Molly Ayala
The world is witnessing a transition to clean energy, with global investments in clean energy manufacturing booming. This shift is driven by industrial policies, market demand, and the imperative to reduce the carbon footprint of fossil fuels. In 2023, clean energy added approximately USD 320 billion to the world economy, accounting for about 10% of global GDP growth. This trend is expected to continue, with an increasing number of electric vehicles on the road and a growing demand for clean energy solutions. As a result, companies in the electricity-driven economy stand to profit significantly. Utility companies, in particular, are expected to benefit from the transition to clean energy as they invest in renewable energy sources and infrastructure upgrades to meet the rising demand for electricity.
| Characteristics | Values |
|---|---|
| Clean energy's contribution to global GDP growth | 10% in 2023 |
| Clean energy's contribution to GDP growth in the US | 6% in 2023 |
| Clean energy's contribution to GDP growth in China | 5.2% in 2023 |
| Clean energy's contribution to GDP growth in the EU | 0.5% in 2023 |
| Clean energy's contribution to GDP growth in India | 5% in 2023 |
| Percentage of new capacity additions to the world's electricity system in 2023 that were from clean electricity | 80% |
| Percentage of cars sold globally in 2023 that were electric vehicles | 20% |
| Percentage of the S&P 500's energy sector composed of natural gas companies | 33% |
| Percentage of electricity generation in the US from renewables | <25% |
| Percentage of the broader US stock market that was the energy sector in the 1970s | 15% |
| Percentage of the S&P 500 index that is the energy sector today | 3.2% |
| Percentage of EPS growth expected by ETN in 2024 | 11% |
| Percentage of EPS growth of FSLR expected in 2024 | 74% |
| Percentage of EPS growth of FSLR expected in 2025 | 53% |
| Percentage of the growth in total investment in China in 2023 that came from the clean energy sector | 50% |
| Percentage of the growth in total investment in the US in 2023 that came from the clean energy sector | 20% |
| Percentage of small and medium-sized businesses that experienced decreased profit margins due to increased electricity costs | Not specified |
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What You'll Learn
Clean energy's role in economic growth
Clean energy is playing an increasingly important role in the global energy system, with clean electricity accounting for around 80% of new capacity additions to the world's electricity system in 2023. This shift towards clean energy is being driven by industrial policies, market demand, and efforts to reduce the carbon footprint of the energy sector.
In 2023, clean energy added approximately USD 320 billion to the world economy, representing about 10% of global GDP growth. This contribution to the global economy is significant and indicates the potential for future economic growth driven by clean energy.
One of the key regions leading the transition to clean energy is the European Union, where clean energy accounted for nearly one-third of GDP growth in 2023. Strong climate targets and policies, such as the Fit for 55 package and the proposed Net Zero Industry Act, have supported investments in clean energy manufacturing, particularly in battery manufacturing.
China is another notable example, where clean energy was the top driver of economic growth in 2023. Clean energy sectors contributed 11.4 trillion yuan ($1.6 trillion) to the Chinese economy, accounting for all of the growth in investment and a significant share of economic growth. This surge in clean energy investment in China coincided with a decline in the real estate sector, indicating a strategic shift in macroeconomic priorities.
In the United States, clean energy also played an important role in economic growth in 2023, with the Inflation Reduction Act and the Bipartisan Infrastructure Law driving investment in clean energy manufacturing and sales of electric vehicles. Clean energy growth accounted for around 6% of GDP growth in the United States, highlighting its contribution to the world's largest economy.
While the transition to clean energy is gaining momentum, it is important to note that investments in the energy sector are still primarily directed towards traditional companies in the oil and natural gas industries. The demand for fossil fuels remains significant, and exploration and production companies continue to generate solid profit margins.
However, the clean energy sector is expected to continue its growth trajectory, driven by increasing investment, supportive policies, and market demands. The integration of digital tools, artificial intelligence, and new energy storage technologies will also play a crucial role in shaping the future of the clean energy economy.
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Electric utility stocks
Electric utility companies are facing an unprecedented increase in power demand, which may require expedited investment in generation, transmission, and distribution. This demand is driven in part by electrification and artificial intelligence-driven data centre expansion.
The integration of new technologies, such as SMR and new energy storage, is expected to continue, alongside the use of AI and digital tools to integrate DERs into the grid.
With this in mind, here is a list of electric utility stocks to consider:
- Edison International, the parent company of Southern California Edison, is undervalued and currently trades 36% below Morningstar's $80 per share fair value estimate.
- Portland General Electric, which provides generation, transmission, and distribution services to about half of Oregon residents and two-thirds of the state's businesses. Shares of Portland General stock look 17% undervalued relative to a $53 per share fair value estimate.
- Essential Utilities, a diversified holding company whose subsidiaries include Aqua and Peoples, provide rate-regulated electric, gas, and water distribution services. Essential Utilities stock is trading at a 15% discount to a $43 per share fair value estimate.
- TXNM Energy, Inc., an investor-owned holding company, provides electricity and electric services in New Mexico and Texas.
- Ameren Corp., a public utility holding company, provides electric and natural gas services in Missouri and Illinois.
- OGE Energy Corp., a holding company that provides investments in energy and energy services, offering physical delivery and related services for electricity in Oklahoma.
- Eco Wave Power Global AB, a company engaged in the research, development, and manufacture of technology for turning ocean and sea waves into electricity.
