MEGATRENDSFUELING THE FUTURE
Investing Across the Global Energy Landscape

SPRING/SUMMER 2024
For professional investors only.
All investments involve risk, including
possible loss of capital.
PGIM | FUELING THE FUTURE 1

About PGIM
PGIM is the global asset management business of Prudential Financial, Inc. (PFI). In 41 offices across 19 countries,
our more than 1,450+ investment professionals serve both retail and institutional clients around the world.
As a leading global asset manager, with $1.34 trillion in assets under management, PGIM is built on a foundationof strength, stability, and disciplined risk management.* Our multi-affiliate model allows us to deliver specialized
expertise across key asset classes with a focused investment approach. This gives our clients a diversified suite ofinvestment strategies and solutions with global depth and scale across public and private asset classes, including
fixed income, equities, real estate, private credit, and other alternatives.
For more information, visit www.pgim.com.

All data is as of March 31, 2024.
* PGIM is the investment management business of Prudential Financial, Inc. (PFI). PFI is the 11th largest investment manager (out of 434 firms surveyed) in terms of worldwide
institutional assets under management based on Pensions & Investments’ Top Money Managers list published June 2023. This ranking represents institutional client assets undermanagement by PFI as of December 31, 2022. Participation in the P&I ranking is voluntary and open to managers that have any kind of U.S. institutional tax-exempt AUM. Managers
self-report their data via a survey. P&I sends the survey to previously identified managers and to any new managers asking to participate in the survey/ranking. No compensation isrequired to participate in the ranking.

2 FUELING THE FUTURE | PGIMINTRODUCTION
Nations have risen and fallen, governments come to power and been ousted, and businesses created anddestroyed, all in the quest for energy.1 Today we stand at a critical inflection point for the energy system.
For decades, the world has wrestled with an energy
trilemma: balancing the three goals of (1) a secure,resilient, and reliable energy supply; (2) universal accessto affordable energy for domestic and commercial use;and (3) an energy system that mitigates and avoids
environmental harm.
However, the complexity of balancing these competing
priorities has dramatically increased in a world facing
multiple interlocking crises. The shocks have kept on
coming: the COVID pandemic and its aftermath,international conflicts in Ukraine and the Middle East,
pressure to decouple from Chinese supply chains, and more
frequent extreme weather events and natural disasters.
Navigating this unprecedented and uncertain energy
landscape is critical for long-term investors for four
key reasons:
1. Energy is critical for everything humans do. It not
only accounts for 10% of the global economy but isalso a crucial input into the other 90%. Energy prices
also drive key macroeconomic indicators, including
inflation, consumer spending, economic growth andexternal balances. Government responses to surging
energy prices can also have fiscal consequences. Andenergy price shocks generate market turbulence throughtrade, commodity markets and monetary policy, creating
significant investment uncertainty.2
2. Energy security is national security. Establishing andmaintaining dependable access to energy lies at theheart of many geopolitical fault lines. These geopoliticalrisks are critical for understanding sovereign risk,
evaluating potential capital restrictions on less liquid
investments and monitoring country-specific risk factors
across the portfolio.
3. The energy transition – the shift towards
electrification and a low-carbon energy mix –creates an array of attractive new investment
opportunities. However, the energy transition also leads
to obsolescence risk in waning energy sectors that may
still be overrepresented in investors’ portfolios, while
simultaneously requiring vigilance against overhyped
innovations that are often too distant, uneconomic or
politically unfeasible.
4. For investors with ESG goals or decarbonizationcommitments, the inescapable arithmetic of global
energy demand and supply means that fossil fuels willremain a major source of energy supply for decades tocome – despite the ongoing and necessary transition
to a low carbon economy. Such a world will needconsiderable nuance – and a simplistic strategy that
divides the investment world into “brown” villains and“green” heroes will not be the most effective approach toachieve either environmental or fiduciary objectives.
To understand the emerging investment opportunities andhidden risks from a global energy system in transition, we
have drawn on the insights of 30 investment professionals
across PGIM’s fixed income, equity, real estate, and private
alternatives managers – as well as leading policymakers,
academics, entrepreneurs, private equity and venture
capital investors.
We lay out the key drivers reshaping the energy system
in Chapter 1. Electrification is a critical and growing
component of this system, and the resulting tradeoffs amidst
a prolonged energy transition are summarized in Chapter
2. These foundational hypotheses and concepts allow us tohighlight the most attractive investment themes across theenergy system in Chapter 3, where we also lay out the casefor avoiding speculative opportunities that garner muchmedia hype. Finally, Chapter 4 lays out an action plan forchief investment officers as they evaluate the impact of theevolving energy system across their portfolio.

PGIM | FUELING THE FUTURE 1

TABLE OF CONTENTS

THE NEW ENERGYLANDSCAPENOBODY IS PERFECT:TRADEOFFS IN SOURCES
OF ELECTRICITYINVESTMENTIMPLICATIONSPORTFOLIOIMPLICATIONSPage 3

Page 13

Page 19

Page 29

01 02 03 04
2 FUELING THE FUTURE | PGIMCHAPTER 1

THE NEW ENERGYLANDSCAPE“

While it will take decades forevery contour of the new energy
landscape to fully appear, we are ata critical inflection point.”

PGIM | FUELING THE FUTURE 3

CHAPTER 1

THE NEW ENERGY LANDSCAPE
Global energy production in 1800 relied mostly on biomass – wood, crop waste, charcoal – and would have powered
today’s world for only 12 days. With the second industrial revolution and the dawn of the 20th century, our demandfor energy began increasing, a combination of rising populations, growing economies and new energy-intensive
technologies – ranging from steam engines and automobiles to airplanes and computers (Exhibit 1). To meet our
seemingly insatiable demand, the energy system has become ever more complex, adding an array of new energy
sources – first coal, then oil and gas, and most recently renewables. Importantly, through each evolution of theenergy system, legacy fuel sources have been supplemented rather than completely replaced.
With regard to supply, energy sources are often segmented
into two groups: (1) fossil fuels like coal, oil and natural gas
which emit carbon; and (2) zero-carbon sources – including
renewables (e.g., solar, wind, hydro) and nuclear power –that generate electricity without carbon emissions. Note thatelectricity itself is not an energy source, but rather a criticalintermediary that delivers power generated from thesesources (Exhibit 2A). Combined, these two groups comprise
all primary energy sources.
As for consumption, it is often segmented into four groups:
industrial, transportation, residential and commercial(Exhibit 2B).

Exhibit 1: Energy consumption took off in the late 20th century
Annual global energy consumption, terawatt hours
One billion
smartphone users

TWh
180,000

One billion
internet users
150,000

Global air traffic
reaches 100 million
passengers

120,000

90,000Over 100 million
cars worldwide
60,000World’s firstoil wellWorld’s firstpower station

30,000

0
1800

1820

1840

1860

1880

1900

1920

1940

1960

1980

2000

Source: PGIM Thematic Research, International Telecommunication Union, US Bureau of Transportations Statistics and International Air Transport Association. March 2024.

4 FUELING THE FUTURE | PGIM

2020

Today’s energy system
Exhibit 2A: The energy system – a simplified schematic

PRIMARY ENERGY SOURCES

Coal

GLOBAL ENERGYCONSUMPTIONElectricity
Generation

Zero-carbon

Industrial
Transportation
Residential
Commercial

Natural Gas

Oil &gasoline

Note: A small portion of oil is used for electricity generation and some renewables are directly used within sectors.
Source: PGIM Thematic Research.

Exhibit 2B: Primary energy usage by sector
Uses of primary energy; quadrillion British thermal units (2022)
Industrial

Transportation

Residential

Commercial

Total

Share

Oil

65

110

11

5

190

30%

Natural Gas

89

5

38

20

153

24%

Coal

110

2

32

22

166

26%

Renewables

60

2

23

16

101

16%

Nuclear

13

1

8

6

28

4%

Total

336

120

113

69

638

Share

53%

19%

18%

11%

Note: Numbers are rounded to full digits. The primary energy per sector includes the amount that is used through electricity generation but does not consider the different efficiency rates ofprimary energy sources, leading to deviation from the usual calculation of consumed energy seen in Exhibit 5. For a detailed breakdown of electricity generation see Appendix A.7.
Source: US Energy Information Administration. April 2024.

PGIM | FUELING THE FUTURE 5

Today our energy system sits at a critical inflection point –shifting away from fossil fuels where possible, promoting
electrification and adding renewables to the energy mix.
While it will take decades for every contour of this newenergy landscape to be fully realized, three foundational
themes will be critical.

national security. This is what leads governments – like
Japan, China, Germany, the US and India – to maintainstrategic reserves of oil or natural gas.3
Indeed, when faced with supply shortfalls and the starkprospect of energy rationing, even countries reasonably
far along in the transition to zero-carbon sources put theirneed to meet current energy demand ahead of long-term
decarbonization goals. For example, with their gas supply
threatened by Russia’s invasion of Ukraine, Germany returned
to heavy carbon-emitting sources like coal-fired power plants
to ensure access to a dependable energy source.4

Energy security issues will
be a key factor in the paceof energy transition.

When considering energy security, it is important to noteeach country faces a unique landscape. At one end, countries
with vast reserves of oil or natural gas (and to some degreecoal), have reliable access to energy and typically makedomestic energy sources the basis of their national energy
strategy. Because of their primacy, energy security issues will
be a key factor in the pace of energy transition away fromfossil fuels. This typically means that countries where fossil
fuels are relatively abundant – China, the US, India andthe Middle East, for example – will likely have an extended
transition to renewables (see Appendix A.1).5

1. With rising geopolitical tensions,energy security is national security
Energy has been the root cause of geopolitical tensions andwars for centuries, and it is difficult to overstate the primacyof ensuring a secure and reliable supply. Dependable
energy is not just critical for economic development, it isconsidered by most countries to be an essential aspect of

Exhibit 3: Natural gas importers face greater price volatility
Natural gas price per one million British thermal units$80$70

June 14, 2022
Russia cuts gas supply

$60
$50

February 24, 2022
Russia invades Ukraine$40

Europe
$30
$20

US

$10
$0
2020

2021

2022

Note: The cuts to gas supply refers to the first Nordstream pipeline shutoff from Russia to Germany.
Source: World Bank. April 2024.

6 FUELING THE FUTURE | PGIM

2023

2024

On the other end of the spectrum, countries not naturally
endowed with significant oil or natural gas reserves have twoalternatives. Their first option is to rely on importing fossil
fuels. An extensive global infrastructure network to store
and transport fossil fuels (e.g., pipelines, shipping terminals
and storage facilities) built over decades makes this a viablechoice. However, countries highly dependent on importing
fossil fuels bear more geopolitical and price risk. These risks
were brought to the fore when uncertainty rose aroundthe supply of Russian natural gas to Europe as early as thesummer of 2021. Germany, Italy and other nations were left
scrambling as natural gas prices soared in Europe six months
before the invasion of Ukraine in early 2022 (Exhibit 3).
The second option for countries not endowed with
sufficient fossil fuel reserves is to seek alternative domesticenergy sources. This was an important driver of investments
in nuclear energy production: The oil shocks and rationingof the 1970s prompted government-led efforts to build
nuclear power plants in France, Sweden and South Korea
to boost energy independence (Exhibit 4).6 Today, nuclear
energy still provides a significant amount of energy to manyof these countries (see Appendix A.2).

Countries not naturally
endowed with oil or gas reserves
have two alternatives: they can
import fossil fuels or seek out
alternate energy sources.
While renewable power generation eliminates vulnerabilities
from importing fossil fuels, it also raises new security
issues around the supply chains of critical components.
For example, China dominates supply chains for lithium
batteries controlling more than two-thirds of global
processing capacity.7 Additionally, China accounts for 80%
of global manufacturing of solar panels – and has built
up sizable technology, efficiency and cost advantages overcompetitors in other countries.8

Exhibit 4: Nuclear power peaked after the 1970s oil shock
Nuclear reactor construction starts between 1971 and 1983
45

30

15

0

1971

1974

1977

1980

1983

Note: From 1984 to 2022 there were only five occasions with more than ten
construction starts.
Source: World Nuclear Association. March 2024.

