Bioenergy: supporting a lower carbon energy transition
A new source of energy in the race for carbon reduction
Marketing Communication
We live in an era where environmental challenges have taken centre stage. Tackling global warming and combatting climate change will require concerted efforts to reduce our greenhouse-gas (GHG) emissions by managing the transition from fossil fuels to renewable energy.
Investors looking at companies that are helping to drive this transition can potentially see more stable, long-term returns by investing in the underlying theme: fighting climate change. Thematic investing may identify a smaller pool of stocks and bonds that could capitalise on growth potential in this sector, but the theme is likely to remain relevant in the long term.
Where does bioenergy fit into the net zero trajectory?
One of the biggest steps we can take to reduce our emissions is to source renewable energy for our homes, factories and transport. Wind, solar, hydroelectric, geothermal and tidal power currently provide around 6% of the world’s total energy supply, with other renewable sources – such as bioenergy derived from waste or crops – accounting for another 7%1. To remain on course for net zero goals by 2050, however, renewables’ share of the market will need to increase from 13% today to more than 30% in the next seven years2. Bioenergy, therefore, has great potential to help drive the transition to net zero.
First-generation biofuels include ethanol, from fermenting agricultural crops, and biodiesel, from animal and vegetable oils. However, these are unsustainable to produce and involve intensive land use and relatively high GHG emissions.
Second-generation bioenergy can be carbon neutral when it’s sourced sustainably from municipal solid waste, biomass or other plant waste because the carbon dioxide released during combustion is offset by growing more plants. Its production is also less polluting, not as land intensive, and can help reduce the amount of waste sent to landfill. As such, the Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) would like to see this more responsibly produced bioenergy’s contribution to the power market reach 20% by 20503.
Supporting growth in bioenergy
While there was clearly an energy crisis on the horizon, the conflict that began in Eastern Europe in 2022 has disrupted power supplies across the continent and had a wider impact globally. In 2019, the European Union (EU) imported 56% of its gas from Russia but that had fallen to just 13% by late 20224. Deriving power from sustainable renewable resources is now more important than ever.
To give two examples, the UK has become a global leader in windfarm technology and Iceland derives 99.96% of its energy from renewable sources, 66% of which is geothermal5. There has also been more investment globally in solar and tidal power. It’s encouraging to see that recent reports suggest the global bioenergy market is now growing at 7% annually and could be worth more than $150bn by 20286.
Bioenergy represents a great opportunity for investors, and the migration to second-generation sources has government backing across the EU and US. Indeed, first-generation fuels are scheduled to be phased out over the next decade and second-gen biorefineries in the US are to receive government grants and subsidies. The companies driving the energy transition will also require significant private investment, however.
The EU’s energy security and diversification strategy could see €37bn invested in increasing biomethane production from three billion cubic metres in 2022 to 35 billion cubic metres by 2030. In the UK, the government has committed to using the 10 million tonnes of waste food produced annually as feedstock for bioenergy production. However, to meet the IEA’s net zero ambitions by 2050, investment in new energy will need to increase to $5trn annually by 20307. In the long term, there’s clearly an opportunity to realise significant returns.
How to tap into thematic ETFs
Thematic ETFs can provide investors with convenient exposure to companies involved in specific niches or themes, which may offer long-term growth potential.
To find out more about our thematics range, just visit our website:
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1 https://www.iea.org/reports/renewables2 https://www.iea.org/reports/renewables3 IEA, Net Zero 2050 (NZE) Report; TES: Total Energy Supply4 https://www.agriinvestor.com/bioenergy-could-be-on-the-cusp-of-something-big/5 https://adventures.is/blog/geothermal-energy-iceland/6 https://www.vantagemarketresearch.com/press-release/bioenergy-market-3424237 International Energy Agency (NZE 2021 Report)
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