traditional, carbon- intensive energy, such as crude oil and natural gas, has been greatly exaggerated.

Alternative energy—thanks to technology and policy support, such as the Inflation Reduction Act (IRA) in the U.S.—has taken center stage and will be the key growth driver going forward. Yet, we believe traditional energy sources will continue to dominate market share over the next 20 years given the benefits of in-place infrastructure and reliability of these assets (Exhibit 1).

Energy resources

Balancing the energy transition

Both traditional and alternative energy will play key roles looking 20 years into the future

Balancing the energy transition

Global energy consumption is set to reach unprecedented levels in the coming years, driven by a global population that is growing in size and prosperity. The world needs both traditional and alternative energy to meet this demand (Exhibit 2), and we believe this will create attractive investment opportunities on both sides.

Traditional energy will continue to satisfy the bulk of energy needs, while alternatives will see staggering growth
Traditional energy will continue to satisfy the bulk of energy needs, while alternatives will see staggering growth

For the market to satisfy growth requirements and offset desired declines in “dirtier” sources of energy, such as coal, it must continue to complement alternative energy with selected traditional energy sources. In fact, it is our belief that traditional energy will still need to make up ~65% of total energy usage in 2040.

To be clear, the marketplace cannot and will not be dependent on one energy source or the other. With the exception of coal, we are in a “more of everything” world for the next few decades.

Energy demand can be modeled by making three key assumptions:

  1. Population growth → more people = more demand for energy, all else equal
  2. Economic growth → bigger economy = more demand for energy, all else equal
  3. Energy intensity of the future economy → This is a complicated topic. New energy technologies are typically more efficient, meaning the economy can grow with less energy inputs required. But this can also be influenced by trends in OECD vs. non-OECD (Organisation for Economic Co-operation and Development) countries and macro factors such as shifts in consumption from goods to services, etc.

Simply put, wealthier countries and more service-oriented economies generally consume more energy than less wealthy and more goods-driven economies.

Population growth

Our macroeconomic forecasts assume a deceleration in global population growth from an average of 1.2% in the last two decades to an average of 0.7% in the next two decades, but this still results in the global population increasing from 7.9 billion people in 2022 to 9.1 billion people in 2040. All else equal, more people equals more energy demand.

Economic growth

We also forecast a deceleration in global real GDP growth. From 2000 to 2021, the world enjoyed 3.1% average GDP growth, which we believe will decline to 2.8% through 2040. Though growth is slowing, the real economy will continue to rise, again requiring more energy.

Energy intensity

Looking into the future, the amount of energy needed will be vast. Perhaps the most important factor in our ability to meet this need will be the energy intensity of economic growth. “Energy intensity” is a measure of efficiency—in this case, the amount of energy required to generate a given unit of economic output.

The energy intensity of the future global economy is the most difficult to predict, as it requires assumptions on new technologies, trade patterns, geopolitical and socioeconomic trends, and myriad other factors. That said, we do hold two core beliefs—(1) the global economy has become more energy efficient in the last two decades, and (2) new technologies and higher prices for traditional energy will accelerate the efficiency gains moving forward (Exhibit 3).

Plainly put, we will become more energy efficient globally and we see investment in technologies that accelerate these shifts as particularly interesting. In real numbers, the global economy saw energy intensity decline by -1.2% annually in the last two decades, and we believe this will accelerate to -1.4% per year looking ahead.

Energy intensity explained

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Energy intensity continues to improve

In global terms, and looking through the lens of a 75-year timeframe, energy efficiency continues to come down even as per-person consumption rises. And we expect this to accelerate.

Energy intensity continues to improve

However, as the emerging markets become wealthier, we expect the energy gap between OECD and non-OECD markets to compress, driving an absolute increase in demand (Exhibit 4). OECD per-person consumption should decline while non-OECD rises, but we still expect to see a wide gap.

