MEGATRENDSEXECUTIVE SUMMARY

FUELING THE FUTURE
Investing Across the Global Energy LandscapeIntroduction
Nations have risen and fallen, governments come to powerand been ousted, and businesses created and destroyed, allin the quest for energy. Today we stand at another criticalinflection point for the energy system. For long-term
investors, navigating this unprecedented and uncertain
energy landscape is critical for four key reasons:
1. Energy not only accounts for 10% of the global
economy but is also a crucial input into theremaining 90%.
Energy prices drive key macroeconomic indicators
including inflation, consumer spending, economic
growth and external balances.
2. Establishing and maintaining dependable accessto energy lies at the heart of many geographicalfault lines. These geopolitical risks are critical forunderstanding sovereign risk, evaluating potential capital

restrictions 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 investment opportunities, leads
to obsolescence risk in waning energy sectors that may
be over-represented in investors’ portfolios, and requires
vigilance against overhyped innovations that in reality areoften too distant, uneconomic or politically unfeasible.
4. For investors with ESG goals, the inescapablearithmetic of global energy supply and demand means
fossil fuels will remain a major source of energy
supply for decades to come. Such a world requiresconsiderable investment nuance – and a simplistic
strategy that divides the world into brown villains andgreen heroes will not be the most effective approach toachieve either environmental or fiduciary objectives.

The energy system – a simplified schematic

PRIMARY ENERGY SOURCES

Coal

GLOBAL ENERGYCONSUMPTION
Zero-carbon

Electricity
Generation

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.

PGIM | EXECUTIVE SUMMARY | FUELING THE FUTURE 1

Exhibit
5: Fossil fuels power today’s world
The New Energy
LandscapeFossil fuels power today’s world
Energy consumption by primary source, terawatt hours

To meet our seemingly insatiable demand, the energy
system has become ever more complex, adding an array of
new energy sources that supplement rather than completely
replace legacy fuel sources. Today our energy system sits ata critical inflection point – and while it will take decades
for every contour of this new energy landscape to be fully
realized, several foundational themes are emerging.

TWhZerocarbon
About
20%

160,000

1. With rising geopolitical tensions, energy security isnational security

120,000

It is difficult to overstate the primacy of ensuring a secureand reliable supply. When considering energy security, it isimportant to note each country faces a unique landscape.
Because of its importance, access to primary energy sources
will be a key factor in the pace of the energy transition awayfrom fossil fuels.

NaturalGas

80,000Fossil
Fuels
About
80%

Oil

40,0002. Our reliance on fossil fuels will continue for decades,
even amidst the energy transition

Coal

Exhibit 11: Accelerating growth ofrenewable power generation0

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 supply for decades.

1966

1974

1982

1990

1998

2006

2014

2022

Note: Zero-carbon includes solar, wind, biofuels, hydropower and nuclear.
Source: US Energy Information Administration, Global Energy Outlook 2023. March 2024.
7

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

400

300

200

100
2011

2013

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

2015

2017

2019

2021

2023

PGIM | EXECUTIVE SUMMARY | FUELING THE FUTURE 2

Exhibit 8: The energy transition has been
There
are multiple economic
and politicalreasons fortwo
theongoingforalmostdecades
The current energy transition has been ongoing for two decades
persistent significance of fossil fuels, but three factors are often
underappreciated in discussions on the pace of the energy
transition. First, there are many specific uses where renewables
may not offer a complete substitute for fossil fuels, for example
in steel manufacturing or in powering airplanes and ships.
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 critical renewable infrastructure.
3. A major transition is underway – with electrification at
the center of itPrevious energy transitions – from wood to coal in the 18th
century and from coal to oil in the early 20th century – have
unfolded slowly, often over a century or more. A majortransition has now been underway for two decades fromfossil fuels to lower-carbon sources, driven by climate change
concerns, government subsidies and regulations, technologicalinnovations, and lower costs of renewable energy production.

Increase in primary sources’ share of global energy consumption
40%

Zerocarbon
+35%

30%

20%

Natural
Gas
+9%

10%

0%

Coal
-6%

-10%

4. Stark tradeoffs around electrification will determine thepace of the energy transition.
An optimal energy system would not only have secure access toprimary sources and key components, but would also provide
electricity cheaply when it is most needed and without harming
the environment. What is often ignored is that: no single source ofelectricity is optimal across all three fronts. That is, fossil fuels andzero-carbon sources present different tradeoffs across:•••

Dispatchability – 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.
Affordability – few developments can trigger universal
political backlash quite like rising energy and electricity
prices. Consequently, governments and politicians havevery little incentive to compromise on energy affordability.
Increasingly, renewables have become the cost-effective wayof generating electricity.
Carbon emissions – energy – both its production andconsumption – accounts for roughly 75% of global GHG
emissions. Nearly all of this comes from combustionof fossil fuels. By contrast, renewable sources – once
manufactured and in place – can generate electricity withno additional GHG emissions. Over 140 countries –including the largest GHG emitters – have made carbon
reduction pledges. With so many countries, firms andinvestors across the globe focused on reducing carbon
emissions, it has become a critical and material factor for allenergy investors.

