Tom Pearson
So Jonathan, how do you see things shaping up in 2024 in the world of sustainable energy?
Jonathan Waghorn
Sure. So we would expect to see the energy transition continue to accelerate in 2024. If we think about renewable power generation and the outcome of all of that, that should grow 7-8%, displacing more coal and natural gas. That should result in the electricity sector's carbon dioxide emissions continuing to decline. Associated with that, there'll be a need for a lot more grid investment, so likely doubling from $300 billion per annum 2022 to something more like the $800 billion per annum level to support that growth in renewable power generation.
Tom Pearson
So electrification, building efficiency, EVs, they're in the news all the time. What's the outlook for these particular sectors?
Jonathan Waghorn
Yeah, certainly efficiency, especially building efficiency and electrification, we need to see much greater levels of investment. So we need to see there go from sort of $340 billion per annum, in 2022, up to something in the order of about $600 billion in the second-half of this decade. So it's essentially as a doubling of the growth rates to achieve those standards. And that's driven very much by energy security. It's by economics and it's by tightening building standards so that's the efficiency side. In terms of electric vehicles, we'd expect to see more growth again this year so seeing probably 16,000,000 units being sold in 2024, that's up from 14 in 2023 and in 2024 be representing about 20% of total vehicle sales in that year. That achieves our long held target of 20% penetration about one year early we thought it was going to be 2025. The drivers of that improved economics that's really lower lithium ion battery prices, that's driven by lower costs of raw materials going into battery manufacturing that, brings about better range brings about quicker charging times as well. They're the key drivers of really the economics kicking off. It's all driven very much by economics and we think that threshold point that the parity where electric vehicles are are properly priced comparable to internal combustion engine vehicles probably happens in 2026/2027, that kind of time period.
Tom Pearson
So Jonathan, can we switch to the supply side for a second, can we talk about solar and wind?
Jonathan Waghorn
Yeah, sure. Solar is still after inflation and interest rate increases last year. It's still the cheapest form of new electricity supply. We'd expect to see record low module prices continue. To spur more growth across all geographies and record installations probably topping 500 gigawatts in 2024. China likely still to be very dominant and representing more than half of all of that. But Europe and the US continuing to grow nicely, Europe at probably 70 gigawatts. The US, probably 38 gigawatts in solar this year. Wind will grow as well, not to the same record, but it will achieve a record in 2024. Probably something in the order of 115 gigawatts of installations. That's more driven by policy support, and that's true especially in China, in Europe and the US and then looking beyond that, I think many of the bottlenecks that we have seen will start to dissipate. That should allow installations to grow again up to about 170 gigawatts by the end of the decade. That's a growth rate of about 7% per annum. Offshore will be the real area of interest in growth. That's more like a 20% per annum growth rate to the end of the decade. So things starting to free up and improve in the world of wind.
Tom Pearson
OK, so anymore to add? Is this enough?
Jonathan Waghorn
Well, it's not enough in a net zero scenario, so you the outlook that we have and that we summarize and we talk about, it's consistent with government kind of current levels of activity and observable investment plans. But if we were to to see a 1 and a half degree scenario this is falling well short of what would be required. And that's as dictated by the IPCC and and also reiterated in COP 28. So that would require deployment of renewable capacity penetration of EV's, battery storage, use of alternative fuels and energy efficiency to all be you know implemented at much much greater levels than what we're currently seeing.
Tom Pearson
So where does that leave the fund valuation and the fund positioning?
Jonathan Waghorn
Yes, so at the end of last year, so December 2023, the fund was trading on a one year forward PE ratio of about 16 and a half times. So that was lower by about 13% than it was the prior year. Over the year 2023, the funds one year forward, PE fell from a premium to the MSCI World. It was a premium of 35%. It fell to a discount of 13% in October as the largest discount we've seen since March 2020. It closed the year at a discount of around 6%. So a discount to the MSCI world. Which we find confusing and surprising because the consensus earnings per share growth outlook for the fund still remains very strong, it's at about 19% per annum and that's a forecast for 2023 to 2026, a big premium to the MSCI world, which is currently at around 8.5%. As we look in the fund. We look at each of the individual sub sectors. They're all forecast to see growth in excess of the MSCI world. So, current valuation multiples imply you know an earnings outcome that is far worse than is currently implied by consensus. So we don't think that that is a situation that can be sustained on a long term basis.
Tom Pearson
So how does this play out for the remainder of 2024?
Jonathan Waghorn
Yes, so we should see further catalysts in the year ahead. I mean, the sector would definitely be a beneficiary of looser monetary policy, lower inflation, higher fossil fuel prices. They would definitely improve the relative economics of renewable technologies. In terms of policy support further clarity around the IRA in the United States around the tax credits there further details and funding behind the EU Net Zero Industrial Act. So seeing real money come to come to bear should be an improving factor. That I think will lead to investor interest picking up, with respect to the sector in 2024 reflecting those catalysts and I think then also the current attractive valuation level that we currently see. Beyond that, we've then got the continuing importance of energy security, the increased individual social, government pressures for consumers to become more energy efficient as well. So that should lead again to good support for the sector. We look at all of this and we build a portfolio so that the Guinness Sustainable Energy Fund, it's 30 broadly equally weighted positions from a universe of 250 companies. It's designed to give good concentrated exposure to the theme that attractive valuation and especially relative to the consensus earnings growth. Expectations that we that we currently see.
Tom Pearson
Jonathan Waghorn, thank you very much indeed.
Jonathan Waghorn
My pleasure.