To counter these vulnerabilities in renewable supply chains,countries are taking measures to ensure a diverse supply ofcritical metals and manufactured components. Australia,
for example, which supplies about half of the world’s raw
lithium, is expanding its capacity to process and export
battery-ready minerals.9 Other countries – like India andthe US – are using subsidies or tariffs to support domestic
supply chains and production capacity for solar panels to
reduce their dependence on imports.10, 11

2. Our reliance on fossil fuels willcontinue for decades, even amidst
the energy transition
Our global economy has evolved over decades with fossil
fuels as the primary source of energy. They currently provide
80% of global energy and are likely to remain a significant
component of global energy supply for decades (Exhibit 5).
There are multiple economic and political reasons for thecontinued significance of fossil fuels, but three factors are

PGIM | FUELING THE FUTURE 7

often underappreciated in discussions on the pace of theenergy transition. First, there are many specific industrial
uses where renewables may not offer a complete substitutefor fossil fuels. Second, the elaborate global infrastructure
network for fossil fuels provides a huge incumbency
advantage over renewables. Third, permitting issues and
NIMBYism contribute to a lack of capital for criticalrenewable infrastructure.

Fossil fuels directly power industry andtransportation
The current stock of capital goods is highly reliant on
fossil fuels. For example, the two largest energy consuming
sectors – transportation and industrial – account for 72% of
all energy use. Notably, this consumption is dominated bydirect use of fossil fuels.

Transportation
In the transportation sector, gasoline, diesel or otherpetroleum-based fuels are poured right into the tanks ofautomobiles, trucks, airplanes, ships and motor-bikes
around the world. In fact, fossil fuels provide 98% of theenergy used for transport globally.

The current stock of capital goods
is highly reliant on fossil fuels. For
example, the two largest energy
consuming sectors – industrial andtransportation – account for 72%
of all energy use.
Even in segments of transportation where electrification isalready underway – such as automobiles – it is exceedingly
slow. There are 1.3 billion internal combustion engine (ICE)
automobiles on the road today. Even optimistic forecasts forpenetration of electric vehicles (EVs) have well over a billion
ICE vehicles remaining through 2050 – roughly twice the

Exhibit 5: Fossil fuels power today’s world
Energy consumption by primary source, terawatt hours
TWh
160,000

Zero-carbon
About 20%

120,000

Natural Gas

80,000Oil

Fossil Fuels
About 80%

40,000

Coal
0
1966

1980

1994

Note: Zero-carbon includes solar, wind, biofuels, hydropower and nuclear.
Source: US Energy Information Administration, Global Energy Outlook 2023. March 2024.

8 FUELING THE FUTURE | PGIM

2008

2022

number of EVs (Exhibit 6).12 Furthermore, those forecasts
may be increasingly unrealistic as major car manufacturers
such as Toyota, Ford and Volkswagen are scaling back theirlong-term forecasts for EV demand.13, 14, 15

Exhibit 6: Global EV adoption is moving slowly
Total vehicles powered by electricity and internal combustion
engines, millions

Indeed, fossil fuels have several characteristics that make them
exceptionally difficult to displace in the transportation sector.
One attribute especially challenging to replicate is their energy
density, which is critical for mobility and transportation.
That is, on a per-kilogram basis, natural gas, coal, gasoline– and even wood – provide significantly greater energy thanelectricity stored in a lithium-ion battery (Exhibit 7). The lackof energy density limits the usage of batteries for transportbecause at scale the weight of the batteries themselves
becomes a factor. For example, today’s battery technology isoften sufficient to power motorbikes, automobiles and buses
but is too heavy for long-haul travel by commercial airplanes,
cargo ships, trucks or freight trains.

2,000

ICE
1,500

1,000

500

EV
0

Industrial
The direct use of fossil fuels is ubiquitous and often without
any viable substitute in the industrial sector as well. The

2022

2035 (F)

2050 (F)

Note: (F) indicates forecast.
Source: US Energy Information Administration, International Energy Outlook 2023.

Exhibit 7: Current batteries cannot compete with fossil fuels on energy density
Energy density in megajoules per kilogram

Lithium-ion
0.5 MJ/kg

Natural Gas

Wood

53.1 MJ/kg

19.8 MJ/kg

Gasoline/Diesel
45.8 MJ/kg

Coal
30.2 MJ/kg

Source: Adapted from Brookings, “Why are fossil fuels so hard to quit?” March 2024.

PGIM | FUELING THE FUTURE 9

role of metallurgical coal in steelmaking provides a usefulexample of the difficulty in replacing certain attributes offossil fuels. Combustion of coking coal not only provides
the intense heat needed to melt the iron ore, but the carbon
released from the coke also very efficiently separates out pureiron from oxidized iron ore by chemically combining withthe oxygen.16 This chemical reaction that purifies iron ore
is critical to manufacturing new steel. Electric arc furnaces
offer an alternative – though often at higher cost – to many
aspects of steel recycling. However, they are rarely used to
manufacture new iron.

The shortfall in electric grid
capacity to support electrification
is becoming a material constraint
on the global energy transition.
The global network of transport and storage
infrastructure for fossil fuels will not be
replicated soon
Another incumbency advantage of fossil fuels is the elaborate
infrastructure – namely, in storage and transport – built out
over time. With more than 500,000 gas stations globally,
gasoline can be accessed in nearly every corner of the world –even where it is not locally produced. The sheer geographicalspread of gas stations is a testament to the extensive networkthat exists to produce, refine, transport and store gasoline.
By comparison, electricity is more difficult to store andtransport than oil or gasoline. Long-term power storage lacks
scale, efficiency and mobility, and an extensive network of
infrastructure to store, distribute and transport renewablygenerated electricity is a distant prospect.17

10 FUELING THE FUTURE | PGIM

Regulatory and political challenges contribute toa lack of capital for renewable infrastructure
Estimates for the additional energy infrastructure needed
for renewables are immense – routinely reaching into thehundreds of trillions of dollars. In 2023, $1.8 trillion wasinvested in global renewable infrastructure. That annual
pace would need to more than double over the next 25 years
to meet global net-zero objectives by 2050.18
The shortfall in electric grid capacity to support
electrification, for instance, is becoming a material
constraint on the global energy transition.19 Delays inconnecting new generation projects to the US power gridare growing and now average about five years – more thandouble the wait time in 2007 (Exhibit 8). This is not
merely a US phenomenon either. Tens of billions of dollars
in renewable power projects across Asia, Europe and theAmericas are being cancelled or delayed due to the lack of
new capacity in existing grids.20, 21, 22

Exhibit 8: Get in line – longer delays in grid connection
Average time from request for grid connection to operation, US
Months
60

48

36

24

12
2006

2008

2010

2012

2014

2016

Source: Lawrence Berkeley National Laboratory. March 2024.

2018

2020

2022

Indeed, transmission is crucial for renewable power
generation as the optimal wind and solar farms areusually remote locations far from population centers. The
planning and permitting phase for transmission lines in
Europe and the United States can routinely take six years
or more, often twice as long as the time needed to build
the transmission lines.23 Permitting in most countries isoften highly decentralized and fragmented. This leads
to opposition from local communities as few welcome
wind turbines or high-voltage transmission lines in theirneighborhoods. This NIMBYism raises uncertainty aroundthe viability of such projects and has a chilling effect on
private capital investment in this space.

3. A major transition is underway –with electrification at the center of it
Despite the notable incumbency advantages of fossil fuels,
the global energy system finds itself at a critical inflection
point. Previous energy transitions – from wood to coalin the 18th century and from coal to oil in the early 20th
century – have unfolded slowly, often over a century or
more.24 A major transition has been underway for two
decades from fossil fuels to lower-carbon sources, driven
by climate change concerns, government subsidies andregulations, technological innovations, and lower costs ofrenewable production (Exhibit 9).

Exhibit 9: The current energy transition has been ongoing for two decades
Increase in primary sources’ share of global energy consumption
40%

Zero-carbon
+35%

30%

20%

Natural Gas

10%

+9%

0%

Coal
-6%

-10%

Oil

-14%
-20%
2005

2011

2017

2022

Source: Energy Institute, Statistical Review 2023. March 2024.

PGIM | FUELING THE FUTURE 11

Exhibit 10: Renewable power is skyrocketing
New renewable electricity generation added globally, gigawatts
GW
500

400

300

Electrification is a critical component of this decarbonizationtransition for two reasons. First, it reduces the direct use offossil fuels – like in automobiles and motorbikes. Second,
electricity is the one form of energy that can be affordably
produced without significant carbon emissions, mostobviously by solar, wind, hydro or nuclear generation.25
Renewables have increasingly become the first choice for
new power generation capacity in major energy markets like
China, the US, India, the EU and Brazil. In 2023, the world
increased its renewable capacity by 50% – and the next five
years are expected to see at least the same pace of growth.
At this rate the world could more than double its renewablecapacity by 2030 (Exhibit 10).26

200

100
2011

2013

2015

2017

2019

2021

2023

Source: International Energy Agency and International Renewable Energy Agency.
March 2024.

12 FUELING THE FUTURE | PGIM

The tradeoffs in energy sources, while often
overlooked, are a critical feature of the energy
transition – and the focus of Chapter 2.

CHAPTER 2NOBODY IS PERFECT:TRADEOFFS IN SOURCES
OF ELECTRICITY“

Today, electricity accounts for
20% of all energy consumption.
Under some electrification
scenarios, that share could
potentially reach 50% by 2050.”

PGIM | FUELING THE FUTURE 13

CHAPTER 2NOBODY IS PERFECT: TRADEOFFSIN SOURCES OF ELECTRICITY
Today, electricity accounts for 20% of all energy consumption. Under some electrification scenarios, thatshare could potentially reach 50% by 2050.27 The adoption of digital technology – from mobile phones andcloud computing to artificial intelligence and crypto mining – will only accelerate the immense growth in global
electricity demand. This chapter examines the tradeoffs between various sources of electricity and lays out
some of the fundamental policy and societal choices around electrification – a critical decarbonization lever as
we transition to a lower-carbon energy system.
Given the massive investment poured into renewable power
generation globally by governments and private industry,
it is striking to note that more than 60% of all electricity is
still generated from fossil fuels (Exhibit 11).
Of course, this aggregate figure masks the tremendous
variation across countries – for example, India generates
almost 75% of its electricity from fossil fuels while less than

5% of Norway’s power comes from them28 (Exhibit 12). And
one country is very prominent at both ends of the energy
transition. China is not only one of the largest consumersof fossil fuels – using enough coal annually to power theentire United States – but also a leader in the transition to
renewables – China added more solar and wind capacity in
2023 than the rest of the world combined (see Appendix A.3-6).

Exhibit 11: Electricity generation still relies on fossil fuels
Share of global energy sources in electricity generation
Coal

100%

Oil

Natural gas

Hydropower

Nuclear

Solar and Wind

Zero-carbon

80%

38%

60%

40%

Fossil Fuels
62%

20%

0%
1900

1920

1940

Source: PGIM Thematic Research, Ember and Pinto, et al; 2023. March 2024.

