Investors Have Energy All Wrong: Addition — Not Transition — Will Define This Century

“We believe the future will look a little bit different than maybe what you hear on the news or you read in the paper,” said Tyler Rosenlicht, portfolio manager at Cohen & Steers.

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Tyler Rosenlicht, who manages a global listed infrastructure portfolio at Cohen & Steers, wants the earth to remain livable and he’s as excited as anyone about the prospects of solar and wind energy. But he and his colleagues are also energy realists.

“We believe the future will look a little bit different than maybe what you hear on the news or you read in the paper,” Rosenlicht told Institutional Investor.

What’s happening right now — the deluge of public policy and consumer support, and investments in sustainable sources of fuel — is not an energy transition. It’s “energy addition” and it’s going to be the story of this century, according to a Cohen & Steers research paper shared with clients on Wednesday and due to be released publicly next week.

“I think we’re going through a massive disruption and a massive amount of change in energy and that’s obviously not anything controversial to say,” Rosenlicht said. “This is a huge opportunity for us as investors…we think the market is potentially misunderstanding or misvaluing” energy companies.

The crux of Cohen & Steers’ argument is that global energy consumption will reach unprecedented levels in the coming decades as the population grows from 7.9 billion people in 2022 to 9.1 billion people in 2040, and as people become increasingly prosperous and bigger energy consumers. In 2022, the world’s usage was roughly 178,000 terawatt-hours but is expected to climb to 213,000 in 2040, according to the report.

Traditional energy — oil, gas and coal — will still serve 65 percent of all energy needs in 2040. However, wind solar and other alternative energy is still going to boom in the coming years and provide more than twice current levels. “The marketplace cannot and will not be dependent on one energy source or the other. With the exception of coal, we are in a ‘more of everything’ world for the next few decades,” according to the report.

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Crude oil will be especially difficult to replace. “Plainly put, the marketplace needs all the reliable — and, ideally, clean — energy sources it can summon,” Rosenlicht said, but battery technology hasn’t made wind and solar energy as storable and transportable as crude oil energy.

Rosenlicht also pointed to the airline industry’s transatlantic flights as another example of the challenge to replace crude oil. Assuming battery technology progresses at its current pace, it could still be decades before aircraft are capable of traveling to and from places like New York and London. And that’s just one part of the puzzle, he explained. “How long is it going to take for us to actually take out of service all the old 737s or whatever and put in these new electric planes? It’s just going to take a really long time,” Rosenlicht said.

Energy transition has been politicized, partly because parts of the industry are concentrated in local areas or states governed by republicans or democrats. Rosenlicht says that neither side is right about their energy supporting everyone in the near- or middle-term. “The reality is we think the future is a bit of a purple. There’s places that will see even more investment in alternatives. There’s places that will rely on traditional [energy] longer. And we think the sort of blending of the two worlds is going to be required,” he said.

But Cohen & Steers doesn’t believe that net zero energy production is just some pipe dream. Right now, renewable energy produces about 30,000 terawatt-hours and Cohen & Steers expects it will grow to 75,000 in 2040. That jump — 45,000 terawatt-hours — is nearly as much output as the entire oil industry today (51,200).

At that pace, by way of new public policy and scientific advances, reliance on things like wind and solar energy could become far more dominant — and sooner. If those things happen, Cohen & Steers will need to update its research.

“It’s important to be intellectually honest. If we get five years in the future and something’s changed, we are able and willing to change our view,” Rosenlicht said. ”It’s one of the nice things about playing in the listed markets. We can update this every six months or every year.”

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