rethink sustainability
Picking the winners in the energy transition. Which countries could benefit most?
A fifth of the world’s energy is consumed in the form of electricity. Most of the rest comes directly from burning coal, oil or gas.1 That balance needs to change significantly if the world is to limit the extent of global warming, according to Thomas Hohne-Sparborth, Head of Sustainability Research at holistiQ Investment Partners, Lombard Odier Investment Managers. “In a net-zero scenario,” he explains, electricity use “would rise to 70%”.2
This shift to electrification is underway around the world. Falls in the cost of producing renewables such as wind and solar, alongside advances in technologies such as electric cars and heat pumps, are creating financial as well as environmental incentives to switch away from fossil fuels. Zero-carbon electrification has come to define the energy transition, leaving investors facing a key question. In the race to renewables, which countries could benefit most, economically and environmentally?
Leading the energy transition
China announced in 2020 that it aims to become carbon neutral by 20603, and it has since strengthened its place among the countries leading the energy transition. It invested USD 676 billion in renewable energy and other low-carbon infrastructure in 2023, twice as much as all EU countries combined and more than double that of nearest rival the United States4 – although a USD 1 trillion injection could be on the way in the US as a result of the Inflation Reduction Act5.
Solar and wind power generation in China outpace that of any other country.6 Chinese firms also dominate the international market for renewable infrastructure: they supplied equipment for more than half of all newly installed wind power capacity globally in 2022, and represent more than 80% of the world’s solar panel manufacturing capacity.7 The country has also become a leading producer and exporter of electric vehicles (EVs): its shipments to the EU are up by over 300% from 2021, and its market share in the continent is expected to double to 15% by 2025.8 BYD recently overtook Tesla to become the world’s biggest-selling EV maker9, while Chinese EV battery manufacturer CATL accounts for over a third of the global market10.
Clean energy consequently contributed USD 1.6 trillion to the Chinese economy last year, making it the largest single driver of the nation’s economic growth.11 But there are potential headwinds. The role of subsidies in China’s surging EV exports is being investigated by the EU, and tariffs could follow.12 A tech trade war with the US over semiconductors – a key element in electric vehicles, solar panels and wind turbines – could also pose a threat to China’s ability to manufacture green technologies13, while protectionist measures by the US14 and EU15 will hit China by restricting levels of foreign materials in battery and clean-energy manufacturing. Beijing has retaliated with its own export restrictions on critical minerals used to make these high-tech chips.16
Read also: China’s reflation still runs second to national strategy
Global interest in green hydrogen
Green hydrogen offers a potential clean alternative to the fossil fuels used in heavy industry. It is produced by splitting water atoms into oxygen and hydrogen using renewably generated electricity. With demand for this future fuel expected to multiply rapidly between 2030 and 205017, wind- and sun-rich countries are eyeing an opportunity to sell their excess renewable electricity for use in hydrogen production. They may also look to produce hydrogen themselves for export.
But green hydrogen is not without its challenges. More than 90% of the world’s hydrogen is derived from oil, gas and coal.18 Production costs are higher for green hydrogen compared with fossil fuel-made alternatives19, and some observers think they may not come down as much as expected20. Progress is also needed on certification, to prove clean hydrogen is what it says it is,21 and more infrastructure is needed to move the fuel to consumers.22
France is among those with ambitions to become a world leader in the production of green hydrogen, specifically for use in industry and transport. The fuel is already being used to power trains23 and there are positive signs about the prospects of hydrogen replacing coal in commercial-scale steel production24. Paris hopes that USD 9.8 billion of investment will help make it the go-to destination for the electrolysers used to produce hydrogen.25
Watch the interview with Matthieu Guesné, Co-founder and CEO of LHYFE:
Africa’s energy transition opportunity
Strong demand for hydrogen from northern Europe could turn Africa into a green hydrogen powerhouse, according to numerous industry commentators. A group of gas companies in Germany, Italy and Austria are behind a move to transport green hydrogen to Europe via a pipeline from the Maghreb region of northern Africa26, where countries such as Morocco and Algeria are endowed with ideal conditions for solar and wind power generation.
A similar story may be told right across Africa. In Namibia, for example, which tops a World Bank list for “photovoltaic power potential”27, a USD 10 billion project is under development that aims to produce 350,000 tonnes of green hydrogen each year for export, as well as 2 million tonnes of green ammonia (a zero-emissions source of fuel or fertiliser)28.
Africa is also home to vast quantities of the critical minerals that will be crucial to building energy transition technologies. More than 50% of the world’s cobalt and manganese reserves are located on the continent. It also has a third of global chromium resources and over 20% of all copper.29
The road ahead is not without obstacles, however. Investment in Africa is lower than elsewhere, and as a result it is behind the rest of the world on the deployment of renewables.30 Issues with electricity supplies along with limited manufacturing capacity also need to be overcome, as do governance issues that have impacted Africa’s resource and energy sectors in the past.31 The rush to mine critical minerals has led to communities being forced off their land in the Democratic Republic of the Congo32 and working conditions that contravene human rights33. Global companies have to ensure such practices are not a part of their supply chains.