14 FUELING THE FUTURE | PGIM

1960

1980

2000

2022

Powering Change: AI’s growing role in the energy system
Despite the breathless hype, one crucial aspect of AI is still often underestimated: the exponentially increasing
demand for computational capacity to power the training of large language models. This will have profound
implications for data centers and may be one of the most overlooked aspects of the energy transition.
Data centers today consume about 2% of global electricity – more than the nation of France.29, 30
This is expected to more than double by 2026, equivalent to the electricity consumption of Japan.31 And, whencombining energy needs from training large language models with cloud computing and bitcoin mining, data
centers could, by some estimates, be consuming over 20% of the world’s electric supply by 2030.32, 33
Notably, data centers are driving new demand in developed countries where electricity growth has beensluggish.34 Electricity demand from data centers in Ireland, for example, is poised to double by 2026 and will
make up roughly a third of all electricity demand by then. And the dramatic increase in power needs from data
centers is a major reason behind the near doubling of forecasts for US demand growth over the next five years.35
Energy to power and cool the servers – the largest operating cost for data centers – is already a constraint on
new construction and expansion.36 For data center operators this means they must not only consider how toscale their business models to accommodate the increased computational intensity and demand for training
deep neural networks, but also where to locate new facilities and how to source abundant and cheap power.
Data center operators are responding to this challenge in different ways. Some are actively partnering with zerocarbon energy providers to incorporate a dedicated power source into their data center complexes. Hydrogen
power has been part of the solution for several years, and the first off-grid modular data center powered
entirely by hydrogen recently opened in the US.37, 38 And the largest data center operators globally are entering
partnerships or joint ventures with renewable energy providers.39 Amazon, for example, acquired a hyperscaledata center campus in Pennsylvania that is adjacent to a nearby nuclear reactor.40 Other data center operators
have also been exploring small modular reactors.41

PGIM | FUELING THE FUTURE 15

Exhibit 12: Zero-carbon’s role in power generation differs widely across the world
Share of total electricity generation from nuclear energy, renewables, and hydroelectric
The Americas

EuropeAsia

0-20%
21-30%
31-40%
41-60%>61%

Source: International Energy Agency and Energy Institute. March 2024.

Nobody is perfect: Tradeoffs fromdifferent sources of electricity
An optimal energy system would not only have secure accessto primary sources and key components, but it would also
provide electricity cheaply when it is most needed andwithout harming the environment. What is often ignored isthat: no single source of electricity is optimal across these threefronts. That is, fossil fuels and zero-carbon sources present
different tradeoffs.

1. Dispatchability
Dispatchability is technical jargon for the ability to generate
power when it is needed, i.e., how easily power production
can be turned up or down to meet variations in demand.
Typically, electricity is managed around baseload – theminimum level of power demand at any time during theday. In periods when demand increased above the baseload,
complementary sources of power could be switched on asneeded to meet the rising electricity demand and then shutoff as demand declined overnight.42, 43 Baseload power was
typically provided by plants (such as nuclear or coal) withlow marginal cost but little ability to adjust output, while
complementary power plants (often, natural gas turbines
or sometimes hydropower) had a higher marginal cost of
production but were dispatchable – that is, their production
16 FUELING THE FUTURE | PGIM

could easily be dialed up or down to respond to daily
fluctuations in demand.44
By contrast, most renewables – especially solar andwind – are intermittent. That is, their production is noteasily adjusted – and they have considerable variation in
production over the course of a typical day. The more
renewable power on the grid, the greater the swings between
minimum and maximum power production within a day.
This has created a new set of infrastructure needs andchallenges as intraday supply-demand imbalances need to be
actively managed by grid operators.45
Current electricity grid and transmission infrastructureis heavily reliant on dispatchable power sources to meetthese daily fluctuations in demand. Because of this, simply
replacing baseload and complementary fossil fuel sources
with more intermittent renewables can lead to significant
challenges downstream.
Managing grids with extensive intermittent power sources
is feasible – but renewable power generation needs to bepaired with complementary infrastructure to enable it.
Utility-scale power storage capability, for example, could be
used to meet daily fluctuations in demand. In the absenceof sufficient storage capacity, easily dispatchable powersources (like some hydroelectric or natural gas) or longdistance transmission lines that can help balance power
between multiple grids are needed.

2. Affordability
More than 2 billion people globally – just under a thirdof the world’s population – lack access to clean, affordable
energy and still cook their food over open fires or on basic
stoves burning wood, charcoal or other biomass.46 And few
developments can trigger universal political backlash quite
like rising energy and electricity prices. A surge in energy
prices in 2022 generated cost-of-living crises and politicalprotests across the globe – from emerging markets like
Pakistan and Ecuador to developed markets like the UK andFrance.47, 48 Consequently, governments and politicians havevery little incentive to compromise on energy affordability.

Solar and wind are amongst
the most cost-efficient sourcesof electricity.
Over the past decade, government support of wind andsolar has attracted private capital which in turn has
enabled and accelerated technological advancements thatnow make solar and wind amongst the most cost-efficient
sources of electricity. In fact, several research studies haveshown it would be less expensive to build entirely newarrays of solar panels or clusters of wind turbines andconnect them to the US grid than it is to keep operating
existing coal plants in the US.49
Renewable power projects like solar and wind generate
electricity today at a relatively low levelized cost of energy(LCOE) – that is, the total cost of power generation overthe lifetime of the asset – and have the added feature of zeromarginal cost of production (Exhibit 13).

3. Carbon emissions
2023 was the warmest year in recorded history – bothon land and in the ocean – and the latest example of apersistent increase in global temperatures.50, 51 Greenhousegases (GHG) – like carbon dioxide and methane – inthe atmosphere are a key factor contributing to warmer
temperatures.52 This persistent global warming is causing ice
caps to melt, driving rises in sea levels and generating more
frequent extreme weather events – whether they’re droughts
and floods or more intense storms and wildfires. 53
Energy – both its production and consumption – accounts
for roughly 75% of global GHG emissions.54 Nearly all of
this comes from combustion of fossil fuels. By contrast,
renewable sources – once manufactured and in place – cangenerate electricity with no additional GHG emissions.
A low-carbon energy system – one that features more
renewable sources rather than fossil fuels – is critical toreducing global GHG emissions. Regardless of how long

Exhibit 13: Renewables have become the cost-effective way of generating electricity
Unsubsidized levelized cost of energy, price per megawatt (2023)
Gas Peaking

Fossil Fuels

Coal
Gas Combined-Cycle
NuclearOffshore Wind

Zero-carbon

Geothermal
Utility Solar
Onshore Wind
0

50

100

150

200

250

Price per Megawatt
Note: LCOE has its limitations. For example, it does not account for the additional cost of power storage for intermittent sources to smooth out the fluctuations in their production. But evenafter adding the cost of firming intermittency – such as the cost of power storage or the need to supplement these renewable sources with dispatchable gas-powered plants – renewablesources remain cost-efficient in most cases – especially compared to nuclear and coal-powered plants.
Source: PGIM Thematic Research, Lazard and International Energy Agency. March 2024.

PGIM | FUELING THE FUTURE 17

Exhibit 14: All sources of electricity offer different tradeoffs
Dispatchability

Affordability

Zero-carbon
Solar

Carbon emissions
BetterWind
Solar with Storage
Geothermal
Hydropower
Nuclear

Fossil Fuels
Coal
Gas

Worse

Note: Affordability is measured by the levelized cost of energy and carbon-emissions captures emissions per BTU.
Source: PGIM Thematic Research, Lazard, International Energy Agency and US Energy Information Administration. March 2024.

it takes to achieve decarbonization goals, reducing carbon
emissions will remain an enduring feature of the energy
landscape for decades.
Over 140 countries – including the largest GHG emitters– have made carbon reduction pledges.55 With so many
countries, firms and investors across the globe focused on
reducing carbon emissions, it has become a critical andmaterial factor for all energy investors.
As the energy transition continues, fossil fuels will be
increasingly displaced by renewables as a source of energy.
However, it is important to acknowledge that no single
approach to the energy transition will work for all countries
at every stage of their development.
The energy system of the future will need a variety ofdifferent sources to achieve the best outcomes (Exhibit 14).
Given that the dispatchability of fossil fuels complement theintermittence of renewable sources quite well, the energy

18 FUELING THE FUTURE | PGIM

system of the foreseeable future will likely continue toincorporate both. Furthermore, diversifying energy sourcesamongst select renewable and fossil fuel sources can provide
a much-needed element of resilience and security. More
importantly, lower-carbon fossil fuels – like natural gas –can play a significant role and allow for energy security andaffordability while the long-term transition is underway.

The tradeoffs around electrification arevery real, and the choices governments andsocieties make will be critical in determining
the pace of the energy transition. Long-term
investors seeking to navigate the evolving
energy landscape will be faced with a range ofinvestment opportunities and challenges, and it
is to these we turn in Chapter 3.

CHAPTER 3

INVESTMENTIMPLICATIONS“

It is important to realize there is no
silver bullet and multiple energy
sources will be needed to meetgrowing global demand.”03
PGIM | FUELING THE FUTURE 19

CHAPTER 3

INVESTMENT IMPLICATIONSThe energy transition is a long, slow, complex process with multiple tradeoffs and challenges along the way.
The pace and breadth will vary by country, but this transition remains a critical driver of the global energy
system and offers a range of investment opportunities around the world. It is important to realize there is no
silver bullet and multiple energy sources will be needed to meet growing global demand. It is also important forinvestors to recognize the different stages of the transition to find the best opportunities, which we believe areencompassed by three overarching themes.

1. Enabling renewable energy bysupporting critical inputs andcomplementary infrastructure
Renewable power generation has grown significantly andhas reached scale in many markets around the world.
However, this expansion has not been matched in otherareas of renewable infrastructure – like power storage andtransmission. This imbalance in renewable infrastructure isreflected in the frequency of episodes of negative prices forelectricity, the power lost from curtailing electricity generationand the long delays to get new projects connected to the grid.

Electricity from renewablesources is at the core of theenergy transition.
These realities demonstrate complementary infrastructure– namely, power transmission and storage – are lagging
and need to be upgraded to handle an energy system withprimarily intermittent sources. For investors, the widespreadneed for expanded and new renewable infrastructure –beyond power generation – is obvious and clear. Additionally,
investors should consider key components of the renewablesupply chain as well as the vast opportunities in emerging
markets where renewable power growth is most rapid.

20 FUELING THE FUTURE | PGIM

Debt opportunities in mature markets
for renewable power and looking pastsolar and wind
The energy transition will require more electricity fromrenewable sources. Government policy and private capital
have embraced this aspect of the energy supply chain andglobal power generation from renewable sources has grown
fourfold from 2012 to 2023.56
For investors, however, the landscape of power generation
becomes more challenging as the market matures.
Government subsidies that enable this growth in renewable
power generation and rapid technological innovation also
drive fierce competition amongst power producers, fallingelectricity prices and shrinking margins.
Additionally, supply chain bottlenecks, rising costs ofequipment and labor, permitting delays as well as higher
interest rates all present mounting challenges to new
projects compared to just a few years ago.57 In fact, efforts
by the US to ramp up offshore wind power generation
are either not drawing interest from project developers
or terms are being renegotiated because the economics
of power generation have shifted so rapidly.58, 59 Similar
challenges are also plaguing projects in Europe and causing
extensive delays or outright cancellations.60
So how should investors consider participating in this highly
dynamic landscape of renewable power generation in Europeand the US? First, there may be better opportunities in debt
rather than equity. Debt financing tends to be less plentiful
than equity in this space. Specifically, senior debt offers
attractive opportunities. And given higher interest rates
globally, some opportunities may emerge in mezzanine andstructured debt as well – especially in projects where offtakeagreements are in place, permitting of new projects is notwide open, grid connections have already been establishedand projects are located relatively close to end customers.
Additionally, providing debt at the parent or holding
company level – rather than at the individual project level –allows for some diversification of idiosyncratic project risk
and a more resilient cash flow.

Power transmission and storage
need to be upgraded to handle
an energy system with primarily
intermittent sources.
Second, investors should look past wind and solar power
generation and explore hydro and geothermal projects –these energy sources can be dispatchable, also have zeromarginal cost and can take advantage of higher prices
when wind and solar are not producing. Given how few
areas can be considered for these kinds of projects and the
difficulty in building new ones, these projects also typicallyface less competition and obsolescence risk than windand solar projects, and their debt can be very attractive.
Specifically, recapitalization of hydro projects in Europe –Scandinavia and Italy – as well as rebuilding of legacy
infrastructure in Chile, Peru, Brazil and other parts of
Latin America. Geothermal power projects are more ofa niche market with some projects arising in the western
United States and parts of Iceland.

