Ceres Power Holdings (LSE: CWR) is one of many companies to have recently got caught up in the global AI boom. Shares in the fuel-cell provider have charged higher by 240% year-to-date. Over the past 12 months, the shares have risen 850%. Despite this performance, the stock is still down around 50% from its ten-year high in February 2021.

UK-based Ceres Power is a developer of solid oxide fuel cells (essentially mini power stations) and hydrogen-power technologies. For many years, the company and its technology were relatively unloved due to high costs and low demand. That has changed over the past 12 months thanks to the massive energy demands of AI, leading to what can only be described as an arms race for power. Data-centre operators and the so-called hyperscalers – Alphabet, Microsoft, Amazon and Meta – are seeking their own power sources as capacity-constrained electricity grids are unable to meet their needs.

Electricity demand from data centres soared by 17% in 2025. The power demand from the average newbuild data centre is forecast to rise to almost 110MW by 2030, from almost 47MW in 2025, according to S&P Global. Globally, data centres could consume 1,000 terawatt-hours (1,000,000GWh) of electricity by 2023, up 100% from 2030.

In November 2024, US utility American Electric Power entered into a landmark supply agreement with Bloom Energy to procure solid-oxide fuel-cell products capable of delivering 1GW of power. Designed to plug directly into AI data centres, the fuel cells can run on natural gas, biogas or hydrogen blends and, most importantly, can be delivered and turned on in months, not years. Data-centre company EdgeCloudLink claims it can construct a data centre and have it running within nine months, partly thanks to fuel cells removing dependency on power utilities.

A turnaround for Ceres Power?

The market seems split on whether Ceres can replicate the success of its US peer. Its record of delivering is spotty to say the least – revenue hasn't grown over the past five years. It is holding out on its next-generation Endura technology, a solid-oxide stack platform that can run on both natural gas and hydrogen. A solid-oxide stack uses ceramic electrolytes to convert fuels into electricity, and Ceres claims its technology can do so more efficiently than its competitors.

At scale, manufacturing costs are expected to be one-third lower than that of its competitors, according to Ceres, and its output aligns perfectly with the electrical requirements and standards of modern data centres. Berenberg analysts describe this as a “gamechanger” that will allow the company to monetise its research and development into a scalable platform.

Peel Hunt analysts believe this is nothing more than a branding exercise, repacking the company's existing technology into a new product. But ultimately, the company's success will depend on its ability to sell licences for its products. Over the past few years, Ceres has transitioned away from a manufacturing model to a licensing model and has outlined a goal of securing at least one new manufacturing licence agreement per year. That doesn't look like a particularly high bar considering the company has identified a 22GW market opportunity for its products by 2030, driven by demand from industry and data centres, particularly in Asia and the Americas.

A single partner scaling up to 1GW of production using Ceres' new Endura technology could generate £50 million to £100 million in annual royalty revenue. Berenberg believes that would generate $1 billion in shareholder value at current sector valuation multiples. Compared to Ceres's current market capitalisation of £1.4 billion, it's easy to see why investors have raced into the stock.

Should you invest in Ceres Power?

The next few years will be key. Analysts have pencilled in revenue of around £80 million for 2028, up from £52 million in 2024 when the company started its transition to a licensing model. This isn't enough to justify the current valuation. Still, these figures were compiled before the company announced a partnership with Centrica (the owner of British Gas) and Delta Electronics (a Ceres manufacturing partner) for off-grid energy generation.

The partnership will offer customers “competitively priced, on-site power generation, significantly reducing exposure to wholesale electricity market volatility and grid capacity constraints”. The plan is to deploy a demonstration site within the next 12 months and scale up capacity over the next three to five years. Other partnerships signed in 2025 are expected to ramp up and start delivering results in 2026, including partnerships with Shell in India, Doosan in South Korea and Weichai in China.

Five years is a long time. The firm is still loss-making when measured by Ebitda and is burning through cash (Ebitda of £7.8 million is projected for December 2028). The shares are trading at 17.5 times forward sales. Still, with £83 million of cash in the bank at the end of 2025, Ceres has the resources to sustain itself for the next three years until it reaches break-even point. The company burned £20 million of cash in 2025 and costs are expected to be down by around 20% this year.

Ultimately, Ceres is a high-risk play and the company's valuation does not leave much room for error if sales fall below expectations next year. However, it's clear there's a large and growing market for the fuel-cell technology Ceres has spent years developing. With 50GW of additional electric supply needed in the UK alone to meet demand from AI data-centre projects in the pipeline, even a relatively small order could transform the company's fortunes.

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You might expect the £219 million Guinness Sustainable Energy Fund to have performed poorly in recent years, given the dreadful performance of renewable-energy infrastructure funds. Far from it: the fund returned 18% in 2025 after losing 17% in the previous three years, but returning 150% in the three before that.

That is because its portfolio is much broader. While the renewable infrastructure funds invest in just a few energy-generation projects, the Guinness Sustainable Energy Fund is spread across quoted companies in the equipment, efficiency, electric vehicles, power generation, batteries and infrastructure sectors.

Last year's returns were due to improving policy clarity, lower interest rates and surging power demand, not just from data centres and digital infrastructure but also from transport, building, industry and the re-shoring to the US of manufacturing, says co-manager Jonathan Waghorn. “Global investment in clean energy in 2025 was $2.2 trillion, twice as much as in fossil fuels, reflecting the fact that renewable energy is the cheapest form of electricity in most situations,” he notes. “Growing power demand has taken over from decarbonisation as the central secular theme.”

Capitalise on the rising demand for electricity

The International Energy Agency forecasts that electricity demand will grow at 3.7% in 2026 – well above the 2015-2023 average of 2.6% – and at 4% per annum thereafter. AI and data centres currently account for 4%-5% of US power demand, but this will grow to around 12% by 2030. Electric vehicle (EV) sales are expected to increase by 4 million to 25 million in 2026 (when they will make up 29% of total sales). Battery prices fallen 93% since 2010, but are likely to drop significantly further by the 2030s. In China, which accounts for 60% of global sales, EV sales are already over half the total. In the US, they are just 10% (against 20%-25% in Europe) due to cheap gasoline and range anxiety in a country where driving distances are longer, but this is expected to increase to 45% by 2030. Policy support has been inconsistent but changes in Donald Trump's “One Big Beautiful Bill Act” last year were not as adverse as many feared.

China added 430GW of renewable capacity in 2025, more than the rest of the world put together, and hit its 2030 target six years early. Approvals for new coal-powered plants have slowed – Waghorn says that global coal-fired generation is at a peak and expects it to halve by 2050. He expects gas-fired generation to continue to grow until 2040, then decline slightly. Renewable energy's market share of energy demand will increase from 15% to 40% as electricity's share of total energy increases from 25% to 40% in 2045.

“Given the growth in electricity demand, it is no longer about renewables or fossil fuels, but about both,” says Waghorn. “Not only is renewable capacity cheaper but costs are falling and lead times for installation are shorter than for gas, whose costs are rising. Gas-fired generation will still have a very important role, providing base load capacity and smoothing out the intermittency of renewable energy. Nuclear power will be slower to expand as expertise needs to be built up.”

“There is significant scope for energy efficiency gains, enabling overall demand growth to slow from 2% to 1% per annum long term.” Growth in electricity demand requires a doubling in expenditure to $600 billion per annum by 2030 and a further increase to $800 billion by the 2040s. “Much of the Western world's power grid is 40-50 years old, and over half of US grid transformers are 30 years old. Estimates point to a doubling of the global power grid by 2040.”

All this adds to the investment opportunity, reflected in the breadth of the fund's portfolio. It makes the funds focused solely on renewable energy projects – with high sunk costs and facing falling wholesale prices – look stuck up a cul-de-sac. Despite this, the portfolio still trades on a 12% discount to the broader market – with higher earnings growth, estimated at 12.7% per annum in 2024-2027 and above that of global markets, there is surely plenty more upside to go for.

An energy fund for a world that still needs oil

The oil and gas sector was a popular contrarian tip for 2026, largely because it had performed so poorly for so long. With the Brent oil price stuck at $65 a barrel, the dollar weakening, demand weak and plenty of potential additional supply visible, the argument for the sector did not look compelling. Yet the Gulf war changed all that, with the oil price surging to over $100 a barrel. Oil and gas companies are back in favour, with the Guinness Global Energy Fund returning 41% in sterling in the first quarter. So is it too late to jump in?

Oil looks expensive relative to recent prices but it was a “cheap commodity and at a 100-year low relative to the gold price”, says co-manager Will Riley. “The world was paying just 2% of GDP for its oil compared with a 30-year average of 3%, and 5% in 2012.”

The International Energy Agency has reduced its estimate for growth in demand from 0.73 million barrels per day (bpd) in 2026 to an average fall of 80,000 bpd. In the longer-term, oil demand, which stood at 104 million bpd in 2025, was previously forecast to peak at 107 million bpd in the 2030s. That peak may be brought forward if higher prices now provide an incentive to shift from oil at the margin, but demand is expected to decline only slowly.

The closure of the Strait of Hormuz theoretically prevents 20 million bpd of oil and 10-11 billion cubic feet of gas per day reaching markets. Alternative pipelines can transport some of this oil, but only some. While high prices will stimulate new investment – both in new production and new transport infrastructure – that will take time. There is no simple alternative to replace Qatar's 20% of global liquefied natural gas (LNG) production, for example. On a longer time scale, there is potential for additional oil and gas supply around the world, which can partly offset the depletion of existing fields. This includes Venezuela, which has the world's largest oil reserves and whose heavy (and costly to extract) crude has a breakeven point of at $80 a barrel, estimates consultancy Wood Mackenzie. However, “under-investment, infrastructure decay, sanctions and loss of technical capacity will take years to rebuild even if political stability and foreign investment returns”, notes Riley.

The Guinness Global Energy Fund had returned a respectable 9% in sterling last year, before oil prices rose – comfortably ahead of the sector, though it had lagged badly over five and ten years. This explains why the fund had shrunk to £125 million, though it is now up to £240 million. Last year's performance was driven by the focus of companies on cash flow and returns on capital, says Riley. Integrated European majors, notably BP and Shell, have been good performers “as they tilted away from renewable energy to fossil fuels”. Canadian companies have also done well as the government U-turned towards fossil fuels.

At the start of the year, the Guinness Global Energy Fund portfolio was trading on a trailing price/earnings (p/e) ratio of 12.8, a 40% discount to global equities, with little prospect of growth in earnings and cash flow if prices remained flat. However, an $80-$90 Brent oil price will add 65% to earnings, says Riley. Even after recent share-price gains, that will bring the fund's p/e ratio back down to about 13 times, compared with a long-run average of 15. Rising earnings also enable firms to pay down debt while distributing higher dividends, making share buybacks and still funding more investment.