Read also: Tomorrow’s mine: the case for investing in an urgent mining revolution
Africa is also facing more severe effects from climate change than much of the rest of the world; coastal floods could impact energy infrastructure,34 while water stress may threaten the main input needed to produce green hydrogen, even though it uses less water than other forms of hydrogen production.35
The Middle East’s clean energy potential
As the world races towards “peak oil”, hydrocarbon-heavy Middle Eastern economies may appear uniquely vulnerable. However, says Thomas Hohne-Sparborth, the region is ideally placed to adapt. “The move from a fossil fuel-based economy will be powered by renewable energy, which will involve changes in industrial value chains,” he explains. “The [Middle East] has capital to deploy and is well-positioned to play a central role in the transition.”36
The region’s climate means it has significant solar energy potential.37 Its combined solar and wind power capacity increased by over 50% in the year to May 2023,38 giving the Middle East, like Africa, potential to benefit from rising demand for green hydrogen.39 Saudi Arabia and the UAE have been quick to recognise this: Riyadh is preparing to invest USD 266 billion in clean energy, with a plan to “export the energy to the world and produce clean hydrogen”40; the UAE has recently opened the world’s biggest single-site solar facility41. Both nations are now seeing strong interest from private equity, attracted by the region’s clean energy potential.42
But oil and gas remain dominant in the region’s electricity mix43 and economy, accounting for more than two-thirds of fiscal revenues and exports in many cases44. Big increases in renewables are coming from a low starting point – the Middle East needs 20 times more renewables to match its current gas-fired power generation.45 Recalibrating for renewables poses more of a paradigm shift here than in other parts of the world. The private sector is expected to play a bigger role as the region diversifies its economy not only in terms of energy, but towards tourism and technology too.46 Lower public-sector revenues have implications for citizens – Saudi Arabia and the UAE are already reducing subsidies and raising taxes.47
Private sources will need to account for around 70% of global clean energy investment between now and 2030, the International Energy Agency estimates.48 The Middle East has already secured some large public-private partnerships to further its energy transition ambitions.49 More will be needed.
Read also: Building Bridges 2023: an EUR 2 trillion opportunity as the economy goes electric
Uruguay’s energy transition story
Uruguay has been embarking on an ambitious scale-up of renewable energy for the past 15 years. After a series of droughts hit its hydropower generation, the South American nation has implemented a large-scale rollout of wind turbines, funded in large part by USD 5.6 billion of investment from private and international development banks. This led to a faster rise in wind power than any country has ever achieved; wind’s share of electricity production rose from just 1% in 2013 to 34% in 2018.50
Uruguay is now largely self-reliant when it comes to electricity production, with as much as 98% coming from domestic renewables.51 It has also become a frequent exporter of electricity to neighbouring countries. Following the success of the first phase of its transition, Uruguay has now moved to a second phase52: switching buses and other public vehicles to electric, to cut emissions and take advantage of the secure domestic supply of zero-carbon energy.
More sustainable practices are now needed in Uruguay’s agriculture industry, which accounts for around 80% of the country’s exports.53 Rapid expansion in the sector has taken a toll on the environment, with over-exploitation of water resources54 and pollution by meat-packing and tannery companies55 threatening drinking supplies. Amid the reality of intensifying droughts, plans to reduce the pressure on ecosystems and natural resources have been put in place for 2025 and 2050.56
The future of the energy transition
Global investment in the clean energy transition soared in 2023, rising by 17% on the year to hit USD 1.8 trillion.57 But this is just the start, believes Thomas Hohne-Sparborth. He estimates that USD 25 trillion of capital investment could be deployed this decade. “Investment will be needed on the supply side in power generation and renewable equipment; on the demand side in the electrification of transport, industry and buildings; in our power grids in the form of energy storage, transmission and distribution; and in all the enabling components and raw materials needed, from semiconductors to lithium.”58
The energy transition will affect all sectors, and as economic growth decouples from greenhouse gas emissions, Lombard Odier believes new profit pools will emerge. A shift to 70% economy-wide electrification will open up investment avenues, including in AI-enhanced power-grid optimisation.