EM investors should consider well-positioned
renewable power generators in India
With both energy demand and renewable supply surging,
India provides an intriguing opportunity for investors. It
is already the world’s fourth-largest electricity consumer

as well as the third-largest renewable power producer.
Today renewable sources make up 20% of India’s power
generation and their share is rapidly growing. India reached
an inflection point in 2022 adding more power generationfrom renewables than fossil fuel sources.
In this landscape of incredible growth, companies witha track record of execution on large-scale projects andestablished relationships with government and regulatory
officials can be attractive. Companies like Greenko andReNew Energy Global are major players in solar and wind
power generation today. The cash flows from existingproduction can also help to support their ambitious capitalintensive efforts to expand power generation capacity.
In addition to providing attractive opportunities, emerging
markets typically provide some unusual risks for investors
as well. Renewable power generation is no exception.
Electricity theft presents a notable risk in many developing
countries in Latin America, Asia and Africa with theftrates estimated as high as 20%-30% in some countries
and the global price tag for this approaching $100 billion
annually.61, 62

Key components of the renewable supply chain:wind turbines and minerals
Another way to invest in the wind sector without gettingcaught up in the imbalanced infrastructure or the highly
volatile price of electricity is to consider investments in the
makers of wind turbines. They offer a different risk-reward
proposition than the individual projects and can be an
attractive investment. Vestas, Nordex and Siemens Gamesa
are market leaders in the European and North American
markets for land-based and offshore wind turbines.
Metals and minerals are also critical components ofthe future energy system. While critical minerals likelithium and cobalt get much attention given their scarce
availability or concentration of processing, their demand ishighly linked to current power storage technology and EV
sales. By contrast, because of its extraordinary conductivity,
resiliency and malleability, copper is essential to all aspectsof electrification – from power generation to transmission
and even in equipment like EVs. Because of its uniqueproperties, it is difficult to engineer copper completely
out of electric systems – unlike, say, cobalt. In fact, the

PGIM | FUELING THE FUTURE 21

need for copper across all aspects of electrification may
sometimes be overlooked by markets. As electrification
advances, the global demand for copper is set to more thandouble by 2050 (Exhibit 15).63
As for the supply of copper, it is usually found in remotelocations, and mining is very capital and time intensive. 64
Additionally, approvals and permitting for new mines are
becoming more challenging due to environmental concerns.
As a result, building new capacity can take years and costbillions – new primary copper mines that started production
between 2019 and 2022, for example, had an average leadtime of more than 20 years.65 In fact, with declines of up to
25% in the average quality of copper ore being mined, somecopper producers will have to spend more just to maintaintheir current levels of production.66, 67

Exhibit 15: Copper is essential to electrification
Kilotons of copper needed to meet energy transition goals
Electricity networks

Utility storage

EVs

Wind

Solar

Kt (in thousands)
16
14
12
10
8
6
4
2

Permitting for new copper mines
is becoming more challenging
due to environmental concerns.
As a result, building new
capacity can take decades andcost billions.
For investors, this creates very attractive long-term supplydemand dynamics.68 Two pure-play copper miners –Ivanhoe Mines and Ero Copper – may offer solid growthprospects for equity investors. Not only do they produce
copper efficiently now, but they also have capacity to expand
production soon to meet rising demand. Additionally, fordebt investors, Southern Copper and Freeport-McMoRan
are large producers with economies of scale, robust cash
flows from ongoing business and strong balance sheets.

Expanding and modernizing the grid
The near-universal need for larger and smarter grids
presents providers of key grid components and construction
services with a powerful macro tailwind. The International
Energy Agency estimates that to power itself primarily withrenewable energy, the world needs to add or replace nearly
50 million miles of transmission lines by 2040.69 Companies

22 FUELING THE FUTURE | PGIM

0

2022

2050 (F)

Note: Shows IEA’s assumption under the announced-pledges scenario. (F) indicates forecast.
Source: International Energy Agency. March 2024.

like Eaton in the US and Schneider Electric in France
provide key components including inverters, transistors
and substations for transmission lines. Their central role in
the energy transition over coming years may not be fully
appreciated by the market today.
In India, transmission cable makers operate in a somewhat
protected market and – given the compelling demand to
expand the transmission network – could make for attractive
investments. Polycab and Apar Industries are leading players
in this growing market.
Engineering and construction of grids and transmission
lines is another area where investors can find opportunities
in emerging markets. For investors, companies like ISA andCeleo Redes, which engineer and build transmission lines
in South America, offer senior secured debt exposure to aportfolio of transmission assets in a liquid, amortizing bondwith compensation indexed to inflation and currency rates.
Furthermore, they are large operators in their regions andhave longstanding relationships with regulators and othergovernment authorities. Having a seat at the table with theirrespective government officials positions these companies
well to navigate permitting challenges and execute on these
massive infrastructure projects.

Large-scale and long-duration power storage
Industrial-scale power storage is another vital part of theenergy transition that investors should consider. To meetenergy transition goals, close to 1,000 GWh of grid-scaleand other forms of energy storage will be needed globallyby 2030 – roughly 35 times the size of the market today(Exhibit 16).70 Leading industrial power storage players
include Korea’s Samsung SDI and LG, China’s BYD andJapan’s Panasonic.

Exhibit 16: Growing need for utility storage
Current storage capacity vs. needed storage capacity

Utility Storage

2022

28 GW

Industrial scale power storageis a vital part of the energy
transition that investors
should consider.
Long-duration energy storage is a key component of
resolving longer-term intermittency and seasonal variability
in renewable energy sources. These mechanisms differ
substantially from the lithium-based batteries used to powercars and cell phones for hours at a time.71 They provide
the ability to store power for days, weeks or even months
to provide an energy system with greater flexibility byabsorbing excess power during peak production periods
and deploying it as needed to meet seasonal fluctuations indemand and supply.72 Sufficient and cost-effective longduration energy storage not only improves the resilience of
local and regional electric grids, but it also reduces the needfor fossil fuels – such as baseload coal or dispatchable naturalgas – to meet energy demand or smooth intermittent
renewable power generation.73
The most widespread and mature technology used ispumped-storage hydropower, and by some estimates it
accounts for 90% or more of bulk electrical energy storage
today.74 It is especially attractive because it can provide
an easily dispatchable source of power, but it has specificgeographical requirements and there may not be much room
to expand. Furthermore, construction of new capacity isvery limited because permitting may be difficult to resolve
given the displacement of entire towns and villages often
involved in these projects. Iberdrola, a European utility,
is a current leader in this area. They recently built andopened a new 40 GWh pumped hydro storage facility

2030 (F)976 GW

Note: Needed storage capacity refers to the net-zero emissions scenario. (F) indicates forecast.
Source: International Energy Agency. March 2024.

in northern Portugal that stores excess power and makes
it dispatchable for a later date. This brings their current
capacity of pumped-storage hydropower stations in Spain
and Portugal to over 100 GWh with another 170 GWh
under construction or in the pipeline.75, 76

Vertically integrated energy providers
Energy providers with power generation and distribution
capabilities can be an intriguing area for investors as well.
Specifically, dominant players in sizable markets who have along record of building and maintaining their infrastructure
can be very attractive. While these utility firms are often
highly regulated, competition is limited in their region, andsome may have the ability to pass-through higher costs to
end users to protect their margins as well.
In Europe, Iberdrola is a multinational electric utility
company and the world’s leading producer of wind powerwith significant expertise and economies of scale. Iberdrola
serves around 30 million customers globally and has
significant operations across the UK, continental Europe
and the Americas. In North America, NextEra Energy is
the largest renewable power generator in the US delivering
electricity across 49 US states and Canada. They provide
electricity from a diversified pool of energy sources that
includes wind, solar, nuclear energy and natural gas.
Debt investors may be missing opportunities if they aresolely focused on bonds of the holding company. In thecase of major power producers like Iberdrola and NextEra,
there may be opportunities at the project level as well. Theseenergy producers often finance a portfolio of power projects
separately via private credit markets, and this kind of debt canoffer investors access to a portfolio of power generation assets.
PGIM | FUELING THE FUTURE 23

Energo-Pro is a leading producer of hydropower andan electricity distributor in Eastern Europe and also has
exposure to Turkey and Spain. They operate under aregulated rate of return in their distribution business,allowing them to pass through costs to maintain their
margins. Given their expertise in acquiring and operatinghydropower plants, they also make hydro power equipment
and offer consulting services to others.
Large and growing markets provide an excellent backdrop
for investors. CenterPoint Energy is a dominant electricity
and natural gas distributor in Texas. The state has a growing
population, and energy demand is poised to rise with it.
Furthermore, Texas is a very large wind and solar generation
hub and Centerpoint’s grid is a critical component of gettingthat growing supply to where it is needed.

2. Leaning into lower-carbon fossil
fuels while avoiding obsolescence risk
While many aspects of the energy transition remain
unsettled and unclear, one thing about the transition iscertain – it will take decades, and fossil fuels are not likely to
be displaced altogether. In other words, fossil fuels and theimmense global network of infrastructure that support theiruse will contribute to meeting global energy needs for muchof the 21st century. For investors, this segment of the energy
complex offers opportunities to invest in elements that arequite stable, generate durable cash flows and can bridge thetransition to a low-carbon world.

Natural gas is displacing higher-carbon
emitting fossil fuels
Natural gas is a key element to a low-carbon future bydisplacing higher-carbon emitting coal – especially inelectricity production. In this capacity it can be valuable
as a “transitionary” fuel source while renewable power
generation, storage and transmission infrastructure getbuilt up. Indeed, global demand for liquified natural gas is
expected to grow by over 50% by 2040 as the coal-to-gas
transition expands in China and South Asia.77
The surge in natural gas production between 2006 and2023 globally was driven primarily by the US shale
revolution. Hydraulic fracking and horizontal drilling
techniques enabled tapping vast new reserves of natural gas

24 FUELING THE FUTURE | PGIM

in the US, and this development launched a boom around
liquified natural gas.78 US production of LNG has nearly
doubled, and the US is now the world’s largest exporter(Exhibit 17). Furthermore, Russia’s invasion of Ukraine
accelerated the LNG infrastructure boom in Europe
and other regions. The ability to transport LNG more
efficiently has ushered in a more globalized market andimproves resiliency as suppliers can respond more quickly
to global shocks.79

For investors, low-carbon fossil
fuels offer opportunities to invest
in stable, durable cash flows.
Companies across the natural gas supply chain – fromproducers to processing to liquifying and transport – canprovide attractive opportunities for investors. Small US gas
producers like EQT and Antero have efficient operations
relative to their peers and offer potential for growth.
Pipelines are another way to invest in natural gas globally.
Often these firms have long-term purchase agreements inplace. The “toll collecting” from pipelines offers investorsa different risk-return proposition in the natural gas space:
exposure to booming demand with less exposure to shortterm price volatility. In the United States, major pipeline
players like Enbridge, Williams and Kinder-Morgan can be
attractive for debt investors.
In Latin America, natural gas players like Esentia Energy
Systems and GNL Quintero offer distinctive exposure
to natural gas transportation and storage as well as LNG
regasification. Mexican private power producers like Tierra
Mojada and Valia Energia offer investment exposure tobaseload, natural gas-fed power plants downstream ofpipeline plays.
Furthermore, as natural gas producers are pushed to curtailtheir carbon emissions during extraction, they increasingly
turn to drilling service providers like Baker Hughes and SLB.
With 50 major oil and gas companies signing pledges at
COP28 in late 2023 to substantially curb methane by 2030,
the services of these firms will continue to be in demand to
detect pipeline leaks and eliminate methane flaring.80

For investors seeking to participate in the booming LNG
export market without taking on additional commodity
risk, Cheniere Energy is an example of a company witha differentiated business proposition. They provide
infrastructure to process natural gas into LNG as well as
terminals for shipping. With tremendous demand for theirservices, Cheniere is already a market leader and, given theirsize and operational efficiency, are achieving economies ofscale. There is also room to grow the business with more
facilities and additional services. Qatar is another major
exporter of LNG, and Gulf International Services is a major
drilling contractor in the region with a close relationship tomajor state-owned producers.

