Energy shock unlocks EU investments in independence

Limited Natural Gas

The biggest shift is for LNG, where the EU plans to replace half of Russian gas supply with other sources. New LNG investment will be positive for suppliers, transporters and companies involved in building infrastructure. The EU wants to replace around 50 bcm of Russia’s gas supply with LNG by the end of 2022.

That looks ambitious. The International Energy Agency estimates that there is an additional 20 bcm in world markets. With LNG supply growth at around 5-6% per year, we expect prices to remain high well into 2023, as buyers compete for limited supplies. We expect the US in particular – currently accounting for only 15% of the global market – to benefit significantly, as well as suppliers in Africa and the Middle East. Qatar already plans to expand its LNG export capacity.

On 20 March, Germany agreed a deal with Qatar to import LNG. That allows German energy companies to begin negotiations with Qatar, without specifying the volumes available. Qatar exported 106 bcm of LNG in 2020. Germany, which currently has no facilities for transforming LNG into gas, has just approved the construction of two such terminals.

Green transition

The EU’s policy shift also supports the green energy transition. Wind and solar power costs were already falling rapidly before the war, and compared with current gas prices are becoming even more favourable.

High input prices in industrial metals and labour, as well as supply chain issues, are limiting new construction projects. In other areas, the crisis is forcing change. Germany, for example, looks set to relax planning restrictions for new wind farms.

Infrastructure spending

New energy finance, and new sources of financing, may help with steep infrastructure costs, including for poorer EU members. As in the past, a crisis is proving a catalyst in the EU. On 10-11 March, EU leaders considered plans to issue bonds to finance energy and defence spending. The precedent was set during Covid. In 2020 the Commission issued ‘social bonds,’ loaning the proceeds to member states to help fund national furlough schemes.

Energy-intensive industries such as electrification and renewable hydrogen infrastructure will attract spending, in addition to the EU’s Green Deal and Next Generation pandemic recovery fund. France is already investing in retrofitting buildings, Germany plans to spend on electric mobility, and Spain on public transport, renewables and smart grids.

Nuclear power? Yes please

While no current energy sources nor saving measures would compensate for the complete loss of Russian gas flow, much attention since the invasion has focused on nuclear power in Europe. The need to wean the continent off Russian gas has stalled debates on its future. In January, the bloc changed its classification of investment activities to label nuclear and gas as ‘green energy.’

Nor is nuclear power a short-term solution. New facilities need as much as a decade to construct and commission. Total European nuclear energy production currently amounts to the gas equivalent of 90 bcm, or 23% of European electricity in 2019, of which around half was produced by French sites. If Europe’s power stations were to increase utilisation, and countries halted their plans to retire plants, the EU may be able to generate additional nuclear energy equivalent of around 13 bcm.

Plugging industrial metals

Green electrification is also key to the EU’s energy plan, especially for domestic heating which accounts for more than 40% of European gas consumption. Sustainable heating, industrial batteries, inverters, transformers, and power cables will all benefit from technological advances in photovoltaic panels, air and ground-source heat pumps, as well as upgrades to ‘smart grids.’

We have long been positive on industrial metals and these policy changes will boost demand for copper and nickel used in batteries and electrification. They play a key role in the transition to sustainable energy and offer a hedge against inflation.

Shares of European renewable firms were among the first to gain since the Ukraine conflict, supporting valuations.

Investors need to be more selective and disciplined as these stocks become more expensive. However, with additional government spending now possible, we expect positive earnings revisions going forward. We favour pure renewable energy developers and component producers for solar and wind products. In wind power, offshore installations are one of the fastest-growing segments and tend to benefit manufacturers of larger turbines. In solar, we prefer new panel technologies including nanomaterials, or parts that can be built directly into roofs and windows.

We remain neutral on utility firms since while the EU’s emergency plans will offer some support, they still face tariff freezes to shield consumers from high energy prices and rising interest rates.

Russia’s invasion is not only reshaping Europe’s energy policy but also defence strategy. With government spending targeting greater military and energy independence, French economist Jean Pisani-Ferry estimates Europe’s total fiscal response may reach EUR 175 bn in 2022 alone. That would support economic growth in the wake of higher energy prices.

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