The crucial consequence of the Middle East crisis is that the world has been reminded of the risks of supply disruption. This is likely to result in significant investment in new production to reduce dependence on the Gulf, actively encouraged by governments. That is good news for oil and gas companies with the necessary capital and expertise. Professional investors, who neglected the sector for so long, will be looking for an opportunity to invest. So should retail investors.

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Prices of commodities flatlined between January 2024 and the start of 2026 – now they are rocketing. The S&P GSCI index of 24 major raw materials has surged 29% since 1 January. That reflects a heavy weighting towards energy, which accounts for more than half of the index's composition. Higher oil and gas costs will also feed through into agriculture prices, the index's second-biggest component. US wheat futures have risen 15%.

The Middle East isn't just a source of hydrocarbons, says The Economist: 22% of the world's traded urea (a fertiliser), one third of its helium and 45% of its sulphur (used as a plant nutrient) comes from the region. The Gulf is also a major source of petrochemicals required for everything from basic pharmaceuticals to glycol (a paint ingredient). With spring planting “imminent” in the northern hemisphere, a squeeze on fertiliser supply that lasts another few weeks risks “catastrophic” consequences for global harvests later this year.

Commodities rise sees industrial metals miss out

The commodities uplift has not carried over into metals, with the S&P GSCI Industrial Metals index flat since the start of the year. Aluminium prices have risen 8% since 1 January; the Middle East accounts for 9% of global production. But nickel has gone nowhere, while copper (down 4% this year) has been behaving like gold, suffering a pullback after a multi-year boom. The prospect of global stagflation doesn't bode well for the industrial demand that underpins metals markets.

Copper entered the year with “a dose of the metals fever” amid dire warnings that soaring demand for electricity will cause shortages, says Andy Home on Reuters. Yet while traders bet on copper shortages later this decade, current supplies are ample. In the US, Chicago Mercantile Exchange warehouse stocks have rocketed from 85,000 tons at the start of 2025 to 536,000 tons today (US stockpiling has been turbocharged by attempts to beat import tariffs). “The gap between speculators' great expectations” and the “current reality” of well-supplied warehouses “yawns ever wider”.

The structural metals story could yet come true, says Alan Livsey in the Financial Times. Sluggish prices between 2015 and 2022 prompted major global miners to cut spending on new mines by “at least a third” and focus on paying dividends instead. While investment started rising again in 2023, mines have very long lead times. The consequences of historic underinvestment will soon loom large. Real assets enjoy other attractions. They provide a hedge, both against bouts of inflation and a prolonged fall in the dollar, which presently appears somewhat overvalued. And at a time of AI-driven concentration risk, investors are eager to diversify into other themes. “Commodities tend to go through cycles,” says Evy Hambro of BlackRock. “We appear to be in the foothills of the next cycle.”

Why gold has lost its shine

Investors looking to gold for relief from the energy shock have been left disappointed. Gold has fallen 16% in dollar terms (and 15% in sterling) since hostilities began on 28 February. You would expect gold to do well at a time of war and inflationary pressure.

So why the pullback? Firstly, gold had already been on a record-breaking rally that saw it reach an all-time high in late January. Having rocketed 174% over the previous two years, the yellow metal entered the conflict looking overextended. Secondly, gold is strongly influenced by real interest rates (interest rates adjusted for inflation). While inflation looks poised to rise, so are interest rates, reducing gold’s appeal relative to competitors such as government bonds.

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The war in the Middle East has created a global oil and gas supply shock, similar in scale to the crisis unleashed in 2022 when Russia invaded Ukraine and cut off Europe's gas supply.

In some regards, this conflict threatens to have an even bigger impact on global hydrocarbon markets if it persists. As countries turned away from Russian gas supply in the months and years after the beginning of the Ukraine conflict, buyers turned to Middle Eastern suppliers of liquefied natural gas (LNG) to replace Russian imports.

At the beginning of the year, LNG shipments from Qatar and the United Arab Emirates (UAE) accounted for about 20% of global LNG supply, but these supplies have now been cut out of the market due to the de facto closure of the Strait of Hormuz.

As supply has been cut off, buyers have rushed to secure new cargoes, paying huge premiums. Building facilities to convert natural gas into the super-cooled liquid product isn't for the faint of heart. These plants can cost around $10 billion for a mid-sized facility, although most producers build as large as possible to achieve the best economies of scale.

As a result, price tags of $50 billion-plus are common. The scale of these projects means that most output is sold on long-term agreements before production even begins, so backers know they have a return on investment before committing billions.

About 70% of LNG output globally is sold on long-term contracts, making it hard for buyers who have now been forced to look elsewhere to secure the energy they need. Prices have spiralled as a result. The price of natural gas in Europe increased 70% in a week after the conflict began.

Venture Global is the fastest gun in the west

Enter Venture Global (NYSE: VG). Founded by former banker Mike Sabel and lawyer Bob Pender just over a decade ago, the company has grown from nothing into one of the largest LNG producers in the US, which itself has surpassed Australia and Qatar as the biggest exporter of the fuel.

Venture Global's founders (who still own around half of the company) looked at the cost of building traditional LNG facilities and set out to take a different approach. They modified the design to focus on smaller modular units, which allows factories to fabricate pieces off-site.

The industry was sceptical, but Venture soon proved its doubters wrong. Its inaugural project, Calcasieu Pass, went from a final investment decision in 2019 to exporting fuel in just 29 months, making it one of the fastest LNG plants ever constructed (although, like most LNG projects, it busted its budget to the tune of $1 billion).

Venture plans to become the second-largest LNG producer in the US, behind only peer Cheniere Energy, which produces around 60 million tonnes per annum (Venture has plans to produce a little over half of that). A total of 90% of this is sold on long-term contracts. The total global supply forecast is expected to rise between 460 and 484 million tonnes in 2026 due to new capacity from the US and Qatar.

Unlike Cheniere, Venture has only fixed 70% of its sales. That leaves 30% to sell at the spot market, which could produce a windfall for the business. Indeed, management has said that a $1.00/MMBtu change in fixed liquefaction fees – the spread between the cost of purchasing natural gas in the US and selling LNG abroad – will impact full-year 2026 adjusted Ebitda by $575 million-$625 million.

The company has said it expects full-year Ebitda of $5.2 billion-$5.8 billion, assuming a fixed liquefaction fee range of $5.00- $6.00/ MMBtu. Following the recent turbulence in the market, the spread between US Henry Hub (the US natural-gas benchmark) and European TTF/Asian JKM benchmarks has jumped to as much as $15/MMBtu.

Venture's decision to leave 30% of production available for sale on the spot market could prove profitable this year, but the market has not factored this windfall into the company's valuation. Based on estimates compiled by analysts at investment bank UBS, the stock is trading at a forward, 2026 price-to-earnings (p/e) multiple of just 9.6.

These figures were compiled alongside the company's results for the fourth quarter of 2025, released at the end of February, before the recent conflict began. Based on the company's fourth-quarter outlook and long-term output growth projections, UBS had pencilled in revenue rising from $11 billion in 2026 to nearly $19 billion by 2029, with net income roughly doubling over the same period. All of these numbers are out of date, but they provide a good indication of Venture's estimated growth in a “normal” market.

One of the reasons Venture is so cheap, and has always been since its IPO in early 2025, is related to lawsuits hanging over the firm. In 2022, after the Ukraine war sent gas prices skyrocketing globally, Venture rerouted some of the cargoes destined for its customers with long-term supply agreements, such as Shell, BP and Repsol, to other customers willing to pay higher prices on the spot market. Those traders left out of pocket sued, claiming as much as $6 billion. Over the past few months, after several years of arbitration, the clouds have started to clear. While Venture lost a case with BP, it has won cases against Shell and Repsol, removing a lot of uncertainty.

Don't fear the debt

Another factor that appears to be acting as an overhang on the stock is the company's debt. At the end of 2025, it had a net debt-to-Ebitda ratio of five, leaving little room for manoeuvre. However, with a cash injection expected this year, thanks to the impact of higher natural gas spreads, the company has the opportunity to make a material dent in these liabilities. The stock looks like a promising play on the brewing energy crisis.

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Utility companies, who provide basic services such as power, water and gas, are traditionally seen as defensive investments. This is because these goods are considered necessities, which means that demand will remain relatively stable even during periods of economic stress.

On the other hand, during periods of strong economic expansion, these sectors will grow at a much slower rate than the rest of the economy. As a result, their shares tend to be of interest to investors looking for a nice dividend rather than for capital growth. However, there are exceptions, and one of these is the energy company SSE.

The core of SSE’s energy business involves delivering electricity across southern England and Scotland. While this is considered a low-risk, humdrum activity, SSE is doing several things to boost growth, including launching an ambitious £33 billion investment programme.

Part of the money will be spent on increasing its capacity for generating renewable energy. The group believes that the planned transition to a low-carbon economy will continue, resulting in consumers being willing to pay a premium for renewable energy.

SSE is upgrading the network

However, the vast majority (around two-thirds) of SSE’s investment is directed at upgrading its electricity-transmission network. The idea is that this will enable it to make money by connecting the producers of renewable energy to the national grid, where the electricity can be transported to those who need it. Provided SSE can deliver the various infrastructure projects on time and on budget, this should enable it to receive a high return on this investment.

Of course, there is no guarantee that these plans will work, which makes SSE riskier than other UK energy companies. The firm’s strategy depends on energy prices not falling and demand for green energy remaining strong. However, the potential upside is greater too, especially if the demand for electricity from data centres and from other sectors of the green transition (such as electric cars) accelerates the pace at which electricity is required in the overall economy.

So far the strategy seems to be paying off. SSE’s revenue jumped by almost 50% between 2021 and 2025, with normalised earnings per share more than doubling between 2020 and 2025. SSE’s management expects this trend to endure, projecting that earnings per share will increase by 7%-9% a year over the next five years, allowing it to increase its dividend by up to 10% a year over the same period.

Despite these bullish estimates, the stock trades at only 14 times estimated 2027 earnings, with a solid dividend yield of 2.8%.

SSE’s ambitious plans seem to have caught the imagination of investors. The share price has risen 26% over the last six months and 44% over the last year. SSE shares also trade above their 50-day and 200-day moving averages.

I would therefore suggest you go long at the current price of 2,596p at £1 per 1p. In that case, I would put the stop-loss at 1,600p, giving you a total downside of £996.