Exhibit 17: The shale revolution has transformed the US
into a global natural gas powerhouse
Share of some of the largest exporters of natural gas
30%

25%

20%

15%

US
Russia10%Companies across the natural
gas supply chain can offer
exposure to booming demandwith less exposure to short-term
price volatility.
Debt opportunities amid mid-size producers
Though some banks have ceased lending to the oil andgas industry altogether, financing is still available for large
producers – especially those able to issue in corporate bondmarkets.81, 82 However, the pullback in bank lending may
be more acute for energy producers too small to tap publiccredit markets. For direct lenders, this middle-market
segment of the energy complex in North America may offer
intriguing opportunities as capital can be scarce and lenders
have some leverage over pricing and terms.
Early stages of oil and gas exploration and production areoften financed with equity. However, once this exploratory
work has been completed and optimal areas for drilling wells
have been verified, energy players often turn to debt markets
for the lower-risk, capital-intensive next stage.83 This kindof mid-stage development offers reliable cash flows andtangible collateral – making for solid credit fundamentals.
Debt that is conservatively underwritten – low leverage,
simple capital structures and lending only on the value of

Norway

5%

0%
2007

2010

2013

2016

2019

2022

Source: Organization of the Petroleum Exporting Countries. March 2024.

known reserves – can be appealing to investors. Additionally,mezzanine or structured debt can come with attractive
coupons based on the proven cash flows as well as added
upside exposure in the form of asset royalties or warrants –which can provide reliable inflation protection for investors
as well.

Is there a role for Big Oil in a newenergy system?
Fossil fuels will almost certainly continue to be a componentof the energy system of the future – albeit a smaller one
and probably more in the form of natural gas than coaland petroleum. This new energy system promises to divide
today’s Big Oil majors into winners and losers. Some global
oil majors will rely on the extended sunset of fossil fuels
and focus their investments solely on continuing to provide
fuels of the past – namely, petroleum. These firms run
the risk of being rendered obsolete by efficiency gains andbetter infrastructure in renewables. They may ultimately be
defined by the magnitude of their stranded carbon assetsthat are no longer economically viable.

PGIM | FUELING THE FUTURE 25

However, there will also be a set of oil majors that will
emerge as winners in the new energy landscape. They are
more forward-looking, will lean into the energy transition
and find ways to remain energy providers regardless of what
the primary energy sources might be. Specifically, there are
two ways for today’s energy majors to remain winners in theenergy system of the future:

Fossil fuels will almost certainly
continue to be a component of
the energy system of the future –albeit a smaller one
1. Transform their energy production to meet theneeds of a new energy system
	Oil majors that are dynamic enough to shift their energy
production to fuel sources of the future will likely remain
prominent. Some are incorporating electricity into
their current business models. For example, global oil
majors BP and Shell are converting their vast networkof gas stations into EV charging facilities in the UK andEurope.84 Others are leveraging their deep insight acrossthe global energy landscape in trading “molecules andelectrons” – that is, oil and gas as well as electricity. 85	Natural gas and LNG are examples of transitionary
fuels that will have a place in the future as a needed
complement to renewable sources. TotalEnergies andShell are two leading producers and transporters of
LNG.86 These companies are well-positioned as gas
and LNG make up a significant share of their overall
revenues and profits.87, 88 However, markets may notappreciate this approach as European oil majors like
Shell and BP have been trading at a discount to US
peers like Exxon Mobil.89, 90

2. Leverage their technical expertise tooperationalize green innovations
	Much innovation in green technology comes from theresearch labs of oil and gas majors – and there is someevidence to suggest they do it better than energy techstartups. On paper, oil and gas majors not only haverobust cash flows to commit significant amounts of

26 FUELING THE FUTURE | PGIM

capital to fund research, but they also have expertise in
extraction, refining and other petrochemical processes
to operationalize their findings. Furthermore, thesefirms have a track record of executing large and complex
projects. For example, oil majors with elaborate refining
operations can leverage those skills to advance andoperationalize biofuels and sustainable aviation.
	Recent research analyzed the landscape of green
innovation through the quality and quantity ofgreen tech patents. This research identified oil and gas
majors as key innovators around green technology andspecifically found both the quantity and quality ofgreen tech patents to be higher for traditional energy
firms.91 The research also indicates the patents fromenergy firms resulted overwhelmingly from in-houseresearch (rather than acquisitions of startups) andmore frequently led to real products that reduced
carbon emissions and generated revenue. Shell, BP
and Exxon Mobil were among the leaders in green
tech patents in areas like biofuels, carbon capture andhydrogen production.92

3. Avoiding the hype: Monitoring
innovation around renewable energy
sources and green techSome speculative innovations – like hydrogen – can garnerconsiderable media attention, and firms can be characterized
as plucky upstarts challenging large energy incumbents.
However, few of the startups behind these speculativetechnologies are likely to operationalize and scale theirbusinesses sufficiently on their own to displace global energy
players. In fact, global energy players will probably beamongst the biggest suppliers and customers for innovativetechnologies – and many startups in this space may choose
to partner with large energy incumbents to leverage theirexpertise in operations, refining and transport.
For investors, the risk-reward propositions some of theseearly-stage innovations offer may not be attractive. Whilethese innovations are at different stages of maturity – somecloser to the laboratory than the real world – they all have twothings in common: first, they each have the potential – when
fully mature and operationalized – to profoundly alter theenergy landscape. Second, they each face immense challenges
before they can be applied in the real world at scale.

Hydrogen fuel cells as an alternate,clean energy source
Hydrogen has gained much attention as a promisingalternate fuel source and has some compelling attributes: itis relatively abundant globally, has two and a half times theenergy density of gasoline or diesel and burns clean with nocarbon emissions. 93
However, hydrogen faces numerous challenges in transportand storage before it can be used widely. One of the main
challenges to wider adoption of hydrogen fuel cells is the
specialized infrastructure (and immense cost) needed to
produce, transport and store hydrogen. Hydrogen is a gas
under typical conditions but is not easily compatible withcurrent pipeline infrastructure. Hydrogen often requires
either extreme high pressure (5,000–10,000 psi) or
low temperatures (-250 degrees C) to transform it into aliquid state where it is more easily transported or stored.94
Furthermore, every stage of hydrogen conversion (e.g., gas
to liquid and then back to gas) requires energy and only
increases the cost to transport and consume hydrogen.
Multiple startups are working on resolving the challenges
around production, storage and transport of hydrogen.
However, they remain far from providing an efficient andviable solution.

Research suggests that oil
majors are key innovators andamong the leaders in green techpatents in areas like biofuels,
carbon capture and hydrogenproduction.
Nuclear energy: fission to fusion
Nuclear fusion is the process that powers the sun and otherstars. It offers the promise of limitless, carbon-free energy.95
Though fusion reactions have been achieved in governmentfunded research labs recently, the prospects of commerciallyoperationalizing these reactions to generate power remains
decades away.96, 97 The challenge is nuclear fusion requires

such extreme conditions of temperature and pressure – over
100 million degrees Celsius – that creating these conditions
safely and efficiently outside of a laboratory is simply not
feasible today.
While nuclear fusion moonshots get much media attention,other nuclear technologies have been playing a part ofthe energy landscape for decades. Nuclear power plays animportant role today, with fission-based plants operatingin more than 30 countries – more than 60% of France andSlovakia’s total electricity come from this kind of nuclear
reaction. And many power plants have been running forthree decades or more.98
With today’s focus on energy security and carbon-freeenergy sources, however, fission-based nuclear power isdrawing renewed attention as a key part of the future energy
system. Nuclear offers some appealing characteristics: it islocally-based and is a zero-carbon source of baseload power.
This also makes it useful for intensive industrial uses likepetroleum refining and data centers.
The development of fission-based nuclear energy has beenslow since the 1970s due to two main challenges: permitting
and cost. Even in cases where the permitting challenges havebeen met, the estimated cost of power production is not often
competitive with other energy sources. Multi-year delays andsignificant cost overruns in nuclear projects are common. For
example, recent new-build nuclear projects in the UK, Franceand Finland have each seen delays of 10 years or more andactual costs more than double original estimates.99, 100, 101
The latest fission innovations are around small-scale
reactors. Known as small modular reactors (SMRs) thesenew designs come with advanced safety features – like
automatic shutoffs – and may have lower costs because they
can be mass-produced at a factory and shipped in pieces to asite for assembly.102 They offer the promise of decarbonizing
some industrial processes. SMRs are being considered on thesites of retiring coal-fired power plants that have much of
the needed infrastructure already in place.103 In some ways
the technology has already been proven as SMRs power
hundreds of submarines and ships today and land-based
designs have been approved by some national regulators.104,
105, 106
However, China is the only country to have a landbased SMR currently in operation.107, 108 While many new
SMR projects are announced, few make it to the end becauseof supply chain challenges as well as cost overruns and delays
that make the projects no longer economical.109, 110

PGIM | FUELING THE FUTURE 27

Innovations in grid-level energy storage
Energy storage mechanisms like batteries can be used toaddress many challenges facing power sectors growing
more reliant on intermittent sources – including improving
economic dispatch and transmission system balancing.
Furthermore, they can also contribute to resiliency andemergency preparedness.
Lithium-based batteries are dominant, and adoption is
growing because advancements in production, efficiency
and economies of scale have caused their cost to decline
over 80% from 2013 to 2023.111 Despite these steep pricedeclines, current lithium mechanisms for industrial power
storage face several challenges.
Most importantly, lithium batteries are not easy to scaleand not always environmentally sustainable. As a result,alternative chemistries that go beyond lithium are emerging.
For example, sodium is more abundant than lithium, ischeaper to access and has similar chemical properties.112
Given their long discharge times, efficiency and improving
technology around their density, sodium batteries havetremendous potential for use on the grid.113, 114
However, sodium battery technology faces some challenges
in the near term. The energy density of sodium-ion batteries
is currently below that of lithium-based batteries.115 Though
the chemical components are cheaper and more accessible,
the sodium battery industry has not reached economies ofscale and has not seen production efficiency gains. In theory,a fully-scaled sodium battery industry should, over time, beable to produce batteries that can be cost-competitive andperform similarly to lithium.116

Carbon capture and storage
Carbon capture and storage (CCS) is another potentiallytransformative technology that faces many real near-term
challenges. The process essentially allows for capturing
CO2 emissions from industry sources – such as ethanol
manufacturing or coal-fired power plants – and storesthe gas in ways that prevent it from ever entering theatmosphere. The promise of CCS is that it enables the world
to meet current and future demand – especially in industrial
areas that are especially difficult to decarbonize – while still
reducing carbon emissions. Indeed, CCS plays a significant
role in many zero-carbon scenarios.117 The challengesof CCS are straightforward. First, there are locational

28 FUELING THE FUTURE | PGIM

challenges – the sites where carbon is emitted are not often
near where carbon can be easily and reliably sequestered.
Transporting the captured CO2 to the sequestration site
can be logistically challenging and costly. In the Unites
States, there are some efforts underway to build out pipeline
infrastructure across the ethanol-producing parts of theMidwest.118, 119 Companies like Summit Carbon Solutions
are involved in building out a “carbon highway” to transport
CO2 from ethanol plants to sequestration and storagesites in other states but face opposition from farmers andlandowners around safety and environmental concerns.120

With today’s focus on energy
security and carbon-free energy
sources, fission-based nuclear
power is drawing renewed
attention as a key part of the
future energy system.
A second challenge for CCS is how to monetize theoperation. In the US, government legislation provides
for direct pay incentives, but the uncertainty around thefuture of the program impedes the long-term infrastructureneeded to operationalize it. In countries that have an active
carbon market, the sequestration has some value. However,the costs of operation – capturing and filtering the CO2,transporting it to a different location and sequestering thegas – must be below the value of the incentives for it to becommercially viable.

