Companies and governments alike are prioritising electrification for three reasons. First, in a post Russia/Ukraine world, decoupling from imported fossil fuels in favour of domestically produced electrons paves the way for a more geopolitically secure prosperity. Second, moving away from fossil fuels helps reach net zero targets. Finally, electrified technologies are typically more efficient in terms of power conversion.
In short, electrification is a structural trend transforming entire sectors. Such trends underpin the thesis on which Impax Environmental Markets plc is built. Namely, that companies delivering basic needs (in this case, energy) in a cleaner, more efficient manner or addressing environmental issues (such as climate change) can deliver superior long-term earnings growth thanks to the insatiable demand for higher living standards on a finite planet.
Taking this view, the investment opportunities from electrification can be segmented into four broad groups: electrified products, generation, transmission and storage.
Consumer-facing products are electrification’s shop window. Electric vehicles (EVs) have grown from 4% of global sales in 2020 to 18% in 2023. This trend is firmly intact despite moderating growth ex-China. Yet, Impax Environmental Markets does not own any EV manufacturers.
Instead, the team invests in companies whose competitive advantages are driven by high value-add components benefitting from the entire sector’s potential for growth. Littelfuse, a US-listed producer of circuit protectors and automotive sensors, is one such name. This contrasts with backing single brands, whose fortunes are subject to consumer taste and fashion.
The electrification of commercial and industrial processes is less visible, but its impact may be greater. Impax Environmental Markets is a long-term holder of Spirax Sarco – a UK-listed industrial steam and heating specialist. Around a third of sales now derive from the precise use of electricity to control temperature, spanning sectors from manufacturing to technology to healthcare. When connected to a renewable electricity source, its solutions can help companies eliminate scope one and two emissions.
As these products and services become electrified, the International Energy Agency estimates electricity’s share in final energy consumption will rise from 20% in 2023, to 30% in 2030. Companies generating this electricity sustainably and profitably can make compelling long-term investments. Yet since 2022, rapidly higher interest rates, supply chain issues and more recently, falling power prices have all weighed on independent power producers.
These dynamics did weaken short-term economics. Political noise has also impacted the multiples some investors are willing to pay for future growth. However, recent acquisitions have forced equity markets to acknowledge a stark gap between public and private assets, with many listed companies trading below the value of existing, profitable operations.
Impax Environmental Markets has started to benefit from these takeovers, with Terna Energy, a Greek independent power producer, recently taken private. With holdings such as Portuguese-listed EDPR also able to focus on projects delivering higher returns, valuation headwinds are starting to fade.
Investment in electrical grids has reached a similar turning point. Ageing infrastructure means existing cables and transformers are increasingly at risk of faults and in need of replacement. At the same time, mass electrification and the shift to renewables means grids are having to supply an ever-greater volume of electrons, with more flexibility and at greater distances.
Political administrations are waking up to this. Last November, the EU Commission launched an Action Plan for Grids, identifying a necessary €584bn of investment to modernise Europe’s electricity grid. In April, the US Department of Energy issued a roadmap to improve the speed generators connect to the grid. Companies such as Prysmian, an Italian manufacturer of cables, are well-placed to capture this increased spending.
Once this electricity has been produced and distributed however, it cannot be stored in its raw state. Batteries resolve this issue, doing away with intermittency and enabling transport’s electrification. On top of rising EV sales, battery storage penetration of renewables is expected to rise from 2% today to 9% by 2030.
This has incentivised manufacturers to develop ever-more energy dense and powerful batteries. Lithium iron phosphate has emerged as the dominant battery technology and costs around 85% less than it did a decade ago. These developments informed Impax Environmental Markets’ new position in CATL, a Chinese battery producer.
A global market share leader thanks to a history of technological innovation, the company recently unveiled a battery capable of delivering a 400km range on a 10 minute charge. At the time of purchase, the shares overly discounted anaemic EV sales growth, China’s lacklustre rebound post-Covid and the potential impact of US tariffs. This is despite a robust balance sheet and sizeable addressable markets in Asia and Europe.
Fotis Chatzimichalakis is co-portfolio manager of Impax Environmental Markets plc. The views expressed above should not be taken as investment advice.