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Interest rate cuts to create energy transition investment ‘megatrend’?

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The energy transition could be one of the investment megatrends this year and beyond as interest rates are likely to be cut, says the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The comments from deVere Group’s Nigel Green come as central banks around the world continue to hold rates steady for the time being, but with growing expectations that they will begin to cut them in the first half of this year.

He says: “Investing in renewable energy infrastructure, such as utility-scale solar and wind farms, demands significant upfront capital.

“As such when interest rates are high, the return on investment for these projects can be adversely affected, leading developers to hesitate and potentially put new projects on the back burner.

“Beyond the large transitional projects, the industrial sphere has been delving into alternatives to traditional fuels with lower carbon footprints, such as the amalgamation of hydrogen with natural gas. This strategic shift is motivated by a dual concern for both environmental preservation and economic viability.

“However, in times marked by elevated borrowing costs, the emphasis tends to pivot more towards economic considerations, potentially impeding the pace of investments in environmentally-friendly technologies.

“Likewise, the transport sector, poised for advancements in electric vehicles (EVs), hydrogen-powered vehicles, biodiesel, and compressed natural gas, has encountered difficulties in rationalising new projects amid heightened interest rates.”

In addition, escalating interest rates have placed added strain on consumers. The allure of embracing electric vehicles or delving into residential solar investments dwindles in the face of elevated borrowing expenses.

“For consumers, the financial repercussions of these choices become more conspicuous, potentially influencing the pace at which sustainable technologies are embraced.”

Despite the obstacles encountered, a positive outlook persists for the transition towards sustainable energy. “The enduring validity of the long-term investment perspective is underscored, with companies maintaining their dedication to environmental objectives, and governments worldwide offering financial backing to facilitate the transition,” notes Nigel Green.

Looking ahead to the rest of 2024 and beyond, the narrative is likely to shift.

The deVere CEO concludes: “The energy transition has been hit by high interest rates and inflation.

“But now the stage appears to be set for an upward trajectory in energy transition investments.

“This, together with global commitments to environmental sustainability intensifying, 2024 could see the start of an energy transition investment megatrend.”

EU and Egypt to collaborate on COP27 energy transition goals

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The EU and Egypt will join efforts to implement the Paris Agreement and ensure ambitious outcomes at COP27, which takes place in Sharm El-Sheikh in November.

The joint statement commits both parties to work together on a global just energy transition, on improving adaptation capacity, mitigating loss and damage due to climate change, and on increasing climate finance to respond to the needs of developing countries.

The cooperation will have a particular focus on renewable energy sources, hydrogen, and energy efficiency. The EU and Egypt will develop a Mediterranean Hydrogen Partnership to promote investments in renewable electricity generation, strengthening and extension of electricity grids, including trans-Mediterranean interconnectors, the production of renewables and low carbon hydrogen, and the construction of storage, transport and distribution infrastructure.

In light of the new geopolitical and energy market reality after the Russian invasion of Ukraine and in line with the REPowerEU plan, the EU and Egypt will accelerate and intensify their energy partnership. Security of gas supply is a common concern. Today in Cairo, European Commissioner for Energy Kadri Simson, together with Minister El Molla and Minister Elharrar signed a trilateral Memorandum of Understanding between the EU, Egypt and Israel for the export of natural gas to Europe.

The three parties will work together on the stable delivery of natural gas, in a way that is consistent with long-term decarbonisation objectives and based on market-oriented pricing. Natural gas from Israel, Egypt and other sources in the Eastern Mediterranean region will be shipped to Europe via Egypt’s LNG export infrastructure.

The parties will promote the reduction of methane leakage, and in particular examine new technologies for reducing venting and flaring and explore possibilities for the utilisation of captured methane throughout the entire supply chain. They will also endeavour to ensure that future investments will not cause pollution of the marine or land environment.

President von der Leyen said: “We are starting to tap into the full potential of EU-Egypt relations, by putting the clean energy transition and the fight against climate change at the heart of our partnership. I look forward to working with Egypt as COP27 Presidency to build on the good momentum from last year in Glasgow. Egypt is also a crucial partner in our efforts to move away from Russian fossil fuels and towards more reliable suppliers.”