Chapter 3 examined the hidden risks andopportunities for investors across individual
securities and asset classes. However, theevolving and dynamic landscape of the global
energy system also has implications that cut
across and impact investment portfolios.
Chapter 4 turns to these implications andproposes a portfolio-wide action plan for CIOs.

CHAPTER 4

PORTFOLIOIMPLICATIONS“

Government action and ESG objectives
each raise important considerations
for investors and can impact a range ofinvestment decisions.”

PGIM | FUELING THE FUTURE 29

CHAPTER 4

PORTFOLIO IMPLICATIONS
Government action and ESG objectives each present tradeoffs for investors that impact a range of investment
decisions. Here we highlight cross-portfolio implications arising from the changing dynamics across the global
energy system and provide an action plan for CIOs.

1. Establish clear positions aroundglobal decarbonization, investment
objectives and time horizons to inform
energy investing
Climate change, decarbonization and energy investing
are deeply entangled and highly interconnected. This canleave CIOs, especially those with more climate-focused
stakeholders, at times facing conflicting demands andexpectations. For example: portfolio decarbonization
imperatives from boards – or in some markets regulators;
inflation-aligned payouts from pensioners; and enablinga resilient clean energy system from future beneficiaries.
The range of cross-purpose demands can be challenging for
CIOs wishing to establish a clear and coherent approach
to investing in the energy sector. Definitive answers to
deceptively simple questions can help inform CIOs thinking
around energy investing:• Are you seeking to purely maximize returns whileremaining agnostic as to the environmental credentialsof the sources of energy you invest in?
• Are you looking to reduce exposure to climate-relatedrisks over time?
• Are you seeking to play a more proactive and positiverole in the decarbonization of our economy?
• Or are you seeking a combination of all three overdifferent time horizons?

30 FUELING THE FUTURE | PGIM

Climate change, decarbonizationand energy investing are
deeply entangled andhighly interconnected.
The most effective tools, metrics and approaches to energy
investing may differ depending on which objective prevails.
Given the layers of complexity around energy investing, it isimperative CIOs have clarity and philosophical agreementwith their key stakeholders on these questions first to informtheir approach to energy sector investing and establish clear
timeframes to guide their decisions.

Clarify objectives around climate change anddecarbonization
Having a clear understanding of investment objectives
and their multiple impacts across a portfolio is essential.
Investors primarily focused on risk-return optimization,for example, face a complex landscape. On the one hand,the shift to electrification and renewables poses transition
risks to the fossil fuel realm including producers, equipment
makers, utilities, etc. It also raises the prospect of stranded
assets – both above ground and below. Electrification canalso provide opportunities in other sectors, even energyintensive ones. For example, as more energy is provided byrenewables, power grid prices become more volatile. This
volatility can provide arbitrage opportunities for energy-intensive industries to flex their demand for power tocoincide with times when renewables are generating lowercost power.
While embracing the new energy landscape may be asound long-term strategy as the economy decarbonizes, thecosts may be unpalatable in the short term. For example,
companies seeking to limit transition risk – such as oil
producers – can also struggle to maintain profit margins
as they tilt their operations away from fossil fuels. The key
question for long-term investors unrestricted by portfolio
decarbonization mandates is how to identify companies
and assets in critical carbon-intensive segments of today’s
economy (like steel-making) that are positioning themselves
well for transition to the low-carbon economy of the future.

Forward-looking carbon-reduction
imperatives, for example, may
not always align with more nearterm goals around economic
development and energy poverty.

Conversely, investors who prioritize portfolio
decarbonization or enabling the energy transition,
face a different set of challenges. With global energy
consumption poised to increase 50% or more by 2050,
sustainability-minded investors face the challenge of
how to decarbonize in the face of persistent rising global
energy demand. Neither divestment from fossil fuels nor
investing in the latest climate tech provide a complete
answer. A decarbonized global energy supply of the future
will rely upon a combination of significant investments
in complementary renewable infrastructure, major
developments in green tech like hydrogen and carbon
capture as well as efficiency gains across multiple sectors andresidual fossil fuels including oil and gas. Investors will needto understand where along this spectrum to participate todetermine their optimal opportunity set.

Investment time horizon
Regardless of investors’ priorities, the risk-return profile
of investments in energy is highly dependent on time
horizon. For all the focus on long-term risks, it isimportant to realize many actively managed strategies
take advantage of short-term relative value shifts andtrading opportunities. Indeed, an active manager with nodecarbonization constraints could have anticipated rising
oil and gas prices in 2021 and invested in oil producers totake advantage of the short-term price action – even if they
believe the long-term prospects for many producers may
not be rosy.
The array of tradeoffs within the energy transition overdifferent timeframes makes it essential for investors to beclear about their time horizon – especially since the energy
transition will play out over decades and its effect on theenergy sector will evolve over that time. For example,
the near-term durable cash flows of oil and gas pipelines
and their current carbon impact have a different appeal
for a pension that is in its runoff phase – paying out allits income and drawing down assets – than they do for a
pension that is accumulating assets with its peak payout
period decades into the future. A different time horizon
can also impact choices around whether to minimize
the current carbon footprint of the portfolio today or tolean into investments that enable and maximize avoided
emissions in the future.

2. Investors with decarbonization
mandates need to consider multiple
approaches
For investors with decarbonization mandates, today’s energy
system presents numerous complexities and challenges.
Forward-looking carbon-reduction imperatives, forexample, may not always align with near-term goals aroundeconomic development and energy poverty. Indeed, multiple
approaches for decarbonization have evolved – each making
a different tradeoff. Some approaches rely on hard data andfocus on current and past Scope 1 and 2 emissions. Others
are more forward-looking and lean on estimates of emissions
that may be avoided in the future.

PGIM | FUELING THE FUTURE 31

Some approaches minimize a portfolio’s current
carbon footprint
Many net-zero and “Paris-aligned” approaches look tominimize a portfolio’s current weighted average carbon
intensity (WACI) – a measure of the carbon emissions
per revenue by portfolio allocation. The appeal of such an
approach is that an investor is supporting those parts of theeconomy that are not heavy carbon emitters today and can say
they are doing their part to not add to carbon emissions.
Typically, this has meant filtering out firms from heavyemitting sectors, creating challenges when executing thisapproach across a scaled portfolio. For example, rotating outof high-intensity sectors – like utilities – and leaning into
sectors with the lowest WACI today – such as tech firms – canlead to tracking errors unless this is controlled for. Investors
should consider a more active portfolio-wide approach thatseeks out the most “improving” firms across all sectors. Thisapproach can lead to substantial carbon emission reductions
across a portfolio (and credible emissions reductions in thereal economy) while also minimizing tracking error.

Some “off the shelf ” temperaturealignment models can have asanguine bias in their ratings.

Another limitation of a WACI-based approach is that it is abackward-looking measure that focuses on the Scope 1 and2 emissions of the firm and may not be indicative of the
trajectory of future carbon emissions. As a result, investors
may be overlooking positive changes made by potential
portfolio companies to reduce emissions today and in the
future. Furthermore, while this approach can create a onetime improvement in the carbon profile of a portfolio, it
may be challenging to demonstrate ongoing improvement in
WACI year after year.

32 FUELING THE FUTURE | PGIM

To account for these limitations, savvy investors need toconsider forward-looking projections and evaluate thecarbon emissions momentum of a firm. That is, they needto consider the recent trajectory of carbon emissions andevaluate the forward-looking reduction strategies of firms.
Additionally, investors will need to actively monitor andreassess each name in their portfolio periodically to ensure
they are still reducing carbon today and finding positive
carbon momentum for tomorrow – all while minimizing
tracking error.

A more forward-looking approach todecarbonization
Increasingly, investors are recognizing that minimizing
carbon emissions in their portfolios now may be
counterproductive to their ultimate objectives of accelerating
a low-carbon economy of the future. Instead, theseinvestors seek to take a longer-term perspective by leaning
into technologies that have a high potential to reducecarbon emissions in the future. Because they are looking tomaximize net reduction of carbon emissions in the future,investors with this approach seek out those firms that havethe greatest potential for carbon abatement or displacing
high-carbon activities. This approach requires an active
strategy and a granular analytical approach that evaluates
the credibility and progress of a firm’s decarbonizationcommitments by, for example, evaluating the trajectory ofa firm’s WACI over the last few years or examining both thequality and volume of their investments in displacing highcarbon activities. Often in these assessments, high-quality,
timely data are not available. In executing such strategies,
some asset managers employ a mix of qualitative andquantitative analysis.
For investors seeking a forward-looking approach, atemperature-aligned model can also be intriguing. Thisapproach focuses on a firm’s forward emissions vs. abenchmark derived from science-based models of an
optimal pathway for that sector. For example, a 2 degrees
Celsius warming world comes with a maximum global
carbon emission over time. That global total for allowable
emissions is allocated to sectors and then subdivided foreach firm within a sector – creating a rough benchmark
for each individual firm. The trajectory of a firm’s expectedcarbon emissions is then compared to the benchmark to
determine whether they are over or under their “allowable
emissions.” This is another methodology for investors to
identify those firms that are performing better than theirpeers at reducing the trajectory of their carbon emissions.
This approach has the benefit of identifying more organic
emission reductions by not shying away from brown
industries and supporting those firms that are actively
avoiding emissions at the fastest rate.

Carbon neutral pledges made bycountries and states can impact
the investment decisions of energy
producers and distributors.
Of course, investors will need to recognize some of theshortcomings of this approach and the models commonly
used. For example, “off the shelf” temperature alignment
models do not ensure that companies’ disclosures and plansalign with their actual outcomes or results and therefore
can have a sanguine bias in their ratings. Some of thesemodels identify nearly half of all firms in their temperaturealignment model as being on the path to achieving long-termgoals. Investors should look to hold individual firms moreaccountable by independently verifying their disclosures andplans. This may mean ensuring there are interim targets andincorporating additional metrics to gauge the credibility of
their decarbonization commitments. Incorporating rules tocapture real-world progress vs. emissions targets is a criticalway of validating the results of a temperature-alignment
strategy, and CIOs also need to ensure their asset managers
are doing this kind of active validation.

3. Closely monitor the current
landscape of government “carrots andsticks” – as well as its trajectory
Because of its national security importance, governments
play a significant role across the dynamic energy landscape.
Given how intertwined government and energy are,investors need to not just be aware of the current state of thepolicy landscape but also monitor geopolitical and economic
developments which influence where it may be headed.
Indeed, government involvement is a feature across nearly
every region and impacts the risk-reward propositions ofenergy investments at almost every stage.
For example, governments often fund early-stage basic
research around alternative energy sources – like nuclear
power – which lead to breakthroughs that find their way
into the market.121 Even at later stages of development,
government subsidies and import restrictions canboost critical industries by supporting domestic supply
chains for critical energy components – like solar panel
manufacturing.122, 123 While these subsidies and tariffs can
support critical energy industries and attract early investors,
they are often not permanent and businesses can growdependent on them. The lingering uncertainty around thefuture trajectory of supportive policies can be detrimental
for investors in the long term.

Attracting private capital tonext-generation technology
Investors may find it attractive to invest alongside
governments at various stages of innovation. For example,
blended finance and public-private partnerships areprominent in emerging markets like India where they can derisk renewable energy projects, for example, and draw private
funding.124 This is especially true in areas where risk-reward
tradeoffs may not otherwise be attractive for private investors.

PGIM | FUELING THE FUTURE 33

Exhibit 18: Government involvement in innovative energy technologies can attract private investment
2015

100

1

2018

2022

Solar
Wind

transition

HydrogenCarbon Capture

0.1

0.01

0.001

0.0001government enabled

Private to DOE Funding Ratio

10

private sector led

1000

Geothermal

Industrial
Decarbonization

0.00001

Source: US Department of Energy. March 2024.