We expect narrowing of the energy gap between OECD and non-OECD countries to occur

Energy consumption of non-OECD countries is rising quickly

Energy consumption of non-OECD countries is rising quickly

One simple example of why energy intensity is declining is CAFE (Corporate Average Fuel Economy) Standards. These standards are regulations set by governments to improve the fuel efficiency of vehicles, primarily automobiles. These standards aim to reduce the average fuel consumption and greenhouse gas emissions of a manufacturer’s fleet of vehicles. As the global auto fleet becomes more efficient, energy intensity declines.

The preceding methodology leads to one clear conclusion: Even as the world becomes more energy efficient, the absolute demand for energy will continue to rise for at least the next two decades (and likely well beyond). Our assumptions result in an aggregate demand increase of ~20%, or 1.2% per year. In physical terms, we foresee energy demand climbing to about 220,000 terawatt-hours (TWh) in that timeframe, markedly higher than 2022’s usage of roughly 179,000 TWh (Exhibit 5).

The demand for energy is rising steadily

Annual usage is set to eclipse 200,000 TWh by early 2030s

The demand for energy is rising steadily

Our supply forecasts: How to satisfy the growing demand for energy

Despite the emergence of alternative resources, the demand for traditional energy will also increase meaningfully in the coming years to satisfy the growth in energy consumption (Exhibit 6).

The supply side of energy consumption will undergo marked changes in the coming two decades

We believe alternative energy will see significant market share gains

The supply side of energy consumption will undergo marked changes in the coming two decades

The use of fossil fuels is under heavy scrutiny today for numerous reasons, including climate change concerns and air quality issues. We are seeing global protests surrounding investment in and usage of carbon-intensive fossil fuels—all with an eye on ushering in a new era of clean, alternative energy to fuel global growth.

Meanwhile, there are three main drivers speeding up the development of alternatives:

  1. Costs. Alternative energy costs are becoming more competitive and are expected to continue declining.
  2. Consumer preferences. Consumers are taking environmental considerations into account, with electric vehicle growth being a prime example.
  3. Government support. The recently enacted IRA in the U.S. and other policy approaches across the globe offer substantial support for alternative development.

As we look to the future, we believe the global energy markets can reach a place where: (1) biomass and coal see significant declines (>50%); (2) crude oil demand grows through the 2020s, then plateaus and declines during the 2030s; and (3) all future growth comes from natural gas, nuclear and alternatives such as wind, solar and hydrogen (Exhibit 7).

The energy transition is occurring, albeit at a more moderate pace then many expect

Natural gas and alternatives will likely benefit the most

The energy transition is occurring, albeit at a more moderate pace then many expect

We take a bottom-up view when we forecast crude oil demand and believe it will be difficult to substitute for it quickly. As an example, Exxon Mobil recently estimated that if all car sales from today were electric vehicles, demand for liquid forms of energy would remain near 2010 levels into 2050. “Alternatively, a slowdown in fuel efficiency improvement of internal combustion engines could increase fuel demand by almost 3 million barrels per day by 2050.” (Source: Exxon Mobil global outlook, published September 2023).

We believe natural gas represents a key bridge fuel as the world pursues the energy addition path. Natural gas has seen significant growth since 2000 and we see global markets continuing to invest in the critical infrastructure required to maintain this growth rate path through 2040. Importantly, natural gas emits approximately -50% less CO2 than coal-fired generation. This transition from coal to natural gas is a step in the right direction for the world’s decarbonization efforts.

We estimate alternatives must boost energy output by about 45,000 TWh – from today’s count of 30,000 TWh to 2040’s predicted need of 78,000 TWh. To put this into perspective, 48,000 TWh is nearly the equivalent to the entire oil industry, which stands at 53,000 TWh today. But with capital, technology and incentives, we believe this scenario is achievable and desirable relative to the status quo. To be clear, this will not be enough to achieve Net Zero goals — but it represents an outcome that is possible.

World economies are making progress on growing energy supply, but much work still needs to be done.

In fact, between 2015-2023, the global economy invested, on average, $1.3 trillion per year in alternative energy capex to produce approximately 1,000 TWh per year (Exhibit 8).

This needs to accelerate to approximately 2,600 TWh per year moving forward if we are to meet expected demand.

