The earth needs rest – this should be the slogan for the next few decades. Due to the deteriorating geopolitical environment and ongoing energy crisis, many countries made a difficult decision to postpone the drive towards being “Greensponsible”. Even in eco-friendly Europe coal-fired electricity generation increased 18% last year from 2020 to 579 TWh, interrupting a trend of decline since 2012.
Who cares about the ESG now?
According to some estimates, if high gas prices continue or the Russia-Ukraine conflict reduces gas-fired generation, coal generation could expand 11% to 641 TWh in 2022. Even the EU climate chief Frans Timmermans acknowledged that some coal plants might need to stay online longer than anticipated to address the continent’s energy crunch. The question then becomes – what will happen to the plan to turn off all the coal facilities by 2024?
On another side of the ocean, US coal production in the forecast increased by 43 million short tons (MMst) (7%) in 2022 to 621 MMst and increases by 12 MMSt (2%) in 2023. US coal consumption is expected to increase by 14 MMst in 2022 and then decrease by 32 MMst in 2023 due to high natural gas prices. The good news is that overall coke plant consumption should fall by 10% in 2022 but increase next year back to 2021 levels.
The bad news is that most like it will not be enough to stop climate change. Just to remind, last year the world has seen the worst wildfires since at least 2003 when satellite records began, as swaths of North America, Siberia, Africa, and southern Europe continue to burn. The combination of extreme heat and prolonged drought resulted in the ignition of forests and grasslands. According to the U.S. National Oceanic and Atmospheric Administration (NOAA), in the first nine months of 2021, the United States faced 18 "unprecedented" weather and climate disasters.
Statistics don’t lie
Forest fires in Yakutia burned more than 6 million hectares of taiga, which is comparable to the territory of Denmark or Switzerland. In Turkey, the authorities determined the size of the damage from fires in approximately $6 million. Economic losses from the severe flooding across Europe exceeded were expected to approach $25 billion. As much as $20 billion in direct damage was anticipated in Germany alone, while the country’s insurers expected losses of EUR4.5 to 5.5 billion ($5.3 to 6.5 billion). As for the first economy of the world, because of shallowing of the rivers fish began to die out, and power generation was reduced by 25%.
In terms of the outlook, the number of large fires in Europe continues to increase and vulnerable areas are widening, according to the EU’s Disaster Risk Management Unit. Thus, the worse is yet to come. Already now, the area of natural fires in Russia is twice as large as it was last year by this time. In 2021, by this time the fire was 915, 6 thousand hectares, and this year the area has already been 2.2 million hectares since the beginning of the year. The Federal Forestry Agency notes that from the beginning of the fire-hazardous season on the lands of the forest fund 783 forest fires occurred in the area of 43 227 ha.
What is the main reason behind all these natural disasters?
According to scientists, climate change and more extreme weather conditions are to blame. Last year, Professor Petteri Taalasa, Secretary-General of the World Meteorological Organization, urged that "We have more water vapor in the atmosphere, which is exacerbating extreme rainfall and deadly flooding. The warming of the oceans has affected the frequency and area of existence of the most intense tropical storms." The UN, on the other hand, forecasts that the Earth's temperature limit could be breached if carbon dioxide emissions are not cut in half by 2030 and completely by 2050.
What does the market say?
Now, talking about investments, who could benefit from this situation? First thing first, home improvement companies, engineering companies, manufacturers of generators, etc. On top of that, we could add water stocks and "water" ETFs to that list. Under the $1 trillion Infrastructure Act signed into law in November 2021, $55 billion will be spent to ensure that citizens have access to clean water.
Why, then, have stocks of companies like American States Water Company (AWR), The York Water Company (YORW), and Essential Utilities, Inc. (WTRG) fallen so drastically this year? To answer that question, we need to recall that The ISE Clean Edge Water Index was up about 18% in 2021. Thus, profit-taking might have been one of the possible reasons for the decline. Speaking of the sector's outlook, utility companies have been allowed to raise rates this year and in 2023 and 2024, based on the rate of inflation. Since no water substitutes have been invented yet, water company stocks could still show themselves.