In developed markets, government involvement in early-stage
funding of innovative technologies can also attract private
capital. A study examining investment by the US Departmentof Energy in cleantech innovations suggests that government
funding during early stages of carbon capture and hydrogenproduction did indeed lead to greater private capital flows insubsequent years (Exhibit 18).
Another key stage where government policy can attract
private capital is after a technology has been establishedand production needs to build scale to gain efficiencies.
For example, there are currently government-led initiatives
underway in Asia and the Americas to build scale andinfrastructure around hydrogen production. The Australian
government is executing a National Hydrogen Strategy
that includes funding projects directly, as well as revenue
support programs to help projects build to scale quickly.125
Some of the plans are very ambitious. A consortium ofenergy companies led by BP, for example, plans to build as
many as 1,700 wind turbines and 10 million solar panels
to produce 26 GW of energy – equivalent to a third ofAustralia’s current grid requirements – in support of greenhydrogen production.126

34 FUELING THE FUTURE | PGIM

50

100

200

300

Number of New Startups

Already one of the largest global producers of renewableenergy in the world, the state of Texas launched Hydrogen
City – an integrated green hydrogen production, storage
and transport hub located in South Texas. With additional
support from the federal level, the state is attracting interestfor green hydrogen projects from global industrial giants.127, 128
The focus on hydrogen as a next-generation fuel source
is not limited to the most developed economies either.
Chile, for example, has launched an ambitious National
Green Hydrogen Strategy seeking to promote domestic
use amongst its mining and heavy industry sectors.
Additionally, the World Bank-supported strategy aims for
Chile to be a major exporter of green ammonia products
and green hydrogen as well. 129, 130

Government policy raises several unique risks
for energy investors
The shifting landscape of government “carrots and sticks” canalter the economics of large-scale infrastructure projects andadd to the uncertainty around estimates of long-term demandand supply. For investors, it is critical to be mindful of thisadditional layer of uncertainty – and especially so for longduration debt and infrastructure owners. Specifically, there areseveral points around policy investors may be overlooking.
First, carbon neutral pledges made by countries and states
can impact the investment decisions of energy producers
and distributors. For example, Duke Energy is the leading
provider and distributor in the state of North Carolina. They
have a legal obligation to act on and adhere to the carbonreduction pledges made by the state legislature.131 This is
influencing their decisions around new energy sources andadditional power production.132
Second, the life of renewable assets may be longer thancurrent policy is in place for. That is, over the life of theirinfrastructure asset, government policy can change sharply.
These changes may alter the economics of their projectand significantly change the value of any debt or equity
associated with it.
Third, difficulties in permitting new power plants ortransmission lines can serve as a moat for energy providers
or distributors. However, as permitting reform becomes

more widespread, the size of the moat may shrink andnew infrastructure with new technology may render legacy
projects obsolete and economically uncompetitive. These
kinds of changes around permitting and supply
can also radically alter valuations of debt and equity forlegacy infrastructure.
At their worst, misplaced government production incentives
or tax credits can exacerbate price distortions such as
negative pricing during peak demand and supply periods.133
Or in emerging markets like Mexico, governments protect
the interests of state-owned energy firms by impeding
private capital investment in renewable power generation.134
Investors need to examine the role of government policy ineach market and assess whether it provides support for theirinvestment thesis or a headwind.
Last, for large-scale consumers of energy, the shifting policy
landscape can add another dimension of cost variability totheir business models. The swings in energy prices that canarise from even subtle shifts in energy policy serve as anadditional source of volatility around cost of goods.

Conclusion
Energy markets have reached a critical inflection point, shifting to renewable energy sources while
simultaneously relying on fossil fuels for years to come. This transition will offer many opportunities – fromrenewable infrastructure to LNG projects – but also a multitude of risks as investors will have to be wary of
stranded assets amidst an uncertain path to a lower-carbon future.
While the energy transition will unfold at different paces in different places, what is clear is that it isalready underway with significant implications for every investor. At PGIM, we believe it is criticalfor all investors to consider the many implications of the future energy system on their portfolio andstakeholders (Exhibit 19).

PGIM | FUELING THE FUTURE 35

Exhibit 19: Summary of Investment Implications
Enabling renewables and balancing out their infrastructure
1. Renewable debt
opportunities beyond windand solar power generation• Debt financing tends to be less plentiful than equity in Europe and the US. This may offer
attractive investment opportunities – especially senior debt in mature projects with offtakeagreements and grid connections in place.

2. India’s renewable power
generators offer
intriguing opportunity• India’s incredible demand growth provides a strong macro tailwind for renewable power
generation companies.

3. Wind turbines offer adifferent risk-reward
proposition• Wind turbines offer a way to invest in renewables with limited exposure to individual power
projects and the price volatility of electricity.

4. Banking on gridmodernizationand expansion• Manufacturers of key grid components – including inverters and substations – offer exposure to a
rapidly growing segment of the market.

5. The need for long
duration storage• Utility-scale power storage can mitigate the issues of intermittency and is a vital part of theenergy transition.

6. Vertically integrated
energy providers• Given their long track record of building and maintaining infrastructure and their ability to passthru higher costs, regional utilities with power generation and distribution capabilities offer an
intriguing investment area.

• Investors should consider looking beyond wind and solar power generation projects in Europe andthe US and consider hydro and geothermal projects where they are possible.

• Companies with an established track record of executing on projects and cash flow from existingproduction may be especially attractive.

• Technology leaders in Europe and North America can be particularly attractive.

• In South America, transmission companies offer exposure to a portfolio of transmission lines withcost pass-thru capabilities and attractive debt structures.

• Pumped-storage hydropower is attractive given its scale, technological maturity and dispatch
capacity. While new projects are very limited, investors should consider global players with room
to expand their capacity.

• Some large energy providers finance segments of their power generating assets in private credit
markets. Debt investors can find opportunities to get exposure to portfolios of mature projects.

36 FUELING THE FUTURE | PGIM

Meeting current demand with fossil fuels while reducing carbon emissions• Natural gas can play a critical role in the energy transition by displacing thermal coal.
1. Natural gas is displacing
higher carbon-emitting fuels • In the US, small gas producers and large LNG players offer growth potential as global
demand soars.

• The debt of regional pipeline operators offers investors a different risk-reward proposition.

2. Debt opportunities in the
mid-market• As banks have receded, debt financing for energy producers in the middle-market has become
scarcer – creating private credit opportunities.

3. Big Oil and the futurerole of incumbents• Though fossil fuels will have an extended sunset, investors need to periodically consider theobsolescence risk in their exposure to Big Oil companies.

• Investors should look for projects that have passed the exploratory phase as they offer reliable
cash flows and tangible collateral.

• Big Oil firms that lean into lower-carbon and renewable sources may face less obsolescence risk –though these firms have not seen higher valuations from markets.
• Global oil incumbents are also major players in research around green tech and clean energy.
They are among the leaders in patents in areas like biofuels and carbon capture. Some may bewinners in the new energy landscape.

Portfolio-wide implications
1. Establish clear positions on • For CIOs it is imperative to clarify their decarbonization objectives with key stakeholders and aligntheir investment timeframe with the energy transition.
decarbonization, investment
objectives and time horizon • Definitive answers to a few simple questions can be clarifying.
2. Investors need to consider
multiple approaches todecarbonization
3. Closely monitor thecurrent landscape andfuture trajectory of
government policy• Minimizing a portfolio’s current carbon footprint offers the benefit of supporting current
companies with low-carbon emission today, but requires evaluation of future emissions as well.
• Investors that take a longer-term perspective should consider firms that have the potential toreduce their own emissions as well as technologies with high potential to avoid carbon emissions
in the future.
• Investors need to be aware of the shifting policy landscape because it alters the outlook forinvestment in every region.
• Government policy can impact the risk-reward proposition of energy investments at every stage ofdevelopment – from basic research all the way on through to large-scale projects.

PGIM | FUELING THE FUTURE 37

APPENDIX
A.1: World’s largest fossil fuel producers and consumers
Share of the five largest producers and consumers of fossil fuels worldwide (2022)
Oil – Top 5
Production

Consumption

Country

Percent

Country

Percent

1

US

18.9%

1

US

19.7%

2

Saudi Arabia

12.9%

2

China

14.7%

3

Russian Federation

11.9%

3

India

5.3%

4

Canada5.9%

4

Saudi Arabia

4.0%

5

Iraq

4.8%

5

Russian Federation

3.7%

Gas – Top 5
Production

Consumption

Country

Percent

Country

Percent

1

US

29.8%

1

US

22.4%

2

Russian Federation

15.3%

2

Russian Federation

10.4%

3

Iran

6.4%

3

Iran

9.5%

4

China

5.5%

4

China

5.8%

5

Canada4.6%

5

Canada3.1%

Coal – Top 5
Production

Consumption

Country

Percent

Country

Percent

1

China

52.8%

1

China

54.8%

2

India

8.6%

2

India

12.4%

3

Indonesia

8.0%

3Indonesia

6.1%

4

US

6.9%

4

US

3.0%

5

Australia

6.6%5Australia

2.7%

38 FUELING THE FUTURE | PGIM

A.2: Share of total electricity from nuclear energy
Ten countries with the largest share in 2022
70%
60%
50%
40%
30%
20%
10%
0%

FranceUkraineSouth Korea

Spain

RussianFederation

US

UnitedKingdom

CanadaUnited ArabEmirates

TaiwanSource: Energy Institute Statistical Review 2023.

A.3: Global energy consumption from renewables
Five largest consumers of renewable energy in 2022, Exajoules
EJ
30

25

Brazil20

Germany

15

India

10

US

5

China

0

2001

2004

2007

2010

2013

2016

2019

2022

Source: Energy Institute Statistical Review 2023.

PGIM | FUELING THE FUTURE 39

A.4: Annual addition of solar capacities
Five countries with the largest new additions in 2022, Megawatt
MW140,000

India

120,000
100,000

Germany

80,000Japan

60,000US
40,000China

20,000
0

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Source: Energy Institute Statistical Review 2023.

A.5: Annual addition of wind capacities
Five countries with the largest new additions in 2022, Megawatt
MW100,000

Spain

80,000India
60,000Germany
40,000US

20,000

0

China

2010

2011

2012

Source: Energy Institute Statistical Review 2023.

40 FUELING THE FUTURE | PGIM

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

A.6: Annual coal production
Total coal production of the five largest producers and rest of the world, Exajoules
EJ

China

Rest of World

100
90
80
70
60
50
40
30
2000

2004

2008

2012

2016

2020

Source: Energy Institute Statistical Review 2023.