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Artificial intelligence (AI) dominates the stock market headlines, and the energy companies powering the technology could be sound investments for those looking for a reliable means of exposure.

Many investors are increasingly concerned about the amount of investment being poured into AI infrastructure, and energy stocks could be one means of maintaining exposure to the theme without over-investing in some of the market’s more over-saturated stocks.

With companies like Nvidia and the Magnificent Seven dominating the global stock market, it is difficult for investors to know whether to stick or twist with big tech megacaps. Valuations appear stretched and there are increasing fears that the AI bubble could burst.

But the downside risk if the AI rally is set to continue leads to significant FOMO. AI appears to be having a dramatic impact across all areas of business, and investors won’t want to be left out of any potential future gains.

“Regardless of your standpoint on the AI stocks valuation debate, there is an alternative way for investors to gain exposure to this monumental growth sector,” says Nick Lawson, founder and CEO of Ocean Wall. He says that this approach hinges around identifying the key bottleneck for the industry.

“That bottleneck is power,” said Lawson.

How much energy does AI use?

Data centres are the fastest-growing consumers of energy in the US. Analysis from Goldman Sachs suggests that data centres will account for 11% of all US power demand by 2030, up from 4% in 2023. AI data centres are expected to account for 39% of total data centre power demand by that time.

That demand could lead to energy supply being seriously stretched. Morgan Stanley analysts predict a US power shortfall of 44 gigawatts (GW) by 2028.

Bridging that gap will require the deployment of innovating “time-to-power” solutions such as natural gas turbine transactions, nuclear reactors or private fuel cells.

That same bottleneck is playing out across the world.

“In the UK, new data centres will have to be developed in sites that can connect to the power grid and be supplied with reliable and, ideally, low-carbon energy,” says Ashley Thomas, infrastructure & renewables research analyst at Winterflood Securities.

“This means that securing power and a grid connection has become vital when evaluating a data centre location or project,” Thomas added.

“In a market defined by scarcity of power – and scarcity of time – astute entrepreneurs are spotting the opportunity, and investors alive to their vision are piling in,” said Lawson.

How to invest in AI energy

Lawson highlights Fermi America (LON:FRMI) as one of the most promising AI energy investments. It is developing private grids, in recognition of the inability of the US or European grids to supply power on the scale and with the reliability that AI requires.

“Their solution is an 11-GW hybrid campus in Amarillo that combines clean natural gas, solar power, battery storage, nuclear baseload and fibre-rich connectivity directly beside the next generation of data-centre clusters,” says Lawson.

Fermi’s stock has nosedived since its 2 October IPO, but Lawson attributes this largely to the market over-reacting to a three week delay in the first $150 million payment from a prospective client.

“As big tech begins treating energy as strategic infrastructure, Fermi, and other companies that take its lead, will emerge as the investable bridge between digital demand and physical power, and one of the few ways to gain pure-play exposure to the US AI-energy nexus,” says Lawson.

But Fermi’s volatility shows the risks in investing directly in this market. It can pay to invest in AI energy stocks through an investment trust. This offers exposure to smaller, sometimes private companies that can be harder to invest in directly, as well as offering the expertise of an active manager researching the individual investments.

“The closed-ended investment trust structure is particularly well-suited for investing in hard to sell assets like data centres and energy infrastructure,” said Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC). “Investors can buy and sell their shares on the stock market while their fund managers can take a long-term approach to their portfolio.”

Ben Newell, analyst at Investec, highlights Pantheon Infrastructure (LON:PINT) as one potential option.

“Pantheon Infrastructure’s exposure extends through its power and renewables holdings,” says Newell. These include Calpine, a major gas-fired power producer, and Intersect Power, a US renewables developer.

“Both are well-positioned to benefit from rising energy demand driven by the demand for [AI] data centres,” said Newell.

Renewable energy trusts were already struggling before the government decided to kneecap them at the end of October. In a major shock, it has launched a consultation on changing the inflation linkage on the subsidies they receive from the retail price index (RPI) to the consumer price index (CPI) in April 2026, three years sooner than expected.

Even worse, the government has floated a second, complex option that would backdate the switch to 2002. This may have been thrown in mainly to make a April 2026 change sound like a concession, but if actually implemented could reduce the income received by generators by billions of pounds over the coming years. The market reacted accordingly and the sector as a whole lost about 5% of its market value on the day.

Why is the renewable energy trusts industry struggling?

The proposals have created yet another cloud of uncertainty over a sector that was already unloved by investors. The industry has been caught in a “perfect storm” and is ill-equipped to deal with its current challenges, says Pietro Nicholls of RM Funds, an activist that has been battling battery-storage fund Gore Street Energy Storage Fund (LSE: GSF). Many of the trusts’ boards lack the experience required to address these problems, he argues. So instead, they’ve turned to easy ideas such as share buybacks.

Part of the problem is uncertainty over reported net asset values (NAVs). “An infrastructure or renewable investment trust NAV calculation is generally based on a number of different asset-specific (eg, output, power prices or project cash flows) and macro (eg, inflation or foreign exchange rate) assumptions, with individual trusts using different inputs to calculate the NAV value,” says Ashley Thomas of broker Winterflood. For example, if Greencoat UK Wind (LSE: UKW) were to use the same power price assumptions as Renewables Infrastructure Group (LSE: TRIG), its NAV would be lower than currently reported, estimates Winterflood. Since these are just assumptions, it is hard to say which numbers are more appropriate, but with so many variables, NAVs are undoubtedly highly subjective and volatile. Across the sector over the past 18 months, NAV changes have ranged from +8% to -7%, says Winterflood.

Feuding with renewable energy trust managers

It is regrettable that many managers were paid fees based on a percentage of NAV rather than performance. This became increasingly controversial once shares traded far below NAV. In the past year, many trusts have belatedly shifted to levying fees on a 50/50 mix of NAV and market value (or in UKW’s case, entirely on market value). Dealings with managers are becoming a common point of contention. Take Aquila European Renewables (LSE: AERI), which has agreed to sell assets to another fund advised by Aquila at a large discount to the current NAV, says Nicholls. How can the same manager assign two different values to the same assets? Or take a plan by Bluefield Solar Income Fund (LSE: BSIF) to merge with its manager, saying this would make to easier to invest in new projects. The trust has instead put itself up for sale after a backlash. Or just this week, TRIG has said it will merge with HICL Infrastructure (LSE: HICL), run by the same manager.

These developments show a lack of concern for investors, says Nicholls, which is clouding the real value of the assets. “If boards were more respectful of shareholders, the share prices would be a lot higher.”

It isn’t clear what it will take to shift sentiment towards the sector. The government’s consultation certainly won’t help. Still, there needs to be a substantial change in the way these trusts are run, with a primary focus on the interests of shareholders. Only then can investors begin to trust NAVs are what managers say they are.

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Federated Hermes Sustainable Global Equity invests across a diverse mix of growth, quality, and value companies, and across developed and emerging markets. It seeks out firms whose products, operations and activities contribute towards a more sustainable future. These companies are well placed to benefit from structural sustainability trends that are reshaping industries.

One such trend is electrification, a powerful yet often overlooked investment theme. As industries shift from fossil fuels to electricity, demand is accelerating, unlocking exciting investment opportunities in areas ranging from transport and heating to mining and steelmaking. Importantly, electrification represents one of the easiest and most cost-effective ways to enhance energy efficiency and reduce emissions – especially when powered by renewables.

Thanks to decades of innovation, the cost of core components such as batteries and power electronics has fallen by 99% since 1990. This has transformed the economics of electrification and accelerated adoption. This is just the beginning. Continued innovation will drive stronger returns and broader uptake, and the most compelling opportunities lie with companies enabling the transition: delivering the means to power an electrified future.

Three stocks to watch in electrification

Taiwan Semiconductor Manufacturing Company (Taipei: 2330) supplies 90% of advanced chips globally and is a critical partner to technology giants such as Apple and Nvidia. Its cutting-edge innovations deliver the enhanced performance and reduced power consumption vital to compact electrified systems.

The firm’s technological superiority and scale position it to benefit from rising demand across sectors. Exposure to electrification, supported by its diversified customer base and sustainability-driven innovation, boosts TSMC’s growth prospects. The Industrial Technology Research Institute estimates that by 2030, each TSMC chip will save the world nearly seven times the energy needed to produce it.

Trane Technologies (NYSE: TT) is a global leader in heating, ventilation and air-conditioning systems, with a strong focus on electrifying building infrastructure. Trane’s systems cut energy costs, improve comfort and help meet emissions regulations, significantly reducing energy use in existing buildings. Heating and cooling comprise 40% of a building’s energy consumption, making Trane’s impact especially significant. Its thermal management systems are between three and five times more efficient than conventional solutions, making up for the higher upfront cost of their units. The company’s service and controls business provides recurring revenue and strengthens relationships with customers.

Schneider Electric (Paris: SU) is a global leader in the digital transformation of energy management and automation. Its platform provides an integrated, hardware, software and services solution enabling electrification across buildings, data centres, industry and infrastructure, cutting emissions and energy costs.

Schneider worked on JPMorgan’s new headquarters in New York, Manhattan’s largest all-electric skyscraper, which is expected to achieve net-zero operational emissions powered by renewables. The firm’s effective strategy and positioning in a market with high barriers to entry has fuelled strong returns for shareholders and consistent dividend growth.

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There may be few things that UK prime minister Keir Starmer and US president Donald Trump agree upon, but one of them is the benefits of nuclear power. The centrepiece of Trump’s recent state visit to the UK was a series of agreements to “accelerate the build-out of new nuclear-power stations and support billions in private investment into the technology”, as Jean-Hugues de Lamaze, manager of Ecofin Global Utilities and Infrastructure Trust, puts it. With the rise of AI leading to what Tancrede Fulop, a senior equity analyst for Morningstar, calls “a growth in energy consumption not seen for decades”, they are not the only enthusiasts.

The debate over energy policy has changed dramatically in recent years. “For the last two decades, we’ve been talking about transitioning from a certain set of fossil fuels to cleaner technologies,” says Mobeen Tahir, director of research at WisdomTree. But in the past few years we’ve come to realise that at the same time we also need to “increase the amount of energy we produce to deal with the demands of the digital economy”. The problem is that these two goals seem contradictory. Renewable energy may be environmentally friendly, but it is not as reliable – wind power and solar energy only generate electricity when the wind is blowing or the sun is shining.

