The energy transition has drawn widespread attention, as governments and companies around the world are making an earnest effort to reduce the world’s dependence on carbon-based energy. But much of the focus has been on the headliners, like electric vehicles, solar panels, and wind turbines. And while they grab all of the attention, they’re only responsible for a fraction of the work.
Much like a theatre production, where the actors onstage rely on the crew backstage, the energy transition and energy security more broadly depend on crucial yet often overlooked parts of the system. These components are just as vital as the headliners in the spotlight and may just prove to be better long-term investments.
For many countries, the stars of the transition are renewable power sources like wind and solar. However, wind and solar come with a challenge for grid operators – they don’t work when the wind isn’t blowing, or the sun isn’t shining. At noon on a clear day, the UK can generate around half of its power from wind and solar but come 7pm renewables only cover around 15% of power demand. Yet the show must go on, and the lights need stay on.
So, what fills the gap?
Natural gas plants make for a pragmatic solution – they emit half the carbon of a comparable coal plant and can be switched on and off quickly to complement wind and solar. Much like a reputable understudy ready to take to the stage when the occasion calls for it.
In our view, this means gas producers and distributors like Shell, turbine makers like Siemens Energy, and developers of “peaker” plants like Drax, who can supply extra power when it’s needed most, will likely remain essential members of the backstage crew.
For systems without sufficient gas, energy storage can also serve as a ready understudy.
On a sunny Hollywood morning, California generates more solar power than it needs, using the excess to charge batteries like those in the Luna farm operated by Siemens Energy and utility AES.
Befitting its weather, the UK relies on water instead. Drax’s “pumped hydro” facility in Scotland buys power when it is plentiful and cheap and uses it to pump water uphill through a dam. Later, when power is scarce, and electricity demand is high Drax lets that water flow back downhill, capturing the power and selling it back to the grid.
Intermittency isn’t the only challenge to contend with – distances matter too. We are moving from a system of compact power plants located close to cities, to one of more dispersedly placed wind and solar farms located far away. The largest offshore windfarm spans over 450 sq km located off the coast of England and is 200 km away from the nearest large city. Needless to say, our energy system is going to become a lot more cable intensive.
Cables can represent up to 25% of the total cost of an offshore wind farm, a boon for cable makers like Prysmian, one of only three western companies capable of making and laying high voltage undersea cables – and with an order book filled through to 2027. Cable interconnections also come in handy when the system needs to import power to fill in gaps. Most evening, California imports around a quarter of its power from neighbouring states that burn more gas, and on most days, the UK gets a tenth of its power from France ’s ample nuclear fleet.
Wind and solar may be temperamental, but other stars are even more demanding. Electricity demand is being accelerated by reshoring, electric vehicles and more recently AI data centres. Mark Zuckerberg has said that energy, not data and chips, is likely to prove to be the bottleneck when it comes to the rollout of AI. Growth in data centres alone is expected to add 2% per annum to total global electricity usage. That’s as much as all the electricity used by the entire country of Japan.
That energy has to come from somewhere, and it has to be reliable.
Nuclear is best where it’s available, but where it isn’t, gas is again a reliable producer. The world currently builds about 100 large gas plants a year, and increased demand for data centres could add another 30 to that. Again, this could be good news for the crew members like Siemens Energy who produce the gas turbines, Shell who produces and transports the liquified natural gas, and Kinder Morgan who operates the largest natural gas pipeline network in North America.
But energy alone isn’t sufficient, as Northern Virginia, the world’s largest data centre hub, can attest. Even when power is adequate, new data centres need to wait to connect to the grid, because the lead time for transformers currently stretches to over two years. That should ensure steady work for leading makers of transformers and substation equipment, like Siemens Energy.
The ongoing changes to our energy system is a production that will see more power travelling greater distances and in more directions. While the energy transition serves as a healthy tailwind for our backstage crew, that’s only part of the story.
When old equipment fails, the consequences can be disastrous leading to wildfires, load shedding and blackouts.
In developed markets, the grid equipment is currently 40 years old on average—older than it was ever designed to operate. Even without greater intermittency and distances, even without accelerating electricity demand, the world would need significant investment in upgrading the grid, and that would result in bigger budgets for cables, transformers, and switchgear.
With governments and companies likely to invest billions of dollars to clean up and modernise the world’s energy system, the “unsung heroes” behind the curtain are the companies likely to find their work more celebrated. And for us as bottom-up investors, that does not look to be reflected in their current share prices.
We can compare their valuations to those of a headliner, like Tesla, with its ambitions across electric vehicles, charging, batteries, and solar power. To join the show with Tesla, you’ll need to pay up. However, the supporting cast and crew like Siemens Energy, Shell and Prysmian could cost you far less while still giving you access to the production.
While the spotlight almost always focuses on the acts taking centre stage, as the curtain rises it becomes clear that the cast and crew behind the scenes are just as, if not more important in determining the success of the overall show.
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