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Fuel prices rocket! Since the beginning of the year, the European gas market benchmark price has risen over 300%. The price of CO2 emissions is soaring: an almost 130% increase in one year. Electricity, indexed to gas, is following the current. And oil prices are ablaze, with Brent at close on 80 dollars, compared with 45 dollars at the start of the year.
The repercussions are already being felt: an electricity shortage in China, soaring costs in Europe, use of coal wherever possible, even in Germany – the champion of renewable energies! And of course, the social embers are smouldering.
Is this price explosion the consequence of a green world still in its infancy, which makes polluting energies more expensive, without yet offering a sufficient clean energy alternative? Or is it, on the contrary, one of the last convulsions of the brown economy?
Some of this increase is temporary: after the economic freeze inflicted by governments to fight the spread of Covid, a sudden economic thaw makes sense. And with it, soaring energy demand, since unfortunately the two have always gone hand in hand – until now. What is more, winter is coming in the Northern Hemisphere, inflating demand for the next few months.
But there is another, more structural, reason: the energy transition comes at a cost. Firstly, we need to rebuild the current energy system, and diminish the value of past investments in brown sectors – "fossils" in every sense of the word. Quantities of wind turbines, solar panels, batteries, cables and other materials need to be produced. That requires energy, as well as a considerable amount of sometimes rare metals, the production of which is particularly contaminating. And secondly, because regulation and the market is discouraging the use of fossil fuels, their cost price tends to increase.
We are therefore looking at a type of “tragedy of the horizon”: we are seeking to decarbonize in the long term, using brown energy in the short term. This tragedy must be financed and supported.
This financing depends in part on banks, especially central banks, which have the power to partly direct financial flows by means of the market conditions they create. Keepers of the currency, they are therefore called upon to become, to a certain extent, keepers of the financial conditions of the energy transition.
But such financing also depends on the market, to which companies can resort in order to fund their transition. This is where investors, in stocks as well as in bonds, can play a key role: they can give preference to companies genuinely engaged in the transition, beyond simple greenwashing. And they can thus support an economic system where energy, better produced and consumed less, will be cheaper in the long run, as the ECB has shown in its recently-published climate stress test.
The market has the necessary financial energy to move forward along this path, which will certainly not be straightforward. We must be able to guide them, as La Financière de l'Échiquier does by adopting an ambitious climate strategy, the result of a thirty-year commitment to responsible investment.
By Olivier de Berranger, CIO, LFDE