- If the energy crisis this winter taught us anything, it is that renewables and fossil fuels must coexist for a stable future and too much emphasis on either will cause ripples in the short run, notwithstanding the long-term energy transition scenario
- Thus, we don’t foresee a hard landing anytime soon for energy commodity prices, even after a remarkable run in 2021
- Post COVID demand recovery, coupled with underinvestment trends on supply side, will continue to support fossil fuel prices. This will benefit upstream names; but we will be more selective in downstream operators and utility plays like refineries, chemicals, and gas distributors.
- Meanwhile, a clearer decarbonisation roadmap in China, combined with lower polysilicon and wind turbine prices as supply issues ease, should lead to a pickup in new solar installations and benefit windfarm operators in the country
“Energy crunch” shows pitfalls of ongoing energy transition push, balance is essential. The global push towards energy transition got a bit messy late last year. Natural gas prices spiked worldwide, electricity prices skyrocketed in Europe, China implemented factory shutdowns to deal with coal shortage, and in turn, ironically, the cost of solar panels went up. There are COVID related supply chain factors involved and geopolitical factors as well (read Russia and Nord Stream 2), but one important factor that has stood out is the inability of renewables to fill the gap without cheap battery storage options. The energy crisis is a reminder that the world cannot do without fossil fuels for the moment. Hence, while there is no doubt renewables’ proportion of the electricity mix will keep on increasing over time, investments in oil and gas will also be needed just to keep supplies steady. In the meantime, a period of high energy prices will prevail.
High fossil fuel prices boon for many, bane for some.
Upstream names are key beneficiaries, whereas we need to be more selective in downstream operators and utility plays. Our top picks among DBS Energy team’s coverage include CNOOC, PTTEP, ITMG, Towngas Smart Energy, China Gas Holdings, Flat Glass, and China Longyuan Power.