Hohne-Sparborth describes the clean energy transition as a major and unprecedented financial opportunity for investors: “A transformation on the scale of the Industrial Revolution, unfolding at the speed of the digital revolution. Electrification will be a cornerstone of tomorrow’s economy, and today’s investors have a unique opportunity to be part of it.”59
1 Final consumption – Key World Energy Statistics 2021 – Analysis - IEA
2 The rise of ESG: Driving sustainable growth in the Middle East (citywire.com)
3 An energy sector roadmap to carbon neutrality in China – Analysis - IEA
4 Global Clean Energy Investment Jumps 17%, Hits $1.8 Trillion in 2023, According to BloombergNEF Report | BloombergNEF (bnef.com)
5 The First Year of the Inflation Reduction Act | Inside Energy & Environment (insideenergyandenvironment.com)
6 Wind Power by Country 2024 (worldpopulationreview.com); Solar Power by Country 2024 (worldpopulationreview.com)
7 Chinese manufacturers dominate wind power, taking 60% of global market - Nikkei Asia; Explainer: The numbers behind China's renewable energy boom | Reuters
8 What is driving Chinese EV exports and their price competitiveness? | Reuters
9 China’s BYD overtakes Tesla as top-selling electric car seller | Electric, hybrid and low-emission cars | The Guardian
10 CATL tops global EV battery market for the seven consecutive year
11 Analysis: Clean energy was top driver of China’s economic growth in 2023 - Carbon Brief
12 EU to investigate 'flood' of Chinese electric cars, weigh tariffs | Reuters
13 Beauty and the beast: Implications of the US-China tech war on climate and energy - Atlantic Council
14 The Biden Administration Unveils the Long-Waited Guidance on “Foreign Entity of Concern” | Inside Energy & Environment (insideenergyandenvironment.com)
15 European Critical Raw Materials Act (europa.eu)
16 Gallium and germanium: What China’s new move in microchip war means for world - BBC News
17 Green hydrogen economy - predicted development of tomorrow: PwC
18 Hydrogen (irena.org)
19 Global average levelised cost of hydrogen production by energy source and technology, 2019 and 2050 – Charts – Data & Statistics - IEA
20 Green hydrogen price in Europe unlikely to fall below €5/kg by 2030, putting off potential offtakers: analyst | Hydrogen news and intelligence (hydrogeninsight.com)
21 Lack of standards could undermine global hydrogen market before it gets started (edf.org)
22 Hydrogen Infrastructure: Development and Challenges (energytracker.asia)
23 Fleet of hydrogen passenger trains begins service in Germany | AP News
24 About us — H2 Green Steel
25 Four electrolyser gigafactories to be built in France as part of €2.1bn state-aid hydrogen push | Recharge (rechargenews.com)
26 Europe pushes ahead with hydrogen pipelines to meet energy demand (ft.com)
27 Global Solar Atlas
28 Hyphen and Namibia agree next phase of $10 billion green hydrogen project | Reuters
29 Developing Africa’s mineral resources: What needs to happen - Zero Carbon Analytics (zerocarbon-analytics.org)
30 The Renewable Energy Transtion in Africa (irena.org)
31 Just energy transitions as a development priority for Africa | United Nations Development Programme (undp.org)
32 Forced evictions at industrial cobalt and copper mines in the DRC (amnesty.org)
33 Green Energy's Dirty Secret: Its Hunger for African Resources (foreignpolicy.com)
34 Key findings – Africa Energy Outlook 2022 – Analysis - IEA
35 Green hydrogen should be prioritised over blue due to the latter's higher water use: Irena | Hydrogen news and intelligence (hydrogeninsight.com)
36 The rise of ESG: Driving sustainable growth in the Middle East (citywire.com)
37 The sun is shining on Middle East solar energy - here’s why - About HSBC | HSBC UAE
38 Report: Middle East embraces solar energy revolution - Zero Carbon Analytics (zerocarbon-analytics.org)
39 This is how to unlock MENA’s low-carbon hydrogen potential | World Economic Forum (weforum.org)
40 Saudi Arabia to invest about $266 bln for clean energy - minister | Reuters
41 VIDEO: UAE inaugurates world’s largest single-site solar power plant ahead of COP28 - GulfToday
42 Why is the UAE's renewable energy sector attracting more private equity funding? (thenationalnews.com);
Saudi Arabia's PIF raises $5.5bn from sale of second green bond in five months (thenationalnews.com)
43 Middle East – Countries & Regions - IEA
44 The impact of the global energy transition on MENA oil and gas producers - ScienceDirect
45 MENA grows renewables by half but clings to risky hydrogen and gas - Global Energy Monitor
46 From AI to e-commerce: Megatrends shaping the Middle East | World Economic Forum (weforum.org)
47 After decades of empty talk, reforms in Gulf states are real—but risky (economist.com)
48 The cost of capital in clean energy transitions – Analysis - IEA
49 Private capital's place in the Middle East energy transition - Allen & Overy (allenovery.com)
50 These 8 Countries Scaled Renewable Energy the Fastest | World Resources Institute (wri.org)
51 Uruguay’s green power revolution: rapid shift to wind shows the world how it’s done | Global development The Guardian
52 Uruguay's second energy transition: a path forward - PtX Hub (ptx-hub.org)
53 Uruguay - Market Overview (trade.gov)
54 Rights experts urge Uruguay to prioritise water use for human consumption | UN News
55 Water Action Hub | Country: Uruguay
56 Uruguay | Integrating Agriculture in National Adaptation Plans (NAPs) | Food and Agriculture Organization of the United Nations (fao.org)
57 Global Clean Energy Investment Jumps 17%, Hits $1.8 Trillion in 2023, According to BloombergNEF Report | BloombergNEF (bnef.com)
58 The rise of ESG: Driving sustainable growth in the Middle East (citywire.com)
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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