Natural gas ‘Still has vital role in energy transition’

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Natural gas has a very important role to play in the energy transition and in meeting the world’s climate goals, according to the Secretary General of the International Energy Forum, HE Joseph McMonigle.

Speaking at the inaugural GECF Gas Lecture of 2021, entitled ‘The Role of Gas in Clean, Reliable, and Sustainable Growth’, McMonigle said that the success of the energy transition rests “on the use of natural gas technologies and their capacity to accelerate fuel-switching and create synergies to integrate renewables, green gas, hydrogen, and other carbon dioxide solutions. 

“Obviously, this does not come without challenges because I think there are those who want to lump natural gas as a hydrocarbon with other fossil fuels that are not as clean under current utilisation.” 

In his welcoming remarks HE Yury Sentyurin, GECF Secretary General, underscored the long-standing partnership between the two entities and thanked HE McMonigle for IEF’s contribution to the recent launch of the latest edition of the GECF Global Gas Outlook 2050 (24 February 2021) – which is regarded as one of the most respected forecasts, especially as the industry looks to discover what the upcoming period holds for natural gas. 

According to HE McMonigle, the growing share of natural gas in energy consumption of Organisation for Economic Cooperation and Development (OECD) economies has enabled the phase out of coal and eased reliance on nuclear whilst in non-OECD growing economies natural gas accelerates the switching from biomass and coal to gas.

“While the OECD sharpens focus on how natural gas contributes to the transition, it is the fuel of choice to enable successful transitions in non-OECD growing economies that lead the global recovery,” he said.

The industry veteran of both public and private sectors for over 20 years noted that the COVID-19 pandemic has laid bare social inequalities and risks widening divides between OECD and non-OECD regions. In this context, he called for an enhanced producer-consumer dialogue and transparency as the absence of a meaningful collaborative spirit may spawn higher prices in greater market volatility that “benefits no one”. 

“Amidst the efforts to overcome COVID-19 impacts, multiple challenges remain in reigniting economic growth, returning livelihoods and job opportunities to families and younger generations, while meeting climate, clean air, and sustainable development goals.”

“Asia, Latin America, and Africa are home to 16 out of the world’s 20 largest mega cities where the health and well-being of billions highlight the region’s growing reliance on clean energy technologies,” he said, whilst adding that in Asia, gas import and electrification requirements will continue to rise as demand shifts from North East Asia to South East Asia where LNG demand is set to quadruple over the longer-term.

Noting that the world was still in the “teeth of the pandemic”, the speaker cautioned that natural gas supply may not recover as fast as demand due to lack of upstream investment. He also warned that the increased level of ambition of producer and consumer governments to accelerate energy sector transitions may create unintended consequences that limit prospects for sustainable growth of natural gas. 

“Governments and industry leaders set up the IEF to enhance energy market stability, sustainability, and transparency – and to avoid market volatility that inadequate investment would set off through a new and unwanted cycle of boom-and-bust pricing. We will focus dialogue on both issues in upcoming meetings.”

In his intervention, HE Sentyurin underlined specifically that the two Forums’ “similarities in values, alignment in priorities and goals, as well as proximity in views and assessments of the energy markets narrative and upward trends”. 

“Energy producers have been hit by a double crisis as this disruption (brought on by the COVID-19 pandemic) coincided with a number of geo-economic developments, weakened energy demand, and due to weather peaks, low prices, increased oversupply, and new emerging suppliers in the market, which added uncertainty. Nevertheless, the GECF shares a rising consensus, that the mid- and long-term fundamental factors that favour natural gas remain unchanged,” continued the event host.

“As recent events have shown, gas industry is used to face uncertainties and experience major shocks, but manages – time and again – to thrive. I would go so far as to say that it is during challenging periods like currently that gas industry’s ability to respond quickly and efficiently to changing dynamics and market fluctuations becomes even more evident,” asserted HE Sentyurin. 

“Our modelling sends a clear message: it is too early to write off hydrocarbons. They will remain the dominating source in the global energy mix for the foreseeable future,” added the GECF speaker. “Natural gas will be the only hydrocarbon resource to increase its share from 23% today to 28% in 2050 as it is one of the global enablers for reducing emissions quickly, cost-effectively and steadfastly by replacing carbon-intensive fuels as well as backing up intermittent renewables.”