Traditional fossil fuels generate power as and when needed, but they are polluting and causing climate change. The solution is nuclear power, which provides the best of both worlds – “addressing the intermittency issues of renewables without compromising on the environmental credentials”, says Tahir. He argues that you can even make the case that nuclear power is more environmentally friendly than most renewables as a nuclear-power plant produces more energy per square foot, which means that you also use much less land.

Nuclear power is also by some measures more economic than most fossil fuels. The fixed costs of building a nuclear reactor are substantial, says Greg Eckel, portfolio manager of Canadian General Investments, but once the reactor is up and going, “it is probably the cheapest form of energy on an ongoing basis”. Eckel reckons that the most likely scenario for the future of energy is now one where nuclear does the bulk of the work, “allowing other renewable sources of energy to just fill in the gaps”.

Nuclear power and Big Tech’s thirst for energy

The need for a clean, stable source of power is particularly pressing in the technology sector, where the AI revolution has led to an explosion in the number of power-hungry data centres, says Tyler Rosenlicht, portfolio manager for global listed infrastructure at Cohen & Steers. And as well as requiring a huge amount of additional energy, the centres also require a high degree of reliability. After all, if you are a technology executive “the last thing you would want would be for your data centres to shut down suddenly because the power supply either cuts out, or starts fluctuating”.

Indeed, as Rosenlicht points out, the tech companies are so eager for the sort of “tried and tested” energy that nuclear power can provide that they aren’t waiting for new plants to be built, but doing deals directly with nuclear-power companies. Sometimes the aim is to prolong the life of power plants due to expire. In other cases, tech companies have underwritten the cost of building new reactors, either through upfront payments or by agreeing long-term contracts. Both of these are important as the need to make a large capital investment for an uncertain future has always been one of the barriers holding back the spread of the technology.

Pretty much all the major companies, such as Amazon, Apple and Meta, have made at least some long-term agreements with nuclear power, with Amazon and Alphabet (Google’s parent company) striking several deals last year. This isn’t a one-way street either – tech company Palantir has said that it plans to use its expertise to develop AI software aimed at accelerating the development of nuclear reactors, “which is exactly the sort of support that we need to make the whole industry more efficient and exciting”.

Of all the deals between tech companies and nuclear utilities, the most symbolic is Microsoft’s with Constellation Energy to reopen Three Mile Island, which shut in 2019. It could be back up and running as soon as 2027 and provide energy for Microsoft’s data centres for the next two decades. It’s symbolic because Three Mile Island was the site of a radiation leak in 1979, just 12 days after the release of The China Syndrome, a film about a fictional nuclear meltdown. That “created a lot of negativity about nuclear power in the mind of the public”, as Tahir says. Three Mile Island’s reopening may be a turning point.

Changing attitudes to nuclear power

The impact of Three Mile Island (as in the case of Fukushima later) was widely exaggerated and features more strongly in the public mind than nuclear power’s stellar safety record. “The facts on the ground have always been on the side of the industry, but these facts have taken a long time to be accepted by the wider public,” says Marco Visscher, author of The Power of Nuclear: The Rise, Fall and Return of Our Mightiest Energy Source. Now, however, he senses that the war in Ukraine and the failure of climate policy has forced the public and policymakers to be more pragmatic.

Visscher points to opinion surveys showing that “across the world, more people are in favour of nuclear power than oppose it”. In the United States, for example, polls show that 57% of people want more nuclear power, up from 43% just three years ago. Similarly, support for nuclear power in the Netherlands has gone up by half in the space of a few years; 85% of those in Belgium now oppose the planned decision to phase out nuclear power and want to keep it. Support for nuclear power is also high in the UK, with three people supporting nuclear power for every one who opposes it.

Government policy is starting to follow suit. As well as the recent agreement between the US and UK, several European countries, which “had historically been unfavourable to nuclear technology, are now thinking about reversing this opposition”, says de Lamaze. He notes that Italy’s Council of Ministers approved a draft law in early 2025 to reintroduce nuclear power nearly 40 years after it was effectively banned following a nationwide vote in 1987.

Joachim Klement, head of Strategy at Panmure Liberum, notes that many countries around the world are removing restrictions on nuclear power. This includes Japan, which is now starting to reopen the plants mothballed following the Fukushima disaster. Germany may be about to follow suit. Chancellor Friedrich Merz has agreed to allow nuclear power to be treated as a renewable sources of energy on an EU level and is considering reversing Angela Merkel’s infamous shutdown of Germany’s nuclear sector.

Many Asian countries are also thinking about beginning their own civil nuclear programmes from scratch, says Klement. Indonesia is one example, as is Malaysia, which is “hoping that nuclear power can help it fulfil its dreams of becoming Asia’s data-centre hub”, says Klement. Malaysia has already agreed contracts with international companies to start developing reactors. South Korea and India, which are already big investors in nuclear power, are also ramping up their efforts to increase production.

The rise of small modular reactors

There is a wave of optimism regarding the emerging technology of small modular reactors (SMRs). As Klement explains, their small size – they have a typical output of around 300 MW-400 MW, compared with 3GW for a large reactor such as Sizewell C – means they obviously take up much less physical space. This, in turn, means “you can locate them right next to an industrial park or major data centre” and also use the heat they create for other industrial purposes. They can also be up and running much sooner than a power plant, which can take as long as a decade to build, says Fulop.

The vision of a “tennis-court-sized nuclear reactor that is hooked up to a data centre and feeding it clean, stable, predictable energy all day every day” has the potential to transform the nuclear industry, says Rosenlicht. He emphasises that, although this might sound like science-fiction, there’s no question that the underlying technology is “viable”. Indeed, a form of SMR has been in use for decades to power nuclear submarines.

With the technology viable, the key remaining question is cost – and SMRs are still “extremely expensive”, says Rosenlicht. Still, the recent surge in SMR-related investment may help solve this problem by starting to make them more cost-effective. Rosenlicht expects SMRs to become competitive with conventional reactors sometime between 2030 and 2035. This may seem to be a bit longer than you might expect given some of the rhetoric around the technology, but “it’s not that long when you consider that the increased demand for from AI and other technologies is a long-term trend that is not going away”.

Indeed, in the very long run, small modular reactors could end up being much cheaper than conventional reactors. Their small size means they could be built into a factory much like a jet engine is built into a aeroplane rather than having to be assembled onsite, says Klement. He notes that past experience in other industries, such as aerospace, suggests that “while the first ones to be produced will be extremely expensive, the cost to produce each additional SMR will quickly plummet as the companies making them learn from their mistakes”. Once SMRs are up and running, they could end up producing electricity for a third or less of the cost of larger reactors.

Potential winners from the nuclear summer

So, who are going to be the big winners from this nuclear summer? Perhaps the most obvious group of companies to benefit will be those that mine the uranium that is needed to power these nuclear plants. John Ciampaglia, CEO of Sprott Asset Management and partner with HANetf for the Sprott Uranium Miners UCITS exchange-traded fund, notes that the current fleet of nuclear-power plants require a total of around 180 million pounds of uranium. Current production of uranium is only 150 million pounds. Even now, we are in a supply deficit as the increase in the uranium supply has been slower than expected.

Ciampaglia thinks the current gap between demand and supply could increase even further. Worldwide demand for uranium is expected almost to double to between 300 million and 350 million pounds over the next 15 years as countries “expand capacity through new builds, life extensions of shuttered plants and restarts of shuttered facilities”. There are signs that investors are starting to allocate more money in an attempt to close the gap, but the mismatch means that uranium miners and the companies developing new mines are “well positioned” to get a good price for the uranium that they extract for some time to come.

The miners aren’t the only companies who stand to do well from the revival of interest in nuclear power. Tahir reckons that all parts of what he calls the “nuclear value chain” will benefit. This includes the “midstream companies, which do things such as converting raw uranium into something that can be used to carry out the nuclear reactions that produce energy”. Other midstream tasks include storage, building nuclear reactor, as well as providing services such as maintenance, safety checks and even the decommissioning of plants that have reached the end of their useful life.

The aspect of the nuclear supply chain that investors are most interested in, however, is the companies that Tahir calls the “innovators” – the firms that are developing the new technologies that will transform the industry. Many of them are not generating revenue yet, but Tahir thinks they are worth investing in as they “have a huge amount of potential growth ahead of them”. As well as the companies involved in small modular reactors, there are other interesting technologies, such as attempts to recycle the uranium used in the process (at the moment, only 5% of the nuclear fuel actually gets used in energy generation).

The best plays in the nuclear sector

One way to invest in the nuclear sector is through an exchange-traded fund such as VanEck Uranium and Nuclear Technologies ETF (LSE: NUCL). This holds 25 companies, mostly from the US, Canada and Japan, including uranium miners, companies designing nuclear reactors (both large-scale and small modular reactors) and utilities. Its largest holdings include firms such as exploration company NexGen Energy and small modular reactor developer NuScale Power, as well as companies such as Cameco and Oklo (see below). The fund has an average price/earnings ratio of 26 and a total expense ratio (TER) of 0.56%.

As the name suggests, the Sprott Uranium Miners ETF (LSE: URNM) focuses on 35 companies that mine uranium. Its TER is 0.85%.

Cameco (Toronto: CCO) is the second-largest uranium miner in the world. Greg Eckel of Canadian General Investments is particularly impressed that Cameco “has learned to anticipate supply and demand and adjust production in light of how the market is evolving”. He also likes the fact that the company has broadened into other parts of the supply chain, owning nearly half of Westinghouse, for example, “which does the full cycle of designing, building, maintaining and decommissioning nuclear reactors”. Cameco trades at an aggressive 55 times 2026 earnings, but this is justified by the fact that revenue has more than doubled since 2021.

A purer play on the development of advanced nuclear technology is Oklo (NYSE: OKLO). As stated in the main story above, WisdomTree’s Mobeen Tahir likes Oklo, as it is one of the leading companies involved in the development of small modular reactors. Its first is planned for 2027. It is also finding ways to recycle nuclear waste. Oklo is a slightly riskier investment as it is currently losing money, but there is plenty of cash on hand to tide it over until profitability is reached in the next couple of years.

Another leader in the development of small modular reactors is Rolls-Royce Holdings (LSE: RR). The company is currently best known for its engines and defence products. The UK government (among others) has selected Rolls-Royce as one of its preferred partners to develop small modular nuclear reactors over the next decade. It trades at 36 times 2026 earnings, but this is more than justified by its rapid turnaround in recent years and its growth potential.

