Soaring global energy demand will require greater production of both fossil fuels and renewable energy, creating opportunities for investors across the market, fund management giant BlackRock has said.
The power-hungry artificial intelligence revolution has swollen projected energy demand forecasts for the future, according to the International Energy Agency, while Governments around the world have made efforts to bolster their energy security.
It follows new projections from BP, which last week pushed back forecasts for peak oil demand by five years to 2030 as the group continues its retreat from the renewables sector.
But research published by the BlackRock Investment Institute on Wednesday suggests growth in both fossil fuels and renewable sources of energy will be required to meet demand.
It found US utility stocks, particularly ‘nuclear-heavy providers’, have rallied, despite renewable energy production surging by 95 per cent since 2019.
But BlackRock says the continued growth of coal, oil and gas ‘shows renewable energy is helping to meet new demand rather than substituting traditional energy’.
BlackRock said continued growth of coal, oil and gas ‘shows renewable energy is helping to meet new demand rather than substituting traditional energy’
It said: ‘The race to develop AI is triggering a massive real asset buildout, particularly of data centres and the power required to run them.
‘Mega cap tech companies building cloud and AI infrastructure are seeking power supplies that are low-carbon, cost-effective, immediately available and always on – a challenging combination
‘Policymakers’ focus on affordable, low-carbon, resilient energy has created a ‘seller’s market’ for many types of utility-scale power, including renewables, storage, natural gas and nuclear, as well as their supply chains.’
Other drivers of demand identified by the group include ‘extreme heat’ driving air conditioning adoption and electrification efforts in emerging economies.
It also pointed to rising incomes, reshoring efforts and industrial growth as ‘compounding electricity demand in key markets like the US and industrialising regions’.
Christopher Kaminker, head of sustainable investment research and analytics at BlackRock Investment Institute, added: ‘We see the energy system increasingly sitting at the cross-currents of mega forces like AI, geopolitical fragmentation, and the low-carbon transition.
‘Potential investment opportunities abound but we suggest a selective and active approach given the complexity – combining alpha-seeking, targeted index, and private markets exposures.’
Renewables stocks have ralied this year but remain well off their post-2020 peakÂ
Where to invest?
BlackRock identified an ‘evolution’ in the energy transition that is increasing ‘dispersion’ in related assets.
‘Within that lies opportunity,’ it said. ‘We see growing opportunities in energy efficiency, clean transportation and critical minerals and metals. We also lean into selective opportunities in Europe, which is driving the energy transition forward.’
Many renewable energy stocks have seen their value fall sharply from their post-2020 peak.
But renewable energy is still expected to meet around 95 per cent of electricity demand growth globally over the next three years, according to BlackRock, with ‘many countries’ continuing to support the building of green infrastructure and manufacturing facilities.
‘Additionally, the decentralisation of the energy grid – as some households and companies look for ways to cut costs and explore alternative solutions to mainstream energy grids – could provide a further tailwind for renewables and energy storage,’ BlackRock said.
‘One of the primary challenges for renewable energy sources such as solar and wind is their intermittency; they don’t produce electricity continuously.Â
‘Energy storage systems, such as batteries, can store excess energy generated during peak production times and release it when production is low, thus stabilising the grid.’
BlackRock’s top pick for this trend is the iShares Energy Storage & Hydrogen ETF, which provides exposure to companies driving energy storage, as well as companies involved in hydrogen.
For investors looking for greater ‘purity of exposure’ to sustainable energy, the group highlights the BGF Sustainable Energy Fund, which targets upstream and cyclical exposure to renewable energy across three themes – clean power, energy efficiency and clean transportation.
Alternatively, nuclear demand is booming, with many countries around the world re-embracing the technology for the first time in decades.
Nuclear is now the second-largest source of low-emissions electricity after hydropower, according to BlackRock, accounting for just under 10 per cent of global generation.
‘The iShares Nuclear Energy and Uranium Mining UCITS ETF offers exposure to this theme,’ suggested BlackRock.
But to meet the energy demand of the future, greater investment will be needed in energy infrastructure and financing, a trend BlackRock said provides ‘strong tailwinds for both listed infrastructure and private assets’.
It recommends the iShares Global Infrastructure UCITS ETF and the BGF Global Listed Infrastructure Fund for exposure to this theme.
The group also identified mining companies as beneficiaries as the sector cashes in on demand for key transition metals.
BlackRock said: ‘Among the raw materials needed to help drive the energy transition, we see copper and lithium as standouts, playing a key role in electrification across renewable energy, EVs and infrastructure.
‘Growing demand coupled with supply constraints could lead to supply deficits of 30 per cent for copper and 39 per cent for lithium by 2035.
‘We expect this to prove supportive for copper miners in the iShares Copper Miners UCITS ETF, as well as lithium miners and producers in the iShares Lithium & Battery Producers ETF. We also look to the iShares Essential Metals Producers UCITS ETF for exposure to companies involved in the production of these metals and others’
Governments around the world are re-embracing nuclear energyÂ
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