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Oil refiners' profits
In 2022, oil companies, including those in California, reported record profits while consumers faced high prices at the pump. Soaring gasoline prices, reaching over $5 per gallon, contributed to a significant increase in refiners' earnings. The eight biggest independent U.S. refiners were estimated to experience a 652% jump in their average earnings per share. High refining margins and fuel demand played a crucial role in this profit surge.
However, the outlook for oil refiners' profits in 2025 appears less optimistic. Executives from major oil companies like Chevron, Exxon Mobil, and Shell have expressed concerns about declining margins in the refining sector. A combination of factors, including sputtering demand growth and an increase in global refinery capacity, has negatively impacted refining margins. As a result, companies like Shell have no plans to expand their refining business, and Chevron has reported losses in this sector.
It is worth noting that the transition to clean energy and the increasing adoption of electric vehicles contribute to the complex dynamics affecting oil refiners' profits. While investments in renewable energy sources are growing, the demand for fossil fuels remains significant in the near term. Oil refiners' ability to adapt to market changes and leverage technologies like AI to optimize operations will influence their profitability in a rapidly evolving energy landscape.
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Electric vehicle sales
Electric vehicles (EVs) are an important part of the shift towards a clean energy economy. In 2023, electric vehicles accounted for around one out of five cars sold globally.
In the United States, EV sales have been experiencing strong growth. In 2024, full-year EV sales reached 1.3 million, an increase of 7.3% from 2023. This growth was driven by incentives from automakers, excellent lease deals, and federal and state incentive programs. Automakers such as General Motors and Honda Motor Co. contributed significantly to this increase, with Hyundai Motor Group and Ford Motor Company also increasing their EV sales. Despite Tesla sales declining by over 37,000 units, their Model Y and Model 3 continue to be the best-selling EVs in the US.
Cox Automotive predicts that EV sales in the US will continue to grow in 2025, potentially reaching around 10% of total sales. This growth is expected due to the introduction of new products, improvements in charging infrastructure, and continued support from automakers. However, policy changes in Washington may slow this growth, but their impact is not expected to be immediate.
In Europe, Toyota's first-quarter electrified vehicle sales, including hybrids, made up more than 50% of their total sales volume. This shift towards electrification is driven by the need to comply with emissions regulations.
While the EV market is hypercompetitive, with a range of models and manufacturers, the integration of electric vehicles into the automotive market is an important aspect of the transition to a clean energy economy.
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Energy sector investments
Energy is a fundamental input for economic activity, and its consumption is tightly correlated with income on every continent. As the world transitions to a clean energy economy, the energy sector is witnessing a shift in investment patterns. While traditional fossil fuel companies still dominate the sector, clean energy is gaining traction, contributing significantly to global GDP growth.
In 2023, clean energy added approximately USD 320 billion to the world economy, accounting for about 10% of global GDP growth. This transition is driven by industrial policies, market demand, and government incentives. As a result, investments in clean energy manufacturing and sales are booming, with employment in this sector surpassing that of the fossil fuel industry.
Despite this shift, the demand for fossil fuels remains robust in the near term. Oil and natural gas companies continue to generate solid profit margins, benefiting from their ability to return capital to shareholders through dividend payouts. However, the focus on reducing the carbon footprint and addressing climate change is leading to a growing interest in renewable energy sources.
In the United States, the Inflation Reduction Act and the Bipartisan Infrastructure Law have driven a surge in investment in clean energy, with a particular emphasis on electric vehicles (EVs). This trend is expected to continue, and companies like Duke Energy, which is investing heavily in enhancing its operations and reducing its carbon footprint, are well-positioned to benefit from this transition.
Looking ahead, 2025 could be a pivotal year for power and utility companies. With an unprecedented increase in power demand expected, utilities will need to expedite investments in generation, transmission, and distribution. This includes leveraging new technologies, such as SMR and energy storage solutions, as well as integrating AI and digital tools to manage power generation and distribution effectively.
For investors, the electricity-driven economy presents opportunities in both traditional and renewable energy sectors. While oil and natural gas companies continue to be profitable, the long-term outlook may be shifting towards renewables. Companies like First Solar, a leading manufacturer of solar panels, are well-positioned to benefit from the expected surge in demand for solar energy by utility companies.
In conclusion, the energy sector is undergoing a transformation, driven by the global shift towards clean and renewable energy sources. This transition is creating investment opportunities in both traditional and renewable energy companies, with the potential for solid profit margins in both sectors. However, the long-term outlook favors renewables as the world moves towards a more sustainable and decarbonized energy future.
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Frequently asked questions
Companies that provide equipment to electric power producers, such as ETN, will profit from the electricity-driven economy.
ETN's revenue jumped to $6 billion last quarter, with a 9% increase in operating cash flow year-over-year to $1.3 billion.
Analysts predict that the amount of energy generated by solar in the U.S. will increase at a CAGR of 26% between now and 2028. As a result, solar panel manufacturers like First Solar (FSLR) are expected to benefit from the rising demand for solar panels.
Electric utility companies are expected to benefit from the electricity-driven economy as they generate predictable revenue due to their government-regulated rates and fees. They also typically pay dividends to investors, making them attractive for those seeking lower-risk investments.
Duke Energy, NextEra Energy, and Xcel Energy are three of the best electric utility stocks, with strong financial profiles, steady revenue, and dividend yields.
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