Few utilities specialise solely in nuclear power, as Morningstar’s Tancrede Fulop points out. Korea Electric Power Corp (Seoul: 052690), for example, uses gas and coal to generate power and is known across the world for its expertise, but it also uses nuclear power to generate electricity, and builds and designs nuclear-power plants around the world. As well as projects in the US, it is behind plans to build the first new reactor in Japan since the Fukushima disaster. Trading at less than four times current earnings, it is available to Western investors via depositary receipts traded on the New York Stock Exchange (NYSE: KEP).

Another utility that Fulop likes, and which is located a little closer to home, is Centrica (LSE: CNA). At the moment, it makes around 20% of its operating profit from nuclear power, including a 15% stake in the Sizewell C nuclear power station that is being built in Suffolk. This should increase as it has agreed to invest in 12 new nuclear-power plants that X-Energy is planning to build in Hartlepool. Centrica trades at 11.4 times 2026 earnings, with a dividend yield of 3.6%.

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Since listing in 2013, Greencoat UK Wind (LSE: UKW) has grown to become one of the UK’s largest investment trusts. At one point, its net asset value (NAV) reached almost £4 billion.

Yet the trust has generated mediocre long-term returns for investors: the NAV total return has been 5.7% per annum (pa) since 2013, while the share price total return has been 6.6% pa. Over five years, results have been much worse, with a NAV total return of 1.8% pa.

In comparison, City of London (LSE: CTY), a straightforward equity-income trust, has produced 15% pa over the past five years, 7.8% pa over ten years and 9.1% pa over 15 years. Greencoat even lags cash funds in recent years: Royal London Short Term Money Market Fund has returned 2.7% pa over five years.

Discounting the future

Granted, Greencoat is an alternative income trust designed to provide investors with diversification from stocks, bonds and cash. So, it’s not directly comparable to these two funds.

Still, to get this income diversification, investors have had to sacrifice their capital: if you ignore dividends received, the trust’s return over the past decade is below zero. That reflects its declining NAV, which is a function of the way that renewables trusts value their assets and the factors that have been working against them.

The value of Greencoat assets is based on the present value of projected future cash flows generated by its portfolio of wind farms. These cash flows are determined by the volume of electricity generated and the price at which it is sold. The present value of them is determined by the discount rate used to put them into today’s terms.

This discount rate reflects the market’s view on the long-term risks of Greencoat’s cash flows, but is also highly sensitive to prevailing interest rates. The discount rate is highly subjective. For example, in a recent report on Greencoat, analysts at Winterflood calculated a NAV 13% below the trust’s published value. Why? “We believe around half of this gap relates to the higher discount rate we have applied to merchant power revenues.”

Many other assumptions also go into these valuations and changing them can have significant consequences. If the power price forecasts used by Renewables Infrastructure Group (LSE: TRIG) were plugged into Winterflood’s model for Greencoat, it would have a further impact of around 9% on the NAV, say the analysts.

That doesn’t mean that either UKW or TRIG is more likely to be right about power price forecasts, and TRIG has its own issues. At its half-year results, it warned that dividend cover would be tight following a drop in power prices and wind generation.

A sector-wide problem

This sums up a broader problem across the renewables trusts: valuations are far more volatile than investors might expect. Take Greencoat Renewables (LSE: GRP), which invests in euro-denominated assets. At the end of June, it cut its NAV by 8.9%, due to lower power prices and estimated wind generation.

As a result of these changes, the management team estimates full-year dividend cover will be 1.3 times, down from the 1.9 times estimated at the end of 2024.

While these three trusts focus mostly on wind, similar issues affect other funds in the sector. Bluefield Solar Income Fund (LSE: BSIF) downgraded its NAV by nearly 5% at its half-year, due to lower forecast power prices for the period from 2027 to 2030. On average, UK-focused peers saw a 2.3% decline in their NAV in the second quarter due to changes in power forecasts, while EU-focused peers dropped 1.92%.

These large changes show just how subjective NAV can be and how easily the numbers can change. Investors shouldn’t rely on the weather to provide positive and steady returns.

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The City is meant to be leading the world in the drive towards “green finance”. But over the past few weeks, it has become clear that it has found reverse gear. Patrick Tiernan, the new CEO of the Lloyd's insurance market, a sector where London is still a world leader, last week indicated that syndicates would no longer be pressured into refusing to cover fossil fuels.

He stressed that the market wanted to be “apolitical”. Earlier in the month, the Net Zero Banking Alliance, a UN-sponsored initiative of which the former Bank of England governor Mark Carney was one of the founders, said it was pressing pause on its work after a whole series of major banks, including Goldman Sachs, HSBC and Barclays, decided to leave. Likewise, a lot of environmental, social and governance (ESG) funds are going to be looking a lot less healthy as the share price of Orsted, one of the favourite stocks for the sector, collapses. Shares in the Danish wind giant have halved in the past year. It turns out it’s a lot harder to make money from windmills than was first predicted. Add it all up, and one point is clear. The “green transition” investment story is turning very sour.

The City's bet on green finance fails to pay out

Much of it was virtue-signalling nonsense from the start. Whatever you think about climate change, fossil fuels are likely to be around for at least a couple more decades, even on the most optimistic scenarios, so it’s hard to see the point of not insuring the companies that produce them. It just meant there was no money to pay out compensation if something went wrong. Likewise, if the major banks refuse to finance fossil fuels, then the companies will just be forced to turn to hedge funds and private credit instead, and the risks will be far harder for central banks to monitor.

At the same time, it was all very well to mobilise the fund-management industry behind green investment, but as Orsted has shown, just because you stamp “climate change” on a project doesn’t mean it will make any genuine profits. As subsidies get wound down, much of the sector turns out to be fundamentally unprofitable – and if the banks are too heavily exposed, they will only find themselves in trouble.

The City’s bet big on “green finance” driving its growth over the next couple of decades. Everyone knew that leaving the EU would pose a challenge to London as a financial centre, even if it was sometimes exaggerated. The City was the key financial hub for the bloc, financing government and corporate debt, and managing bond and equity issues. As some of that business drifted away, as it inevitably would, London was meant to turn itself into the global centre for “green finance” instead. It would become the place where the hundreds of billions that would have to be invested to transition from oil and gas to wind, solar and nuclear power would be financed, and where environmentally friendly companies could list, and where ESG fund management would flourish. It would be the world’s green finance centre, not just Europe’s. Cheerleaders such as Mark Carney predicted that green finance would be a $5 trillion market. It was the City’s future.

Green finance turns sour

This bet has not worked out well. Over the past five years, the City has stagnated. The number of new companies listed in London has shrunk to almost nothing, very few major bids have been launched, and there is not much sign of the green boom we were promised. That is about to become a lot more apparent as many of the deals struck over the past few years turn sour. We have already seen the best years of green finance, when governments were pouring unlimited sums of money into industries such as wind and solar. We are now seeing a retreat, and that will expose a lot of dud projects.

There has to be a reset. The City needs to start growing again and to replace the markets lost by Brexit. It is not going to be green finance, that much is now clear. London’s financial markets need to ditch the green delusion and move on as quickly as possible – and get back to businesses where they can actually make money.

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While finding discount opportunities in the investment-trust sector has always been at the core of the Migo Opportunities Trust strategy, Migo 2.0 now overlays this with increased activism, engagement and concentration. Higher interest rates, flawed regulation surrounding cost disclosures and wealth-manager consolidation have jointly created the most fertile hunting ground in a generation. We intend to exploit this opportunity by finding the best-value opportunities in the sector and unlocking that value for shareholders.

For some, activism is a dirty word. But, at its best, it is often centred on dialogue with shareholders aimed at creating a consensus. This then allows for a sharper and more coherent message to be presented to boards when engaging to create value. Most of our work happens in private. Intensive and detailed research is required when evaluating private-asset vehicles, where we believe the most exciting opportunities reside. Here are three such investments from the portfolio.

Funds focusing on private assets

Chrysalis Investments (LSE: CHRY) has a portfolio of mature venture-capital investments with holdings in several of the biggest European fintechs, such as Klarna and Starling. CHRY has had an extremely rocky ride in recent years, with its net asset value (NAV) hitting 251p in July 2021 during the post-Covid bubble before falling to 130p in March 2023 as its investee companies raised new money at materially lower valuations.

Scepticism surrounding even these reduced valuations led to the discount to NAV widening considerably. CHRY still trades at a 27% discount today despite using cash from recent realisations of portfolio holdings to buy back shares. Although tariff-induced US stock market volatility put the planned flotation of Klarna on hold, we believe a listing will be revived later in the year, which would provide further liquidity for continued buybacks or a tender offer.

Battery-storage funds began 2024 in the doldrums thanks to a combination of reduced wholesale power price volatility and the National Grid’s system sidelining battery storage, which severely reduced revenue generation and, for some trusts, resulted in the suspension of dividends and concerns around gearing levels.

This year has been a very different story for these funds and Gresham House Energy Storage (LSE: GRID) has put in place tolling agreements, which provide a reliable floor for revenue generation. The recent bids for Harmony Energy Income Trust (another battery storage trust) from Drax and Foresight highlighted the potential of GRID’s portfolio. The fact that there were two bidders further emphasises the appeal to private buyers of portfolios of battery-storage assets.

Trusts in wind-down can prove to be very profitable investments. However, this involves modelling out timeframes and sales prices to try to ensure that even in a “worst case” scenario, returns remain attractive. Aberdeen European Logistics (LSE: ASLI) is an example where we have enjoyed returns from the disposals already achieved, but also believe there is value from here.

ASLI invests in “big box” logistic hubs and urban list-mile warehouses across continental Europe. Despite an attractive set of assets, ASLI entered into a managed run-off in May 2024 after a sustained period of trading at a persistent discount and has been selling off the portfolio and handing cash back to shareholders. The pricing achieved so far on the realisation process highlights the portfolio’s quality.

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The US has been undergoing a quiet energy revolution. The amount of energy produced by solar, wind and geothermal sources has more than tripled over the last decade. Solar energy has been one of the big winners.

Total installed capacity has grown eightfold, while solar power’s share of new energy capacity has expanded almost continuously from a minuscule 4% in 2010 to 66% in 2024, a figure that rises to 84% when you include storage. While Trump’s return to the White House has cast doubt on the subsector’s progress, even he may not be able to stop its rise. That is good news for firms like First Solar (Nasdaq: FSLR).

For most of its history, First Solar has focused on making and installing solar panels; it is still the seventh-largest manufacturer of photovoltaic (solar) power cells in the world. However, in the past few years, it has shifted its emphasis from panels for retail customers to utilities and now makes much of its money from building and maintaining solar power plants.

This shift has proved a shrewd move, as power companies have been eager to invest in solar energy in order to secure a range of tax credits and mandates from both the US government and individual states, notably the Inflation Reduction Act of 2022.