As the energy transition continues, fossil fuels will be
increasingly displaced by renewables as a source of electricity.
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.

Oil
-14%
-20%
2005

2011

2017

2022

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

All sources of electricity offer different tradeoffs
Dispatchability

Affordability

Carbon emissions

Zero-carbon
Solar
Wind
Solar with
StorageGeothermal
Hydropower
Nuclear

Fossil Fuels
Coal
Gas

Worse

BetterNote: 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.

PGIM | EXECUTIVE SUMMARY | FUELING THE FUTURE 3

11

Investment Implications
The energy transition is a long, complex process with multiple tradeoffs and challenges along the way. 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 are encompassed bythree overarching themes.

1. Enabling renewable energy by supporting critical inputs and complementary infrastructure
Renewable power generation has grown significantly and has reached scale in many markets around the world. However, thisexpansion has not been matched in other areas of renewable infrastructure – like power storage and transmission.

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 offtake agreements 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 pricevolatility 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 the energy transition.

6. Vertically integrated
energy providers• Given their long track record of building and maintaining infrastructure and their ability to pass-thru 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 and the US andconsider hydro and geothermal projects where they are possible.

• Companies with an established track record of executing on projects and cash flow from existing production 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 with cost 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.

PGIM | EXECUTIVE SUMMARY | FUELING THE FUTURE 4

2. Leaning into lower-carbon fossil fuels while avoiding obsolescence risk
While many aspects of the energy transition remain unsettled and unclear, one thing is certain – it will take decades, and fossil
fuels are not likely to be displaced altogether. For investors, this segment of the energy complex offers opportunities to invest
in elements that are quite stable, meet near-term demand, generate durable cash flows and can bridge the transition to a lowcarbon world.

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 offer 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 the obsolescence risk intheir exposure to Big Oil companies.

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

• Big Oil firms that lean into lower-carbon and renewable sources may face less obsolescence risk – though thesefirms 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 theleaders in patents in areas like biofuels and carbon capture. Some may be winners in the new energy landscape.

3. Avoiding the hype: Monitoring innovation around renewable energy sources and green techSome speculative innovations – like hydrogen and nuclear fusion – can garner considerable media attention, and startup firms
can be characterized as plucky upstarts challenging large energy incumbents. For investors, the risk-reward propositions manyof these early-stage innovations offer may not be attractive. They all have two things in common: first, they each have thepotential – when fully mature and operationalized – to profoundly alter the energy landscape. Second, they each face immense
challenges before they can applied in the real world at scale.
•Hydrogen faces numerous challenges in transport and storage before it can be used widely.

•

Nuclear fusion requires such extreme conditions – over 100 million degrees Celsius – that creating these conditions
safely and efficiently outside of a laboratory is simply not feasible today.

•

Small modular nuclear reactors are plagued by delays and cost overruns in new construction that renders many
projects uneconomical.

•

Grid-level power storage faces challenges around energy density, cost and efficiency.

•

Carbon capture and storage requires significant investment in infrastructure to move vast amounts of carbon from
where it is generated to where it can be sequestered. And it is unclear how to monetize such operations in the long term.

PGIM | EXECUTIVE SUMMARY | FUELING THE FUTURE 5

Portfolio Implications
Government action as well as ESG objectives present tradeoffs for investors that impact a range of investment decisions. Herewe highlight a few of the cross-portfolio implications arising from the shifting dynamics across the global energy system andprovide an action plan for CIOs.

Portfolio-wide implications
1. Establish clear positions on • For CIOs it is imperative to clarify their decarbonization objectives with key stakeholders and align theirinvestment 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• Minimizing a portfolio’s current carbon footprint offers the benefit of supporting current companies with lowcarbon emission today, but requires evaluation of future emissions as well.

3. Closely monitor thecurrent landscape andfuture trajectory of
government policy• Investors need to be aware of the shifting policy landscape because it alters the outlook for investment inevery region.

• Investors that take a longer-term perspective, should consider firms that have the potential to reduce their own
emissions as well as technologies with high potential to avoid carbon emissions in the future.

• Government policy can impact the risk-reward proposition of energy investments at every stage of development –from basic research all the way on through to large-scale projects.

