As countries and economies worldwide recover from the COVID-19 pandemic, demand for electrical grids worldwide is rising.
The International Energy Agency recently released a new report that anticipates global demand for electricity to increase by 5% in 2021.
But while the renewable energy sector has been growing, it won’t yet have enough capacity to meet this uptick in demand. As a result, half of new demand will be fulfilled using fossil fuels, specifically coal, pushing carbon dioxide emissions from the power sector to record highs next year.
Fossil Fuel-Powered Electricity Set to Grow
As a result of the Covid-19 pandemic, global electrical use fell by 1% last year, as industries shuttered factories and offices alike. However, demand is expected to grow by 5% in 2021 and another 4% in 2022, with the majority of the increases coming from primarily China and India.
Renewable energy usage is set to grow 8% globally this year, including power generated by wind, solar PV, and hydropower, and is anticipated to grow another 6% in 2022.
That’s a rapid increase, but even still, energy produced from renewables will only be able to fulfill half of the need for this year and next.
Electricity generated from fossil fuels should cover roughly 45% of the increased demand in 2021, and 40% in 2022, while nuclear power will fill the remainder.
Unfortunately, this will drive carbon emissions from the power sector to record levels, after having fallen in the two previous years.
“Renewable power is growing impressively in many parts of the world, but it still isn’t where it needs to be to put us on a path to reaching net-zero emissions by mid-century,” said Keisuke Sadamori, the IEA Director of Energy Markets and Security in a press release.
“As economies rebound, we’ve seen a surge in electricity generation from fossil fuels. To shift to a sustainable trajectory, we need to massively step up investment in clean energy technologies – especially renewables and energy efficiency,” he explained.
The IEA Roadmap to Net Zero outlines how to reach carbon neutrality by mid-century. In order to meet this goal, three-quarters of global emissions from the electricity sector must be cut between 2020 and 2025. This calls for a 6% decrease in coal-fired electricity.
Instead, global demand is trending in the opposite direction, increasing instead of staying level or decreasing, as hoped for.
Fossil Fuel-Free Investing
With the updated power sector outlook, investing in companies free of fossil fuels has become a critical way for investors to align their values with the corporate push toward net-zero emissions targets.
The SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) is one such option. The investment is a core allocation to the large cap equities of the S&P 500, except with much-reduced carbon footprints.
The fund tracks the S&P 500 Fossil Fuel Free Index, a benchmark of companies within the S&P 500 that are “fossil fuel free,” which is defined as companies that don’t own fossil fuel reserves (thermal coal reserves and coal reserve biproducts, as well as oil or gas reserves).
That’s not the same as devoid of all oil stocks. The fund still has minor allocations to traditional energy companies, such as Valero (VLO) and Halliburton (HAL). But without exposure to companies actually holding the physical oil, coal, or gas reserves, the fund’s energy allocation is much reduced. Energy comprises just 0.72% of the ETF’s sector make-up, compared to 2.57% of the SPDR S&P 500 ETF Trust (SPY).
Top sector allocations of SPYX include information technology at 28.38%, healthcare at 13.25%, and consumer discretionary at 12.57%.
SPYX has an expense ratio of 0.20%.
For more news, information, and strategy, visit the ESG Channel.