Silver linings for First Solar

Even though Donald Trump’s new bill curtails many of Joe Biden’s incentives for solar power, there are several silver linings for First Solar. Firstly, the tax credits for utilities will last longer than those for residential panels, while Trump’s changes won’t affect state-level mandates.

Most importantly, Trump’s tariff policies mean that the solar panels sold by Chinese rivals, who currently dominate the market, accounting for seven out of ten of the world’s largest producers, are now much more expensive. While the tariffs have also increased the price of many components that First Solar imports, the net impact of the tariffs is so positive for First Solar that even when you take the subsidy cuts into account, the group is in a better position than it was before Trump arrived in office, according to management.

First Solar has made excellent progress over the past few years, with sales rising from $3.06 billion in 2019 to $4.21 billion five years later – an increase of 40%. Sales are expected to grow even faster in future, increasing by around 50% in the next two years. Normalised earnings per share have jumped more than tenfold between 2019 and 2024, while operating margins have swelled, and the company now boasts a double-digit return on capital employed. Despite this, First Solar is still valued at only eight times 2026 earnings.

With First Solar recently upgrading its profit forecasts, the stock has been on a tear, beating the wider market over the last six months. It is also trading above its 50-day and 200-day moving averages. I therefore suggest that you go long at the current price of $184 at £11 per $1. In that case I recommend putting the stop-loss at $100, which gives you a total downside risk of £924.

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North American midstream energy infrastructure has been a standout in the energy sector, generating strong free cash flow and returning capital to investors via growing dividends and buybacks. These companies, which transport, process, and store hydrocarbons, benefit from fee-based revenue under long-term contracts, supporting stable, predictable cash flows.

Midstream energy infrastructure is especially well-positioned to benefit from rising demand for natural gas, particularly through liquefied natural gas (LNG) exports. North American LNG-export capacity is expected to more than double by 2030. Meanwhile, America’s demand for electricity is climbing for the first time in nearly 20 years (driven by electrification and data centres), boosting natural gas-fired power generation.

The Alerian Midstream Energy Dividend UCITS ETF (LSE: MMLP) is an exchange-traded fund offering exposure to US and Canadian midstream firms. Roughly 65% of MMLP’s index by weighting is focused on natural gas infrastructure.

Profits in the energy infrastructure pipeline

Among natural gas-infrastructure companies, Williams Companies (NYSE: WMB) has a unique advantage with its Transco pipeline, the largest natural-gas pipeline in the US. It extends from Texas to New York City. Transco has several attractive expansion projects set to come online between the second half of 2025 and 2030.

Williams is also pursuing natural gas power projects to support data centres. Scheduled to start up in 2026, its Socrates project in Ohio for a data centre belonging to Meta is backed by a long-term, fixed-price power purchase agreement. Williams has two similar power projects under development. Williams recently raised its forecast for this year’s adjusted EBITDA by $50 million. The company expects adjusted EBITDA growth of 9% in 2025 and raised its dividend by 5.3% earlier this year.

Canada’s TC Energy (Toronto: TRP) handles approximately 30% of the natural gas consumed daily across North America. It spun off its liquids pipeline business last year, and now natural gas pipelines represent 90% of the company’s expected 2025 EBITDA. With robust growth opportunities, TC Energy expects to notch up C$6 billion-C$7 billion annually in capital expenditure. For instance, the company recently announced the Northwoods pipeline project to support power generation in the US Midwest, including for data centres. It is expected to come online in 2029.

TC Energy expects comparable yearly EBITDA growth of 5%-7% from 2024 through 2027. The company expects C$10.8 billion in comparable EBITDA for 2025, which implies 8% growth. TC Energy boasts a 25-year record of dividend increases and anticipates 3%-5% annual dividend growth over the next few years.

Also worth researching is Cheniere Energy (NYSE: LNG). It liquefies natural gas for export. The company is expanding its export capacity at Corpus Christi, a key gas port, and expects to sanction an additional expansion project this year. EBITDA is expected to expand by 9% growth in 2025.

Cheniere has been the clear leader in terms of buyback activity in the midstream sector, repurchasing $5.5 billion of equity since 2022. Cheniere had $3.5 billion remaining on its repurchase authorisation at the end of March. The company has also prioritised dividend growth, committing to raising its payout by about 10% each year through to the end of this decade.

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I don’t know about you, but I use artificial intelligence (AI) all the time. ChatGPT has become my right-hand man. It gives me advice (really – and good advice too), it helps me make decisions, it gives me exercise workouts and recipes; it proofreads what I write, it helps me write titles, it even helps me write song lyrics. Midjourney does all the imaging for my newsletter. Even a simple Google search now involves lots of AI. I know I’m not alone. Almost everyone is using AI, consciously or not.

But AI requires bucketloads of power. That’s why Microsoft recently agreed to pay Constellation Energy, the new owner of America’s infamous nuclear power station, Three Mile Island, a sizeable premium for its energy. There is cheaper wind and solar power to be had in Pennsylvania, but it isn’t as reliable as nuclear 24 hours a day.

It’s not just AI. The widespread political desire to rid ourselves of fossil fuels means the world needs electricity, and fast.

Nuclear is the solution, of course. But nuclear takes a lot of time, even with AI now “re-routing” the anti-nuclear narrative. It takes especially long in the UK, where any kind of infrastructure project requires billions to be spent on planners, lawyers and consultants before a brick is even lifted.

It’s absurd. Nuclear power stations have been operating commercially for 70 years, providing reliable, affordable and almost infinitely renewable “clean” electricity. Nuclear has the best safety record of any energy technology. Almost all environmental concerns, such as waste disposal, have been solved. It has taken so long for this narrative to change because activists have, for so many years, insisted to the public, politicians and the media that nuclear energy is unsafe that the notion has become firmly entrenched.

The narrative around nuclear power is changing

Layer upon layer of safety is demanded in nuclear plant design. The regulatory process is slow, cumbersome and complex. There is a long lead time between planning, building and operation, which adds to expense. Political uncertainty meant many proposals for nuclear power stations in the UK were shelved. It all drives away investment.

But governments around the world are waking up to the fact that the silver bullet is nuclear-powered. Thus the narrative is changing. The dawn of the new age of nuclear power is upon us and it can’t come quickly enough. However, it still takes a long time to design and build a nuclear power station.

That’s why the focus has shifted to small modular reactors (SMRs). These have been operational for almost 70 years now in submarines, aircraft carriers and ice-breakers, but in the last few years land-based SMRs have been developed to generate electricity. They are a huge potential problem-solver.

They use simple, proven technology, and are safer than current nuclear power stations. They can be manufactured in factories and then rapidly erected on-site. Modular refers to the design principle of breaking down a system into small, independent and interchangeable components, or “modules”, that can easily be combined, modified or replaced without affecting the rest of the system. This flexibility means they are scalable. It aids manufacture, transportation and installation while reducing construction time and costs.

SMRs don’t occupy much land, so they have little impact on the landscape. Some can even be constructed underground – surely preferable to wind turbines and solar farms. In the UK, they could be erected on the redundant sites of closed nuclear and coal-fired power stations, where grid connections are readily available.

A 440 megawatt (MW) SMR would produce about 3.5 terawatt hours (TWh) of electricity per year – enough for 1.2 million homes, or to provide power to Wales, the Northeast of England or two Devons. That would require about 25 acres of land. A solar farm would need 13,000 acres for the same output; a wind farm, 32,000 acres. Three 440MW SMRs would be enough for London, which has around 3.6 million homes.

What’s more, their output is not dependent on the weather. That’s why Microsoft paid a premium of more than 85% for Three Mile Island’s power. SMRs also produce electricity that can easily be adjusted to meet the constant, everyday needs of the grid (baseload), and they can also ramp up or down to follow changes in demand throughout the day. They spin in sync with the grid, so they help keep everything stable. When they’re running, they act like a steady hand, providing momentum that makes it easier to manage sudden changes in electricity supply or demand.

How to invest in nuclear power

There are all sorts of ways to invest in nuclear power. The simplest and least risky is to buy the metal itself. Current demand for uranium stands at around 200 million pounds per year, while mining output totals only 140 million pounds. Another 25 million pounds comes from secondary sources, such as scrap and recycling. So there is a supply deficit. I’m surprised the price isn’t higher. London-listed Yellow Cake (Aim: YCA) has been set up with this purpose in mind. It is, essentially, a uranium holding company. You buy the shares and thus own a share of the uranium it holds.

You could also buy uranium miners. There are large producers, such as Cameco (Toronto: CCO) and Paladin Energy (Sydney: PDN). You can also gain exposure via large caps, such as Rio Tinto (LSE: RIO), but they are not pure plays. There are mine developers too, such as NexGen Energy (Toronto: NXE), whose Rook 1 project should be producing a whopping 30 million pounds a year by 2030, almost enough to solve the uranium supply deficit single-handedly.

If you don’t fancy your stock-picking skills, go for a fund instead. The London-listed Sprott Uranium Miners ETF (LSE: URNP) is an exchange-traded fund that gives you exposure to a basket of mining companies, as does the closed-end fund Geiger Counter (LSE: GCL). Another popular ETF is the Global X Uranium UCITS ETF (LSE: URNU).

Are miners a good investment?

I do not like the miners at all. About 90% of those listed in the funds do not have any production coming in the near future and are, therefore, huge vortexes into which capital will disappear. At present, they are fully valued. That’s not to say they won’t go up. But when the time comes for them to fall, they will bomb.

Both Rolls-Royce (LSE: RR) and Fluor Corp (NYSE: FLR) have been real winners. Rolls-Royce has built seven generations of SMRs for use in nuclear submarines and, with its modern designs for SMRs, has been winning contracts all over. Rolls-Royce is not a pure SMR play. But it has put its SMR business into a separate entity (Rolls-Royce SMR) and I presume this will be spun out and listed at some stage.

The stock has been going great guns under its new CEO, Tufan Erginbilgiç, and it’s been a real winner. It’s now at 530p and there’s no stopping it. It was 1,350p in 2013, so there’s plenty of upside left, and that was before there was any urgency about SMRs.

Majority shareholder and engineering company Fluor Corp has been a real winner too. It’s now $50. The stock remains a hold, although it is not a pure play. Worth $8.6 billion, Fluor has $200 million of free cash flow and trades at 42 times earnings.

A new listed player

But the company we were looking at, NuScale Power Corporation (NYSE: SMR), has now listed – good ticker – and you can buy the stock at not far off the flotation price. Be warned, however: this is a volatile company. Since its initial public offering (IPO) at $10, the stock has been as high as $15 and as low as $2. It is now at $13.