EXPLORE THE FULL PAPER PGIM | EXECUTIVE SUMMARY | FUELING THE FUTURE 6

Important Information
Professional Investor Use Only. All investments involve risks, including possible loss of principal. Past performance is not indicative of future results.
The information contained herein is provided by PGIM, Inc., the principal asset management business of Prudential Financial, Inc. (PFI), and a trading name of PGIM, Inc.
and its global subsidiaries. PGIM, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not
imply a certain level of skill or training. –In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM
Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic
Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA Amsterdam, The Netherlands. PGIM Netherlands
B.V. is, authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport.
In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under
temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Limited and/or PGIM
Netherlands B.V. to persons who are professional clients as defined under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local
implementation of Directive 2014/65/EU (MiFID II). In Italy, information is provided by PGIM Limited authorized to operate in Italy by Commissione Nazionale per leSocietà e la Borsa (CONSOB). In Japan, information is provided by PGIM Japan Co., Ltd. (“PGIM Japan”) and/or PGIM Real Estate (Japan) Ltd. (“PGIMREJ”). PGIM
Japan, a registered Financial Instruments Business Operator with the Financial Services Agency of Japan offers various investment management services in Japan. PGIMREJ is
a Japanese real estate asset manager that is registered with the Kanto Local Finance Bureau of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited,a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 of the Securities andFutures Ordinance (Cap. 571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a regulated entity with the Monetary Authority ofSingapore under a Capital Markets Services License to conduct fund management and an exempt financial adviser. This material is issued by PGIM Singapore for the general
information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act 2001 of Singapore (the “SFA”) and “accredited investors” and other relevant
persons in accordance with the conditions specified in Section 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary
investment management services directly to South Korean qualified institutional investors on a cross-border basis.
These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about managing orinvesting assets or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicableto their place of citizenship, domicile or residence. In providing these materials, PGIM is not acting as your fiduciary. These materials represent the views, opinions andrecommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. Distribution of thisinformation to any person other than the person to whom it was originally delivered and to such person’s advisers is unauthorized, and any reproduction of these materials,
in whole or in part, or the divulgence of any of the contents hereof, without prior consent of PGIM is prohibited. Certain information contained herein has been obtained
from sources that PGIM believes to be reliable as of the date presented; however, PGIM cannot guarantee the accuracy of such information, assure its completeness, or warrant
such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change
without notice. PGIM has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completenessor accuracy or accept responsibility for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial
instrument or any investment management services and should not be used as the basis for any investment decision. No risk management technique can guarantee themitigation or elimination of risk in any market environment. Past performance is not a guarantee or a reliable indicator of future results and an investment could lose value.
No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from thisreport. PGIM and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accountsof PGIM or its affiliates. Any projections or forecasts presented herein are as of the date of this presentation and are subject to change without notice. Actual data will vary andmay not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representativeof a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as
economic and market conditions change. PGIM has no obligation to provide updates or changes to any projections or forecasts.
PGIM and its affiliates may develop and publish research that is independent of, and different than, the recommendations contained herein. PGIM’s personnel other than theauthor(s), such as sales, marketing and trading personnel, may provide oral or written market commentary or ideas to PGIM’s clients or prospects or proprietary investment
ideas that differ from the views expressed herein.
Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance
Company, a subsidiary of M&G plc, incorporated in the United Kingdom.
© 2024 PFI and its related entities, registered in many jurisdictions worldwide.

PGIM | EXECUTIVE SUMMARY | FUELING THE FUTURE 7

August, 2023
留意事項
※本資料は米国SECの登録投資顧問会社であるPGIMインクが作成したものです。
※本資料は情報提供を目的としたものであり、特定の金融商品の勧誘又は販売を目的としたものではありません。また、本資料に記載された内容等については今後変更されることもあります。
※記載されている市場動向等は現時点での見解であり、これらは今後変更することもあります。また、その結果の確実性を表明するものではなく、将来の市場環境の変動等を保証するものでもありません。
※本資料で取り上げられた資産クラス、個別セクター等はあくまで例示を目的としたものであり、推奨ならびにこれらに係る将来性を明示・暗示的に示
唆するものではありません。
※本資料で言及されている個別銘柄は例示のみを目的とするものであり、特定の個別銘柄への投資を推奨するものではありません。
※本資料に記載されている市場関連データ及び情報等は信頼できると判断した各種情報源から入手したものですが、その情報の正確性、確実性について当社が保証するものではありません。
※本資料に掲載された各インデックスに関する知的財産権及びその他の一切の権利は、各インデックスの開発、算出、公表を行う各社に帰属します。
※過去の運用実績は必ずしも将来の運用成果等を保証するものではありません。
※本資料は法務、会計、税務上のアドバイスあるいは投資推奨等を行うために作成されたものではありません。
※PGIMジャパン株式会社による事前承諾なしに、本資料の一部または全部を複製することは堅くお断り致します。
※“Prudential”、“PGIM ”、それぞれのロゴおよびロック・シンボルは、プルデンシャル・ファイナンシャル・インクおよびその関連会社のサービスマークであり、多数の国・地域で登録されています。
※PGIMジャパン株式会社は、世界最大級の金融サービス機関プルデンシャル・ファイナンシャルの一員であり、英国プルーデンシャル社とはなんら関係がありません。

PGIMジャパン株式会社
金融商品取引業者 関東財務局長（金商）第392号
加入協会：一般社団法人日本投資顧問業協会、 一般社団法人投資信託協会、一般社団法人第二種金融商品取引業協会
PGIMJ108613

For Professional Investors Only. All Investments involve risk, including the possible loss of capital.