Investment Opportunities and Risks in the Global Energy Industry

2020 looks like being the biggest black swan event since WWII. The global pandemic has affected the mentality of investors all over the world. Both the present and the future are now being defined by uncertainty. To offer some clarity to what is happening and to provide a number of different perspectives is the mission of the M&A Community. 

Recently, M&A Community hosted a talk show to discuss investment opportunities and risk analysis in the global energy industry. We were joined by Legend Yi from the leading global energy consulting group, Wood Mackenzie. He shared his opinions concerning the current situation on the global energy markets, the future of renewable energy, and gave some recommendations for investors looking for electricity projects all over the world. 

Why are investments in the energy sector worth paying attention to today, amidst the economic downturn caused by the pandemic?

Looking at recent years, we can surely state that globally, our demand for energy is much higher than it used to be. It is still rising, regardless if we are talking about developed countries, those developing or less developed ones. Moreover, there will be a stable upward trend in the future as well. 

Yes, in China, in February-March 2020 we observed a substantial decrease in energy consumption that, of course, was caused by Covid-19 and the subsequent lockdown. But as soon as in April, we were seeing a gradual increase again. There are several reasons for this. Firstly, most countries introduced policies to stimulate their economies, thus creating additional demand. Secondly, both households and industries are going to increase their energy consumption. We can expect explosive growth in the future.

For these reasons, I believe that right now is a great time to invest in the energy or electricity sectors. 

Even in the most negative scenario, where the pandemic lasts for half a year, the demand for electricity may not increase for one or two years, or maybe even three. Even in the worst case, the demand rebound will simply be delayed until 2024-2025. However, the current situation shows that this is highly unlikely. 

Moreover, energy investments take time. You cannot simply build a power plant in a day. If you invest today, starting the construction cycle, the time that output starts is the time when the demand will have recovered to its highest point. Anyway, in the long run the payoff is going to be rather good.

The current blow to another source of energy, the oil industry, is obvious. Nevertheless, renewables have been steadily growing as a high-profile field in recent years. Is it also a hot spot for investments?

There are many reasons attributed to the collapse of oil prices. It is not purely due to the pandemic. There are also political reasons, like watching some big-time gambling with some of the most serious players on the market moving prices and output. Secondly, the drop in oil prices has also brought coal and gas prices down. Another factor contributing to this is the present falling demand for electricity. 

Nevertheless, renewable energy is attracting investment. For instance, in China you can see the rapid development of solar and wind energy, lots of research has been conducted, and new technologies are constantly emerging. The cost of this kind of energy can compete with traditional coal-energy prices in many places. There are also natural advantages to investing in new energy sources since, in the case of gas and coal, you also need a large amount of infrastructure support, such as ports and pipelines. 

The construction cycle for the new kinds of energy is also shorter. Even something like a complex offshore wind farm can be completed in a year. A 100-megawatt solar plant in China can be completed in four or five months. So, in these terms, especially compared to thermal or hydro-energy, capital risk is much less.

Many countries are encouraging as much investment in renewable energy as is possible. 

Take for instance countries in Southeast Asia. Places like Indonesia, Thailand, Bangladesh are rapidly growing and construction is in full swing. This means the demand for electricity in the region will grow. Renewable energy in these places is a hot spot for investment. South Korea, Japan, the Chinese state and private capital, some funds in Germany and the US are already investing in Southeast Asia. 

***

Legend Yi predicts that sooner or later, the demand for electricity will grow. Developing countries seem to be one of the most lucrative places for potential investors as governments are fostering large infrastructure projects and are ready to welcome foreign capital. However, ROI promises seem to be optimistic as well, he states, also warning about possible risks. For how you can define and tackle them as well as where and how to find a suitable spot for energy investments, read here.

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Speakers of this event

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Legend Yi

Wood Mackenzie

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