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Edition 7 - Infrastructure Insights

The crucial transition

An all-encompassing change to the fuel of some of the world’s largest investments needs to understood to be both acted and capitalised on.

The world is undergoing a crucial transition. The shift towards environmentally-friendly energy and away from fossil fuels is coinciding with ever-growing energy consumption from a growing global population.

The 2015 Paris Agreement on climate change, which aims to limit temperature increases to less than 2 degrees above pre-industrial levels, we believe has more work to do.

And while we are seeing energy demand continuing to grow and supply is transitioning towards environmentally-friendly sources, substantial carbon reductions will depend on government policies and new technology.

But some of the largest oil and gas companies are already starting to make the switch to become energy companies that supply a diverse range of fuels, electricity and other energy services to consumers1.

While as a whole, the big oil and gas companies are spending less than 1 per cent of their total capital expenditure outside their core business areas, some leading individual companies are spending as much as 5 per cent of their capex on projects outside core oil and gas supply.

The largest outlays are in solar and wind. Others are buying non‑core businesses in electricity distribution, electric vehicle charging and batteries.

“Big oil, we believe, is becoming big energy,” says AMP Capital portfolio manager Antonio Barbera.

The gradual transition to a decarbonised world is happening alongside a shift in the way energy is supplied and consumed, according to a new whitepaper2 from Barbera and the AMP Capital infrastructure team.

In developed economies, we believe centralised generation and vertically integrated monopolies are going to eventually coexist with smaller decentralised sources.

These can be supported by micro grids, digitalisation and various storage options.


Meanwhile, we forecast emerging economies will progressively reduce their dependence on coal and satisfy their growing demands for energy with natural gas and renewables.

“Climate change is a global issue,” say the report’s authors. “Carbon dioxide does not respect human-made borders. A reduction of carbon emissions requires either the developed world asking the developing world to stall their trajectory of development, or to find some technological breakthrough that will be affordable and rapidly scalable.

“Without addressing the ‘demand’ side of the equation, we are unlikely to be able to safeguard the planet for future generations.”

Carbon emissions have tripled worldwide since 1965 and emerging markets have driven the bulk of the increase.

China’s per capita emissions are up 154 per cent since 2000, while India experienced an increase of 101 per cent.

That’s in contrast to the situation in the west where North America and Europe have actually been reducing emissions since 2000, with emissions per capita falling 22 per cent in North America and 15 per cent in Europe.

Fundamentally, growth in energy demand is driven by two factors – population and economic growth.

The world population reached 7.7 billion in 2019 and is expected to grow 1 per cent a year over the next two decades, reaching 9.2 billion by 2040.

China will be overtaken by India as the largest country in the world by population, but most of the growth over the next 20 years will come from African countries. Pakistan and the United States will also drive growth.

Big oil, we believe, is becoming big energy.”

- Antonio Barbera, AMP Capital


The second reason for growing energy demand is that as people get wealthier their behaviour changes. They buy refrigerators, television and mobile phones – all of which require electricity.

Interestingly, the link between growth and energy demand is slowly weakening.

Population growth and economic growth will still drive energy demand, but not at the rate that historically has been true.

Energy intensity measures how inefficiently an economy uses energy relative to its output. Intensity tends to decline as GDP increases3, mainly because more advanced economies tend to have smaller manufacturing sectors than developing economies. Instead, they rely more on service industries that are less energy intensive.

Technology also helps. Energy-efficient light bulbs use up to 80 per cent less energy than traditional incandescent bulbs4. A new fridge-freezer uses 73 per cent less energy than its equivalent 20 years ago5.

As you can read about in more detail in our January 2020 whitepaper, The More Energy, Less Carbon Dilemma, this decline in 'energy intensity' means world energy consumption will grow at an annual rate of 1 per cent, compared to a 3 per cent rise in global GDP.

Meanwhile, the mix of energy supply is changing.

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It is broadly understood that fossil fuels represent 83 per cent of today’s energy mix, but that headline figure disguises changes in underlying composition.

Oil’s share of consumption is falling over the last two decades, mostly because China has preferred coal for its electricity generation.

And renewables are seeing remarkable growth. Renewable energy sources – led by wind and solar – have increased their share of global energy consumption from 1 per cent to 6 per cent over the same time period.

This trend will continue. Fossil fuels will remain the main source of energy in the global economy, but their share of the global energy mix is expected to decline materially, to 73 per cent in 2040.

Natural gas will grow from 24 per cent of the global energy mix to 26 per cent in 2040, driven by North America’s vast shale gas resource base. But oil and coal will continue to lose market share.

Renewables will take up the running, playing an increasingly important role with their share of the world’s energy mix rising to 15 per cent by 2040.

The biggest change will come in power generation.

Renewables will become the largest source of power generation energy in 2040, almost tripling their share to approach a third of the fuel mix.


Improving affordability of electric vehicles is required for that performance to be matched in transport, and significant changes to industrial and real estate energy may require regulation.

In fact, direct policy actions from governments will only accelerate the changes. Potential regulatory changes could involve banning new coal generation plants or implementing a global carbon tax.

A technological breakthrough – possibly carbon capture and storage, clean nuclear or transmission grids that are able to run fully on renewables – could also contribute to further reduction in carbon intensity.

These changes are critical for infrastructure investors.

One of the most dramatic illustrations of the infrastructure impacts of the shift to a decarbonised economy is in offshore wind power.

Offshore wind power provided just 0.3 per cent of global electricity supply in 2018 but the market has been growing by almost 30 per cent a year since 2010, second only to solar energy6.

There are now more than 100 offshore wind farms in 12 European countries7.

Within two decades, the International Energy Agency predicts offshore wind will be a USD $1 trillion industry8.

Source: BP, 2019
Source: BP, 2019
Source: BP, 2019
Source: BP, 2019

The growth is being driven by advances in technology. The shallow, windy waters of the North Sea have provided an ideal environment to perfect offshore wind technology. Larger turbines are being developed, improving power capacity and delivering performance and cost improvements. On average, turbine capacity has increased by 16 per cent every year since 20149.

The result is a capacity factor that matches many gas and coal-fired power plants and can be better than onshore wind and solar10.

The other enormous infrastructure change we believe is coming is the oil and gas companies themselves shifting capital expenditure into renewables.

A 2020 report from the International Energy Agency11 contemplates the change the energy industry is undergoing from being part of the problem of rising carbon emissions to a crucial part of the solution.

“The oil and gas industry faces the strategic challenge of balancing short-term returns with its long-term licence to operate,” the report says.

“Societies are simultaneously demanding energy services and also reductions in emissions. Oil and gas companies have been proficient at delivering the fuels that form the bedrock of today’s energy system; the question that they now face is whether they can help deliver climate solutions.”

The impacts coming in the power sector – which represents almost 40 per cent of global emissions12 – will be accompanied by changes coming to transport and real estate.

Transport represents almost 25 per cent of global emissions globally. Real estate figures are harder to come by but as a reference, buildings contribute 26 per cent of emissions in the UK.

The affordability of electric vehicles will help decarbonise transport, but the slow turnover of building stock means decarbonising real estate will be an ambitious goal to achieve.

Regardless, all-encompassing change is upon us and investors will need to carefully evaluate the impact of these trends.

You can read more in the global listed infrastructure team’s whitepaper: The more energy, less carbon dilemma.

Important Notes

While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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