(3-minute read)  | 

Weather forecasts are pointing to a very cold European Christmas in 2022. Germany, a heavyweight in the green energy movement, has resorted to switching on once-dormant coal plants to keep households warm this winter.

How did we get here? How will these events pave the way to a more sustainable future? We have to look back to the early 2010s and what happened after the covid crisis to paint a better picture.

Last decade we saw the rise of ESG investing, where investors prefer companies that uphold certain societal standards such as low carbon emissions. This narrative has dominated the mutual fund and pension fund industry where portfolio managers are mandated not to invest in high carbon-emitting companies (we focus on the Environmental aspect of ESG). 

Fossil fuels have been framed as an enemy to human civilisation and are thus antagonised by capital. This has caused a decade long underinvestment in critical hydrocarbons needed to tide us through the green revolution. Oil & Gas majors are deprived of funding to explore for new hydrocarbon deposits, which will dwindle supply in the long run.

Fast-forward to post-Covid lockdowns, where easy monetary policy and a western reopening have caused a surge in demand in travel and goods. Oil is always needed to keep planes running and factories operating. 

This effect has been further hastened when the world sealed Russia off from the financial markets after it invaded Ukraine. 

Some 34% of Germany’s crude oil and 60% of its gas imports came from Russia before the war. Not wanting to fuel the war effort, Germany, alongside many other European countries, has been trying to make do without Russian energy. The lack of supply due to the decade-long underinvestment in fossil fuels and the massive reopening floodgate of capital has caused energy prices to skyrocket, which weighs heavy on Germany’s budget.

At last, we have reached the point where a colder-than-normal winter will force Germany’s hand to use much-hated coal as a source of cheap baseload energy.

Apart from Germany, many other European countries face a similar complication. As it is of national interest to increase local energy sources as a percentage of all energy sources, these nations begin to reinvest in onshore energy production:

• The European Union and the United Kingdom’s natural gas import capacity is expected to increase by 34% by the end of 2024.
• Germany plans to develop three new floating LNG terminals while Finland and Estonia are jointly developing a new floating LNG terminal.
• Italy is also developing a new floating LNG terminal to be operable by spring 2023 while the head of Eni, Italian multinational energy company, has called for four more new LNG terminals. 

Fiscal stimulus will head in this direction of energy security, and we believe that this will be one of the next big themes for 2023 and 2024.