A.7: Electric power generation
Primary energy sources used for Electricity, quadrillion British thermal units (2022)

Renewables
74.5

Nuclear
27.7

Coal
98.2

Electricity
Generation

Natural Gas
52.5

Oil & Gasoline
5.4

PGIM | FUELING THE FUTURE 41

ACKNOWLEDGMENTS
PGIM gratefully acknowledges the contributions of the following individuals:
Dr. Vanessa Chan, Chief Commercialization Officer, US Department of Energy
Ryan Dalton, Partner, Warburg Pincus
Eric Danzinger, Managing Director, Energy Transition, Riverband Energy Group
Samantha Gross, Director, Energy Security and Climate Initiative, Brookings Institution
Stephen Hendrickson, Director, Office of Technology Transitions, US Department of Energy
Jeff Luse, Partner, Warburg Pincus
Tony Morriss, Senior Manager, Thematic Strategy, Australian Super
Bruce Sassi, President and CEO, Nuclear Energy Insurance Ltd
Katheryn Scott, Engineer, Office of Technology Transitions, U.S. Department of Energy
Travis Skelly, Partner, PruVen
Dr. Scott Tinker, Director, Bureau of Economic Geology, Jackson School of Geosciences, University of Texas

PGIM Contributors
Dr. Raimondo Amabile, PGIM Real Estate

Darren Ku, PGIM Fixed Income

Alyssa Braun, PGIM Fixed Income

David Klausner, PGIM Fixed Income

Matt Baker, PGIM Private Capital

Albert Kwok, Jennison Associates

Neil Brown, Jennison Associates

James Malone, PGIM Fixed Income

Wendy Carlson, PGIM Private Capital

Sara Moreno, Jennison Associates

Armelle DeVienne, PGIM Fixed Income

Mark Negus, PGIM Real Estate

Omari Douglas-Hall, PGIM Fixed Income

Michael Pettit, PGIM Fixed Income

Bobby Edemeka, Jennison Associates

John Ploeg, PGIM Fixed Income

Jim Footh, PGIM Real Estate

Tom Porcelli, PGIM Fixed Income

Elizabeth Gunning, PGIM Fixed Income

Jay Saunders, Jennison Associates

Callie Hamilton, PGIM Private Capital

Dr. Gavin Smith, PQS

Dr. Peter Hayes, PGIM Real Estate

Naqash Tahir, PGIM Real Estate

Deb Hemsey, PGIM Private Capital

Brian Thomas, PGIM Private Capital

Matthew Huen, PGIM Real Estate

Dr. Noah Weisberger, IAS

Eugenia Jackson, PGIMDavid Winans, PGIM Fixed Income

Principal Authors
Shehriyar Antia, PGIM Thematic Research
Dr. Taimur Hyat, PGIM
Jakob Wilhelmus, PGIM Thematic Research
42 FUELING THE FUTURE | PGIMENDNOTES
1

Rhodes, Richard, “Energy: A Human History,” May 29, 2018. https://www.simonandschuster.com/books/Energy/RichardRhodes/9781501105364

2

Guénette, Justin-Damien and Jeetendra, Khadan, “The energy shock could sap global growth for years,” June 22, 2022. https://blogs.
worldbank.org/developmenttalk/energy-shock-could-sap-global-growth-years

3

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67

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68

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69“IEA Warns of Insufficient Transmission Lines Worldwide to Connect Renewables to the Grid,” IER, Oct. 20, 2023. https://www.
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81“BNP Paribas: Will No Longer Finance Development of New Oil and Gas Fields,” Reuters, May 11, 2023. https://www.reuters.com/
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88

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96“Press Conference: Secretary Granholm & DOE leaders Announced Fusion Breakthrough by DOE National Lab,” US Department ofEnergy, Dec. 13, 2022. https://www.youtube.com/watch?v=K2ktAL4rGuY

97

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98

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99“EDF Eyes Flamanville EPR Nuclear Reactor Fuel Loading in March,” Reuters, Dec. 21, 2023. https://www.reuters.com/business/
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100 “Finland’s New Nuclear Reactor: What Does It Mean for Climate Goals and Energy Security?” Euronews Green with AP, April 17, 2023.
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101 Crellin, Forrest et al., “EDF’s UK Hinkley Point Nuclear Plant Start Date Delayed Again, Costs Mount,” Reuters, Jan. 25, 2024. https://www.reuters.com/business/energy/edfs-nuclear-project-britain-pushed-back-2029-may-cost-up-34-bln-2024-01-23 /102 Cho, Adrian, “Deal to build pint-size nuclear reactors canceled,” November 10, 2023. https://www.science.org/content/article/deal-buildpint-size-nuclear-reactors-canceled
103 Siegler, Kirk, “Why a Town on the Front Line of America’s Energy Transition Isn’t Letting Go of Coal,” NPR, March 28, 2024. https://www.npr.org/2024/03/28/1240708556/why-a-town-on-the-front-line-of-americas-energy-transition-isnt-letting-go-of-co
104 Dewan, Angela et al, “New-wave reactor technology could kick-start a nuclear renaissance — and the US is banking on it,” February 1,
2024. https://www.cnn.com/2024/02/01/climate/nuclear-small-modular-reactors-us-russia-china-climate-solution-intl/index.html
105 “NRC Certifies First US Small Modular Reactor Design,” Office of Nuclear Energy, Jan. 20, 2023. https://www.energy.gov/ne/articles/
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106 World Nuclear News, “Preparatory work stepped up for Russia’s first land-based SMR,” February 9, 2024. https://world-nuclear-news.
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107 Ibid.
108 Peng, Dannie, “Small Modular Nuclear Reactors: How China and the US Are Poles Apart in Energy Ambitions,” South China Morning
Post, Dec. 9, 2023. https://www.scmp.com/news/china/science/article/3244234/small-modular-nuclear-reactors-how-china-and-us-arepoles-apart-energy-ambitions

46 FUELING THE FUTURE | PGIM

109 “Global Nuclear SMR Project Pipeline Expands to 22 GW, Increasing More Than 65% Since 2021,” Wood Mackenzie, March 7, 2024.
https://www.woodmac.com/press-releases/2024-press-releases/global-nuclear-smr-project-pipeline-expands-to-22-gw-increasing-morethan-65-since-2021/
110 Bright, Zach, “NuScale cancels first-of-a-kind nuclear project as costs surge,” November 9, 2023. https://www.eenews.net/articles/
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111 BloombergNEF, “Lithium-Ion Battery Pack Prices Hit Record Low of $139/kWh,” November 26, 2023. https://about.bnef.com/blog/
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112 Spano, Christina, “Sodium batteries offer an alternative to tricky lithium,” October, 26, 2023. https://www.economist.com/
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113 Breakthrough Energy, “Advancing the Landscape of Clean Energy Innovation,” February, 2019. https://breakthroughenergy.org/wpcontent/uploads/2022/10/Report_AdvancingtheLandscapeofCleanEnergyInnovation_2019.pdf
114 Crownhart, Casey, “How sodium could change the game for batteries,” May 11, 2023. https://www.technologyreview.
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115 Ibid.
116 Spano, Christina, “Sodium batteries offer an alternative to tricky lithium,” October, 26, 2023. https://www.economist.com/
leaders/2023/10/26/sodium-batteries-offer-an-alternative-to-tricky-lithium
117 McKinsey & Company, “Scaling the CCUS industry to achieve net-zero emissions,” October 28, 2022. https://www.mckinsey.com/
industries/oil-and-gas/our-insights/scaling-the-ccus-industry-to-achieve-net-zero-emissions
118 Douglas, Leah, “POET’s US Midwest ethanol plants to join Summit Carbon pipeline project,” January 29, 2024. https://www.reuters.
com/sustainability/climate-energy/poets-us-midwest-ethanol-plants-join-summit-carbon-pipeline-project-2024-01-29/
119 Dunker, Chris, “Carbon pipeline says it has secured easements for half of Nebraska route,” December 6, 2022. https://journalstar.com/
news/state-and-regional/govt-and-politics/carbon-pipeline-says-it-has-secured-easements-for-half-of-nebraska-route/article_4daa603f38fd-5d71-9461-ad0b5314a871.html
120 Douglas, Leah, “US carbon capture pipeline setbacks reflect challenges in climate fight,” September 28, 2023. https://www.reuters.com/
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122 Dvorak, Phred, “America Wanted a Homegrown Solar Industry. China Is Building a Lot of It,” Wall Street Journal, Feb. 6, 2024. https://www.wsj.com/business/america-wanted-a-homegrown-solar-industry-china-is-building-a-lot-of-it-a782f959
123 Robinson, Quillan, “The True Cost of Chinese Solar Panels,” Time, Jan. 18, 2024. https://time.com/6564184/chinese-solar-panels-cost
124 Ivory, Robin, “How Is Blended Finance Deployed in South Asia?” Convergence, March 14, 2024. https://www.convergence.finance/
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PGIM | FUELING THE FUTURE 47

IMPORTANT INFORMATION
Professional Investor Use Only. All investments involve risks, including possible loss of principal. Past performance is not indicative of future results.
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© 2024 PFI and its related entities, registered in many jurisdictions worldwide.

48 FUELING THE FUTURE | PGIM

PGIM’S MEGATREND SERIESHow today’s shifting global landscape will affect the investments of tomorrow

The Transformation of Labor Markets
Among its many tragic human and economic consequences, the COVID-19 pandemic left labormarkets in turmoil. While these issues get much media attention – and some may prove to havean enduring impact – they often obscure the profound structural changes to labor markets thatwere already underway prior to COVID and that will ultimately have a much greater impact on
reshaping the global workforce..
Learn more at pgim.com/labor

Food For Thought
Whether seeking opportunities or mitigating hidden risks, understanding the rapidly transforming
food system is crucial for institutional investors.
Learn more at pgim.com/food

The New Dynamics of Private Markets
Private markets have provided entrepreneurs, corporate tycoons and property developers withaccess to capital for centuries. But the current scale, growth and complexity of private capital istruly unprecedented – and is radically altering the investment opportunities and challenges facing
institutional investors.
Learn more at pgim.com/private-markets

Cryptocurrency Investing
Exploring why direct investments in bitcoin and its peers are currently unattractive for an
institutional portfolio – underscored by recent gyrations in the crypto market. Still, thetechnologies that cryptocurrencies helped spawn present new opportunities for savvy
long-term investors.
Learn more at pgim.com/crypto

PGIM | FUELING THE FUTURE 49

Reshaping Services
Technological disruption has finally reached the shores of the service economy. It’s a developmentthat will represent a major shift for investors and the global economy as services represent morethan two-thirds of global GDP, three-quarters of the workforce in developed markets, and nearly
half of the workforce in advanced emerging markets.
Learn more at pgim.com/reshaping

Weathering Climate Change
Climate change is no longer a hypothetical risk. It is already transforming the global economy,
reshaping markets and altering the investment landscape. In this paper, we propose an actionableclimate change agenda that addresses both hidden portfolio vulnerabilities and potential
opportunities in the transition to a lower-carbon world.
Learn more at pgim.com/climate

After the Great Lockdown
The pandemic has forced businesses to adapt in ways that will lead to lasting changes in consumer
behavior and corporate business models. Now is the time to focus on the massive disruption thatlies ahead so we’re best positioned for when the Great Lockdown has passed.
Learn more at pgim.com/lockdown

The Future Means Business
Disruptive forces have led to the emergence of three new business models that are radicallychanging the investment calculus for institutional investors. Here we explore the investment
implications of these transformative new corporate models.
Learn more at pgim.com/futurefirm

The Technology Frontier
We are living in an era of unprecedented technological change. At PGIM, we believe theimplications for investors will be profound, radically transforming investment opportunities acrossasset classes and geographies.
Learn more at pgim.com/tech

50 FUELING THE FUTURE | PGIM

The End of Sovereignty?
Never before in history have people, information and capital moved across borders at the
speed, frequency and volume we see today. In this white paper, we take a closer look at theescalating tussle between globalization and nationalism, the implications this could havefor global financial markets, and how long-term investors may best position themselves tonavigate these uncertain times.

Emerging Markets at the Crossroads
A radical shift in the forces shaping emerging market growth will require investors
to take a different investment approach from what may have worked in the past.
Increasingly, discovering investment opportunities will be rooted in the ability tocapture alpha from the new growth drivers, rather than in chasing the beta of thebroad universe.

A Silver Lining
The unprecedented aging of the global population creates increased opportunities insenior housing, multifamily condos, biotech, and the emerging silvertech industry.
Institutional investors should consider how this megatrend could affect their portfolios,
given the trend’s evolving impact on consumer spending and far-reaching effects on
emerging nations, home to two-thirds of the world’s elderly.

Longevity and Liabilities
The rise in global life expectancy has implications for pension plan liabilities that are
not fully appreciated. As new mortality tables demonstrate, longevity risk to pension
liabilities could increase dramatically over the next two to three decades. This reportexamines the challenge and the available risk mitigation strategies.

The Wealth of Cities
Never in history has the pace of urbanization been so rapid: 60 to 70 million people
moving to cities every year for the next few decades. To help institutional investors
benefit from this “prime time” of urbanization, we identified a range of specificinvestment ideas across the major investable themes of this opportune megatrend.

PGIM | FUELING THE FUTURE 51

THE PURSUIT OF OUTPERFORMANCETM

54 FUELING THE FUTURE | PGIM

August, 2023
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