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Renewable energy may be the big winner in Glasgow: Analyst

BNP Paribas Research Analyst Trevor Allen joins Yaho Finance to discuss the COP26 Summit and how he thinks it will impact the markets

Video Transcript

- And here to help us discuss that is Trevor Allen, BNP Paribas sustainability research analyst. Thank you so much for being with us. It's going to take several days for us to find out what the wins are at the summit. But who are the winners besides the EV market in this sector, in this space?

TREVOR ALLEN: Thank you, Karina, for that, and thank you for having me today. You know, we're looking at the big winners who are going to be around renewable energy. There's still a tremendous amount of renewable energy development that needs to occur. Solar, onshore wind, when we look at those, those are technologies that are economically competitive, whether it's with coal development in China, natural gas or coal development in Europe, or natural gas developments in the US. So what we're talking about here is the technology that is profit-generating today. This is not something that you have to necessarily have an ambition for in the future.

So we certainly see renewable energy as being one of the key elements there going forward, and one of the positive aspects that we see of the cop coming out is really commitments to develop more of this renewable energy in that sense.

- Is one of the takeaways, though, that big companies, multinationals are just not prepared for the next 25 years to meet some of these goals?

TREVOR ALLEN: So this is a transition, this is not necessarily going to happen overnight. So I wouldn't say that countries-- sorry, that companies aren't necessarily prepared. I would say what we need is kind of an alignment of the tools of how we're going to get to that next stage. So, for example, one of the elements that is actually out there and it's used quite extensively in the US actually is a purchasing power agreement. This is basically an agreement for a company to be able to buy a certain amount of renewable energy over a given period of time.

So, for example, you know, a lot of the tech companies out there are buying renewable energy specifically for 10, 15-year commitments in that sense. So they're preparing themselves for the transition. What we have to look at now really is what are the elements that you have to get in line to kind of develop this renewable energy, it's largely Capex. When you look at solar or wind development, 85% of the cost of solar and wind developments is going to be around Capex. So it's a very small amount of blowback.

So really, in order to align this, we need agreements from how fast countries want to move and then being able to kind of disclose that to the individual companies are kind of acting underneath in that particular region aligning those to understand how quickly we can move because this is a transition. It's going to require planning, and it's going to require transparency in particular.

- But then how much Capex are you talking about? Because we're still a far ways off. Just look at the energy crisis we're in now, where countries are begging for oil basically. So we're talking about reducing the effects of climate change and reducing fossil fuels right now at this summit. But we're nowhere near there yet.

- No, we're not, and that's why we have to go back to this idea of transition. So if we think about-- we think about renewable energy going forward with solar and onshore wind and even offshore wind, you're going to need battery storage to basically make that kind of a more reliable technology in that sense. On the other side, with the fossil fuel side, when we have natural gas, and we have coal, what we have to think about is starting to generate capital for carbon capture storage in that sense. So we need this balance of transition.

So for example, obviously solar is not going to be producing overnight, so we need to be able to have other methods such as wind that's going to help us, but, you know, as we saw in the UK and we saw in Germany both this summer and a bit in September, we had low wind levels in that sense. So we need other technologies. If there is still kind of a dependency on natural gas, for example, which is kind of a technology that you can switch on instantaneously for electricity on demand, that is going to require carbon capture storage going forward.

So if we go back to the amount of commitment that this is going to require in terms of Capex expenditure, it is going to be significant. But we have to remember that these are also profitable technologies, so the money you're spending today, you're going to make back in terms of actually being able to generate that electricity and selling it in the market, whether it's hedged through a PPA, or whether it's actually a merchant sales afterwards in that sense.

- And to that point, I mean, how do you measure success or return on investment on this Capex you're talking about.

TREVOR ALLEN: So typically, if you're looking specifically at renewable energy, it's around the levelized cost of energy. So this is the cost to one, build the plant, to run the plant, and to actually make a bit of a profit on that electricity that you're generating in that sense. So when we look at the levelized cost of energy, this is why we're talking about solar being competitive in China, onshore wind being competitive in China, as well as solar and onshore wind being competitive in Europe and in the US as well.