NuScale designs, develops and commercialises SMR reactors for nuclear-power generation, aiming to provide a “safe, flexible and scalable nuclear-energy solution”. Its flagship product is the NuScale Power Module, a self-contained pressurised water reactor (PWR) that is far smaller than traditional nuclear reactors. Each module has an electric capacity of about 60 megawatts, but they can combine to scale up.

NuScale has partnered with various organisations, including the US Department of Energy (DOE) and global energy firms, but it does not yet have a solid sales pipeline, so it is hard to value. Instead, it’s a bit of a meme stock that rises and falls when it gets tipped. Nuscale has a market capitalisation of $1.2 billion and revenues of $23 million; it lost $273 million last year. It now has $180 million in negative free cash flow, $130 million in cash and a burn rate of about $35 million per quarter. (So it’s got enough money for another year.) Caveat emptor.

Another option is BWX Technologies (NYSE: BWXT), but again it’s not a pure SMR play, more of a picks-and-shovels play. The company manufactures nuclear reactor components, systems fuel and other critical parts for the nuclear power industry. It really is wide-ranging (think anything from naval nuclear propulsion to nuclear defence) and its history goes all the way back to the Manhattan Project.

SMR developers will often rely on BWX’s expertise and manufacturing capabilities to ensure the safety and functionality of their designs. As demand for SMRs grows, so will the appetite for BWX’s products and services. BWX has a market value of $10 million and $1.2 billion in debt. Earnings per share are just shy of $3, and the price/earnings (p/e) ratio is close to 40. But it is profitable and pays a yield just below 1%.

If you want to go really small and speculative, there is always the mining exploration option (not recommended), or uranium enrichment firms. If this technology of enriching uranium to make it more powerful becomes good, then the efficiencies of the industry will improve even further, and the problem of uranium supply deficits will quickly vanish, along with the high prices of many uranium miners. Silex Systems (Sydney: SLX) – market cap A$1.1 billion (£565 million), 50% owned by Cameco – is the market leader here, although Centrus Energy (NYSE: LEU), worth $1 billion, is not far behind.

We are still some years from successful enrichment, but it is coming. I doubt we will see it before the uranium price itself breaks to new highs above $140/lb, which it hit in 2006, and probably not until $200 uranium. High prices have a habit of accelerating everything. Uranium is now at $70/lb.

That’s when tiny-cap nuclear-fuel tech firms such as Lightbridge (Nasdaq: LTBR), worth $46 million, could rocket. Lightbridge, looking to improve the safety, economics and proliferation resistance of nuclear power, is developing a fuel that operates about 1,000 degrees cooler than standard fuel. It’s got $27 million in the bank, is losing $10 million a year and, like NuScale, seems to rely on memes and tipsters. The stock costs $3 so there is plenty of upside. But be warned: this is an illiquid Nasdaq stock. Don’t chase it.

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“It’s not a way to get real rich, but it’s a way to stay real rich,” Warren Buffett said in 2020 at the annual general meeting of his conglomerate Berkshire Hathaway. Buffett was talking about the utility and energy sector. In particular, he was referring to Berkshire’s division, Berkshire Hathaway Energy (BHE). 

Berkshire entered the energy supply and distribution business in 1999 when it bought a controlling stake in MidAmerican Energy Company for $2billion. The group expanded rapidly, buying stakes in other operators in the US, Canada, the UK and Australia. Today, BHE operates across 28 US states, transports 15% of America’s natural gas and serves more than 13 million customers. The $2billion initial investment has grown into a giant with $138billion of assets. 

However, ferocious headwinds have started building against the utility giant in recent years. These trends, which seem to have forced Buffett to reconsider his stance as an advocate of the industry, aren’t limited to North America, and BHE isn’t the only company struggling. Worldwide, the entire utility sector is grappling with what can only be described as a once-in-a-generation period of change that threatens to upend the once-reliable industry.

Future of the energy sector

In Warren Buffett’s 2023 letter to the investors of Berkshire Hathaway, the billionaire cast doubt over the future of the group’s energy business, which he had praised only a few years previously. “Berkshire can sustain financial surprises, but we will not knowingly throw good money after bad,” he noted in his annual letter to shareholders in February, warning of the “spectre of zero-profitability or even bankruptcy” across the industry. 

The root cause of this change of heart is climate change. PacifiCorp, the largest electric utility owned by Berkshire, has been found liable for a series of deadly wildfires in 2020. The company has been blamed for failing to shut off some of its power lines, which ignited vegetation that had been dried to a crisp by the hot weather. The scale of the potential liability isn’t yet clear, but analysts have suggested the bill could be as high as $45bn. 

At the same time, BHE is spending tens of billions of dollars rebuilding its electricity network to cope with the surge in demand for green power and associated transition systems. Meanwhile, in 2019, Pacific Gas & Electric, California’s largest utility, filed for Chapter 11 bankruptcy protection after accumulating an estimated $30bn in liability for fires started by its poorly maintained equipment. 

These twin issues perfectly illustrate the difficulties facing the global utility sector today. On the one hand, climate change is upending how companies have been doing business for years. And on the other, these companies are having to rebuild their networks to cope with the green transition. That means more electricity (copper wire, in other words), less coal, more solar and fewer big, horizon-dominating power plants.

The biggest problem facing the sector is that the new world order is going to look very different to the old one. Large power plants are becoming a thing of the past, to be replaced with tens of thousands of smaller solar or wind farms. These units are cheaper and easier to build, but they require the grid to be rewired. 

The current electricity grid in most nations is based on the model of a few big power plants and their associated equipment. So there tend to be a few well-connected spots around each country. That’s no longer relevant. Where there was one plant, there are now ten dotted around each region, and each one needs new connections. The cost of this change will be astronomical. The UK’s National Grid has released a “£58bn plan” to rewire Great Britain’s electricity grid, and that’s just the start. 

The water sector, too, is facing an uphill struggle in a changing world. In the UK, the situation is particularly dire as water companies, after years of under-investment, have attracted criticism from all sides for dumping raw sewage in rivers and the sea as ageing systems just can’t cope. Water companies have proposed a £100bn capital spending plan between 2025 and 2030 to tackle the problem. These numbers are huge, and the money’s going to have to come from somewhere. It is likely that investors will have to foot the bill. 

This suggests that the once-dependable returns investors once received from utility companies are no longer on the cards. Investment returns are likely to fall, and in some cases, investors may even be asked to put up extra cash. 

The trend is already taking shape. In 2020, SSE, one of the UK’s largest electricity suppliers and distributors, announced that it would cut its dividend to fund future growth after it sold its energy-supply business. Another cut followed earlier this year as part of the company’s reinvestment plans. The money that SSE is pouring into its network business should see its regulated asset base double from £8bn in 2022 to more than £16bn by 2027. 

National Grid hasn’t cut its dividend (yet), but it recently announced a mammoth £7bn fundraising to help fund a £60bn investment plan in both its UK and US markets set to take place over the next five years, double the sum spent over the previous five. The company said the investment would help underpin a 10% compound annual growth rate in its asset base (compared to 14% for SSE) over the next five years.

Challenges faced by the global energy sector

Both SSE and National Grid are investing today to drive growth in the future, which is the trade-off these businesses and investors are going to have to make in the coming years. Returns are no longer assured, but long-term growth is on the cards for those willing to stick around. 

That said, there will be some challenges along the way. These industries are heavily regulated, and the building and planning system in most countries is also heavily regulated. The UK’s planning system has drawn headlines for its complexity, but other countries have similar problems. 

The world’s re-wiring has captured the attention of the media over the past few years, but there has been another global issue brewing below the surface: water security. The problems with Britain’s water providers have been well-publicised. Ageing infrastructure can’t cope with storm surges and a modern population. 

In Spain, it’s a matter of not having enough water rather than too much of it. Parts of the country are suffering one of the worst droughts on record, and that’s before the summer has even started. Like electricity providers, water companies face a large bill to future-proof their networks. This will prove a headache for most businesses. Water is a highly regulated industry, and even where it’s not, the threat of government intervention is never far away. So, while the industry may look attractive, it shouldn’t be deemed risk-free. 

There are now question marks hanging over the sustainability of the returns water companies have provided their investors for so long. After over a decade of sucking as much money as possible out of Thames Water, the company’s owners have marked down the value of the company’s equity, in some cases to zero. There is no money left for investors. 

Thames’s problems are not an isolated case. According to the Financial Times, the 16 water monopolies in England and Wales paid out a total of £78bn in dividends in the 32 years between privatisation in 1991 to March 2023, while chalking up £64bn in net debt. Infrastructure spending over the period totalled £190bn. 

When the companies were privatised, they had no debt. Ofwat, the sector’s regulator, wants companies to get a grip on their finances. It is pushing them to reduce gearing – a measure of the ratio of debt to assets – from a sector average of around 68% to 55% by April 2025. 

That will require an equity injection of £5bn by 2030 and £8bn by 2035. Water UK, the industry’s trade body, said investors have pledged to inject £6.5bn in new equity as well as raising debt as part of a plan to invest £96bn by 2023. On top of this, costs will be passed onto billpayers. Companies have asked for bills to be hiked by as much as 70% by 2030 in some cases. 

Wherever you look in the global utilities sector, costs are mounting, and regulators are clamping down. As Warren Buffett has discovered, these challenges are turning a once lucrative sector into a minefield. Utilities are no longer a way to “stay real rich”.

Growing opportunities in the energy sector

That’s not to say investors should avoid the sector altogether. It’s changing, not failing. Whereas investors might once have expected to buy utilities for their dividends and hold them indefinitely, relying on their steady, dependable income, now investors have to look past the income to long-term asset growth. 

For example, National Grid has raised money from investors but now aims to grow its asset base at a double-digit annual rate. SSE has laid out similar targets. Assuming each company’s share price continues to trade in line with book value, investors should be able to pocket a double-digit annual capital return with some income thrown into the mix. 

So far, countries representing 90% of the world’s GDP have committed to decarbonising the planet by 2050. That’s a huge commitment to long-duration investment programmes. The total bill for this is going to be several trillion dollars, and politicians and regulators can’t afford to penalise investments: the public sector alone can’t afford the bill. 

As the team at Ecofin, which manages $1.9bn across private and public assets, including UK investment trust Ecofin Global Utilities and Infrastructure, told me, the “structural growth opportunities inherent in the energy transition” have only enhanced the attractiveness of infrastructure as an investment. Ecofin argues that the policy environment is becoming “increasingly supportive” of utilities’ rising to the challenge. 

