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Infrastructure Will Play a Key Role in Energy Transformation
According to the International Energy Agency (IEA), the energy sector is the source of approximately three-quarters of greenhouse gas emissions globally. Reducing carbon emissions is seen as one key to averting the worst effects of climate change. In a recently released report, the IEA states that nothing short of a total transformation of the world’s energy systems is required if the world is to successfully limit the rise in global temperature.
Simultaneously, various governments around the world are introducing legislation to help reach ambitious emissions reduction targets, most with the long-term goal of eventually becoming carbon neutral. Here in the United States, President Biden has introduced the largest investment in our infrastructure to date, a portion of which will provide for creating thousands of miles of new power lines and expanding renewable energy.
The recent focus on infrastructure and cleaner energy has ignited questions about the future role of the world’s current energy infrastructure system. After all, our current network of pipelines stores and transports mostly energy created from carbon-based sources like oil and natural gas, and much of our electricity is still generated from carbon-based sources. If the world is indeed moving toward cleaner energy, will our current energy infrastructure system become obsolete? Will it be needed at all? Is renewable energy like wind and solar the only way to invest in the future of energy?
In this commentary, we highlight four important reasons we believe infrastructure will continue to play an important role in energy transformation, helping to build a cleaner and more sustainable future and providing attractive investment opportunities.
1. All Forms of Energy Will Be Needed to Meet Future Global Demand
The world’s population is expected to grow to almost 10 billion people by 2050, and the global economy is expected to be almost twice as large as today’s.1 With continued economic progress, more of the world’s population will enjoy better living standards.
More people with higher living standards will require more energy. While it would be ideal if all the world’s energy needs were met with clean energy sources, there simply won’t be enough of it, at least for several decades. In the meantime, carbon-based fuels will remain a key component of the world’s energy sources. This continued use of carbon-based fuels means that ongoing investment in energy infrastructure will be just as critical as ever in supporting growing, developing populations.
Source: IEA 2020 World Energy Outlook, via Enterprise Products Partners presentation. TOLZ has holdings in Enterprise Products Partners (2.31%) as of 07/30/2021. Holdings are subject to change.
2. The Energy Transition Will Take Time
Recently, the U.S. government strengthened its pledge to reduce greenhouse gas emissions, targeting net zero. Net zero pledges now cover approximately 70% of global GDP and CO2 emissions. However, getting to net zero will take several decades. Some countries, such as Finland, are seeking to reach net neutral as soon as 2035, but most countries will take much longer to get there. And China isn’t targeting carbon-neutrality until 2060.2
In the meantime, low-emission, carbon-based fuels like natural gas will play a significant role in the global energy mix for decades to come. Natural gas, including liquefied natural gas (LNG), is a key enabler of a lower carbon future and will gradually replace much dirtier sources, like coal, as a reliable and cost-effective energy source. Natural gas enables economic growth without sacrificing environmental objectives.
The infrastructure that extracts, stores and transports natural gas will therefore continue to present compelling investment opportunities for the foreseeable future.
Source: Becher, Meike. “All hydrogen roads lead to renewables (and through Rome?)” Sanford C. Bernstein & Co., LLC. September 3, 2020. Kinder Morgan, Inc. Report. TOLZ has holdings in Kinder Morgan, Inc. (2.37%) and Cheniere Energy (1.36%) as of 07/30/2021.
3. Existing Pipelines Will Transport Fuels of the Future
"Existing gas infrastructure is a valuable asset with significant storage capacity that can be repurposed over time to deliver large columns of biomethane, or, with modifications, low-carbon hydrogen"—IEA
Many of today’s leading pipeline operators—like Williams and Kinder Morgan—are already pursuing and investing in cleaner alternative fuels of the future. Low-emission fuel sources like hydrogen, and renewable fuels like biodiesel and renewable natural gas, can be transported, stored, and used in the same pipelines as natural gas with little to no modification. This positions many of today’s leading operators to maintain and expand their capacity in the future.
Source: KMI presentation: Becker, Meike. “All hydrogen roads lead to renewables (and through Rome?)” Sanford C. Bernstein & Co., LLC. September 3, 2020. TOLZ has holdings in Kinder Morgan, Inc. (2.37%) as of 07/30/2021. Holdings are subject to change.
4. Electrification Is Coming
The adoption of low-emissions electricity in place of fossil fuels is one of the most important drivers of reducing our carbon footprint. Global electricity demand is expected to more than double by 2050, according to the IEA. Perhaps the most apparent of these initiatives will be the rapid increase in electric car sales. According to the IEA, electric vehicle inventory is expected to increase by 18x by 2030 to 140 million vehicles. More electricity needs will require investments not only in low-carbon electricity generation, but also in developing and maintaining a more robust transmission and distribution network. Electricity transmission and distribution companies such as National Grid and Eversource will be at the center of these efforts.
Invest in Infrastructure: The Infrastructure Investment Opportunity
For investors, these tides of change represent investment opportunities in infrastructure.
With long-term commitments to energy transformation around the world, maintaining and enhancing current energy infrastructure and developing new infrastructure will be critical for decades to come. As a result, the owners and operators of those pipelines, energy grids and other energy infrastructure may be poised for investment opportunity.
To take advantage of this investment opportunity, we invite you to explore the ProShares DJ Brookfield Global Infrastructure ETF (TOLZ). TOLZ invests in the “pure-play” owners and operators of transportation, communication, water, and energy infrastructure. Pure-play refers to companies that derive 70% or more of their cash flows from infrastructure lines of business, as tracked by the DJ Brookfield Global Infrastructure Composite Index. The TOLZ portfolio’s energy infrastructure exposure includes mid-stream-energy pipelines and electricity transmission and distribution systems that are well positioned for the world’s transformation to a cleaner energy future.
1 OurWorldinData.org, History Database of the Global Environment (HYDE); U.N., Department of Economic and Social Affairs, Population Division, World Population Prospects 2019.
2 BofA Global Thematic Research, BNEF, Press Reports, GWEC, PV-Magazine.com, EV-Volumes.com, BP.
As of July 31, 2021 TOLZ’s total operating expenses are 0.47%.
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