Alternative energy spending is rising

Investments in alternative power, battery storage and energy efficiency are drivers of spending

Alternative energy spending is rising

World of energy addition, not replacement

If the industry is to meet energy demand by 2040, record investments in energy must be made. Plainly put, the marketplace needs all the reliable—and, ideally, clean—energy sources it can summon.

Technological advances must (and will) occur for alternative energy to be heavily relied upon, but it will take time. For example, energy produced by wind or solar cannot be stored for long periods of time due to limitations in battery storage technology, and production at any given moment is dependent on weather patterns. Conversely, one of the benefits of traditional resources, such as crude oil, is that they can be stored, transported and utilized on demand.

Further, a change in narrative is taking place as renewed attention is levied on domestic energy security, given the rise in geopolitical uncertainty and post Russia’s invasion of Ukraine. The need for dependable energy has never been more critical.

Looking ahead, we see attractive opportunities across the energy value chain in both traditional and alternative energy. However most passive investment strategies, and many active ones, take a zero-sum view, and limit their investment universes to either traditional energy companies, or new alternative opportunities. We believe this is suboptimal and the definition of ‘energy’ needs to be expanded. As seen in Exhibit 9, the Bloomberg Industry Classification Standard segments the energy universe in a way that is more representative of where global energy markets are going.

How Bloomberg classifications segment the future of energy

Companies participating in the future of energy come from a broad array of sectors

How MSCI GICS classifications segment the future of energy

Further, the line between clean and so-called “dirty” companies has blurred in recent years. Large, fossil-based companies are investing billions of dollars in research and development of cleaner energy forms. This includes lower-carbon hydrogen, carbon capture and storage and renewable facility investments by the world’s leading integrated energy companies.

Limited access to capital for conventional energy and a rising cost of capital will continue to constrain investment in traditional resources. This should lead to continued focus on capital efficiency and return on capital employed for businesses in the crude oil and natural gas value chain, which may lead to strong investment performance as the cycle continues.

Traditional energy companies’ woeful stock performance during 2014-2020, which was driven by poor capital allocation and value destruction, alienated investors. And the volatility of many alternative investments has left many with a ‘proceed-with-caution’ mindset. However, disruption is afoot. Amid attractive valuations, improving fundamentals, better capital allocation and disruptive change, we believe active managers can provide superior returns to investors. And the opportunity is especially timely, given that many investors are under-allocated to energy today.

As seen in Exhibit 10, traditional and alternative energy have unique and differentiated performance profiles. Since 2013, and including the year to date period, these two sectors have performed inversely (traditional up / alternative down and vice versa) in 6 of 10 periods. We believe combining the two helps to smooth volatility and will create superior risk adjusted returns going forward. Dynamic structural change is accelerating in this new energy landscape. The menu of choices for investments continues to broaden which enhances the return opportunity and potential for alpha, particularly for active managers adept at managing through disruption.

Traditional and alternative energy have experienced divergence in performance profiles

Blending traditional with alternative gives full access to the energy industry

Traditional and alternative energy have experienced divergence in performance profiles

At December 31, 2023. Source: Morningstar.
The views and opinions are as of the date of publication and are subject to change without notice. There is no guarantee that any market forecast set forth in this presentation will be realized.

The complementary performance profile of traditional energy and alternative investments, when combined, creates attractive risk return profiles for investors. We analyzed an illustrative blend of index performance representative of how we believe the global energy composition will look in 2033 (70% traditional / 30% alternative). This starting point delivered better returns at lower volatility with lower drawdowns than an investment in traditional energy alone.

An illustrative blend of indices offers attractive risk/return profile
An illustrative blend of indices offers attractive risk/return profile

In our view, investors should be taking a much closer look at the energy sector, but must do so with a wider aperture that recognizes the new energy world. Taking this action will help optimize portfolios and generate superior investment outcomes.

Author Profile Picture

Tyler Rosenlicht, Senior Vice President, is a portfolio manager for Global Listed Infrastructure and serves as Head of Natural Resource Equities.


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