And the qualities that have historically driven returns haven’t disappeared. The sector has always had high barriers to entry; I’d argue that these barriers have never been higher. The UK hasn’t built a new reservoir in three decades. There are now a handful in the pipeline, but it is expected to be decades before they’re in use due to planning and construction hurdles. Major UK renewable-energy projects are being delayed by more than ten years as the grid reaches capacity and new networks are bogged down in planning and construction bottlenecks. 

The same is true in the US and other developed nations. In Germany, it can take ten years for a project to get from the design to the commissioning stage, while in the US, it has taken one of BHE’s flagship projects 30 years of planning and construction to get anywhere near completion. It’s not easy to build energy infrastructure anywhere in the world, and that has only solidified the sector’s competitive advantage and monopolistic traits. That’s without touching on the vast sums of money that would be required to build a competitor to a company such as Thames Water. 

The best investments in the sector are likely to be the firms adapting to the changes and meeting regulatory issues head-on. This won’t come cheap, but as EcoFin notes, these businesses “are expected to be major beneficiaries of structural growth and attractive returns on significant capital investments”. However, “there will be winners and losers along the way”. Base investment decisions on “detailed fundamental analysis” and incorporate diversification – at the stock, sector and global levels. 

As EcoFin points out, companies and countries are moving at different paces and adopting varying strategies. In Europe, 80% of the largest European utilities’ earnings before interest, tax, deprecation and amortisation (Ebitda) is fully contracted and inflation-linked, thereby “de-risking these businesses”. That’s less common in the US, which is also less advanced when it comes to the energy transition.

Ten energy stocks to consider now

I’ve tried to make it clear throughout this article that utilities no longer offer a free lunch, and investors have to be careful where they invest. Despite the potential opportunities, the risks are growing, which investors need to keep in mind when looking for ways to play the energy transition. A plethora of London-listed investment trusts offer exposure to companies with a part to play in the energy transition. 

As William Heathcoat Amory, managing partner at investment service Kepler Partners, notes, trusts can be a better way to invest in the sector as they’re “cash flow-based, meaning that a high proportion of returns are seen as income paid every year, rather than a growth investment which is a lump sum that may or may not be returned at the end”. 

Trusts also have a “simpler, purer exposure” as they do not have to grapple with the “complexity of employing people” and tend to have limited development and construction risks. Amory cites the example of The Renewables Infrastructure Group (LSE: TRIG), which recently bought a battery developer to access this market. Renewables Infrastructure is the second-largest renewable-energy infrastructure trust listed in London, second only to Greencoat UK Wind (LSE: UKW). Its portfolio ranges from offshore wind in Germany and onshore wind in Sweden to solar power in France and battery-storage assets in England. 

According to the Association of Investment Companies, the trust trades at a 21.7% discount on the value of its assets and offers a dividend yield of 7.5%. Compared with Greencoat, which focuses purely on wind, Renewables Infrastructure’s diversification across sectors is highly attractive. Its peers, Greencoat Renewables (LSE: GRP) and the Octopus Renewables Infrastructure Trust (LSE: ORIT), offer a similar investment portfolio, and both are trading at discounts to net asset value (NAV) of between 20% and 30%. 

The Ecofin Global Utilities and Infrastructure Trust (LSE: EGL) doesn’t own assets in the same way. Instead, it owns a global portfolio of infrastructure stocks – a more diverse way to play the global energy transition. It has a big weighting in the UK-listed National Grid and SEE, both of which it believes are “very attractive” at recent levels, considering their capital investment and growth plans for the next decade and current valuation. 

Only 10% of the portfolio is invested in the UK. Just over 22% is invested in US firms such as NextEra Energy (NYSE: NEE), the world’s largest generator of renewable energy from the wind and sun as well as a leader in battery storage. 

The Imapx Listed Infrastructure Fund offers more sector diversification. Three of its top-ten holdings are water utilities, including United Utilities (LSE: UU) and Severn Trent (LSE: SVT). Roughly 44% of its assets are in North America, 42% in Europe, and the rest in Asia. 

United Utilities and Severn Trent, along with their peer Pennon (LSE: PNN), are interesting plays. The water sector in the UK has faced a lot of flak, and this does not look set to go away anytime soon. But these companies are likely to maintain their monopolistic traits, and all now look appealing with dividend yields of between 5% and 7%. But I’d only recommend buying them as part of a basket of utilities rather than individual picks to reduce risk. 

The iShares Global Clean Energy UCITS ETF (LSE: INRG) is an excellent passive option for investors looking for exposure to a portfolio of clean-energy companies at the forefront of the energy transition. 

For a US focus, investors could pick another exchange-traded fund (ETF), the iShares S&P 500 Utilities Sector UCITS ETF (LSE: IUSU), which offers exposure to the top utility players in the S&P 500, an excellent way to invest in the energy transition across the pond. For a global infrastructure play, there’s the iShares Global Infrastructure ETF (LSE: INFR), which holds the likes of NextEra Energy, but also key infrastructure providers such as Union Pacific.

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The UK government has pledged to decarbonise the country’s electricity grid by 2035, a target it must hit in order to reach net zero by 2050.

However, according to research by the House of Commons, the UK currently lags behind other nations when it comes to investing in the energy transition.

This suggests policymakers will have to ramp up spending if they want to bring the country up to par with its neighbours over the coming decade. And renewable energy companies could benefit from this spending boom as investment flows into the sector.

The path to net zero is not a straightforward one and while fossil fuels will be necessary to power the transition to cleaner energy wind and solar energy generation are going to be a fundamentally important part of the transition.

With that in mind, here are three renewable energy stocks investors could buy today to benefit from the industry’s upcoming, and pretty much inevitable, boom.

Greencoat UK Wind

Greencoat UK Wind invests in and operates wind farms across the UK and Ireland.

In the first three months of this year wind turbines generated more electricity than gas for the first time in the UK, according to the National Grid.

The UK is a global leader in wind power generation, only recently having been overtaken by China as having the most wind farms in development.

Greencoat is one of the best ways to invest in this growth.

Management is aiming to grow the company’s dividend by RPI inflation every year, which makes the stock especially attractive today. Its dividend target for the current year is 8.76p per share and the shares currently yield 6.1%.

In 2022 it paid out £178m in dividends, up from £140m the year before. Its dividend per share increased to 7.72p from 7.18p.

That should come in handy in the face of any further market volatility. Its share price is currently 149p, up from 140p in 2021 and slightly lower than the 152 at the end of its 2022 financial year, which could provide investors the opportunity to buy in and secure longer term income.

Good Energy

Good Energy was recently slapped with a hefty fine due to delayed repayments of customers’ final bills.

But despite this error, the company has some attractive qualities as an investment. It supplies 100% renewable electricity and carbon-neutral gas to customers and helps customers instal solar panels, heat pumps, and batteries to store extra energy.

The company also pays customers for any additional energy they make and send back into the grid.

Its 2022 final-year results were positive. Revenue increased by 70%, and profit before tax also jumped from £2.6m to £9.3m. It’s also nearing its target of acquiring one million customers – currently, it serves 795k.

As more and more people become aware of the benefits of using renewable energy, Good Energy could see a jump in the number of customers it serves.

Going forward it's focusing on acquisitions to expand its capacity. Even though the UK energy supply market is a bit of a mess, Good Energy does have a lot going for it and wholesale energy prices are falling. As the market stabilises, the firm may benefit from its reputation as a “clean” energy company.

ITM Power

Hydrogen will play a key role in the energy transition. It is a cleaner alternative to natural gas, as its only byproduct is water. Meanwhile, methane, which is the traditional gas used to power homes, releases carbon dioxide.

Even though the market is still in its early stages, it could be a multi-trillion-dollar industry, and ITM is one of the businesses making waves in the sector.

Still, there’s no denying the firm is in its early stages of growth.

The company raised significant capital to expand last year, although some strategic missteps have hindered the growth plan. In order to rectify this, ITM recently appointed a new CEO who developed a 12-month plan to turn the company around.

The errors hit sales. Revenue halved from £4.2m in the first half of 2022 to £2m in the six months to 31 October.

Going forward, it plans to focus on its foundations before expanding – and there is plenty of room for expansion. It recently tripled the power supply to its main site and plans to expand it, as well as production volumes.

Its hydrogen technology, coupled with its new strategy gives ITM positive long-term prospects, but perhaps for investors willing to take on some risk.

Today I wanted to expand on a theme I have been writing about for a while: that the green energy revolution is anything but green.

In fact, the amount of metal required and the amount of fossil fuel needed to be burnt to make it happen means it will be extraordinarily damaging to the environment, releasing unprecedented amounts of CO2.

Moreover, unlike the inflation that resulted from Covid and the Ukraine war, which might yet prove temporary, Net Zero could produce inflation that will be prolonged and entrenched.

In other words, Net Zero is not only deluded, but it will also be extremely damaging, both to the planet and to people’s lives.

Here we explain why - and what to do to protect your wealth.

The problem with the Net Zero transition

I stumbled across a super talk this week by Mark Mills, author and senior fellow at the Manhattan Institute, called "The Energy Transition Delusion: Inescapable Mineral Realities".

He argues that the current energy transition to renewable sources is based on a flawed understanding of the resources required to make it happen. Most of the evidence cited here is cited from that talk.

Today the world gets a little under 4% of its total energy supply from wind and solar. That’s one-third as much energy as it gets from burning wood.

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I couldn’t believe that stat when I read it, but that’s what the International Energy Agency (IEA) says. Wood still provides 350% more energy to the world than all the world's wind turbines and solar power combined.

To get to this 4% level the world has directly spent something like $5 trillion (more than double UK GDP) in the last 15 years, and probably the same amount again in indirect spending, says Mills.

An electric vehicle requires 400% more metals than a conventional car. To build a machine to replace a gas turbine, you need 1,000% to 2,000% more minerals to deliver the same unit of power. To deliver the same mile of driving, the same hour of heat, the same hour of lighting or the same hour of computer time the extra minerals required amount to 2,000% to 7,000%

Overall this amounts to an increase in mineral demand in the order of 700% to 4,000%.

“Not to put too fine a hyperbolic a point on this,” says Mills, “this would be the largest single increase in demand or supply of metals in all of human history. It's never happened.”

Net Zero will require huge investments

Mining cannot increase output by 700% to 4,000%, not in the next decade, nor in time for the Net Zero deadlines.

We are thinking in terms of kilowatt hours instead of in terms of tonnage - and tonnage is what’s required to get those kilowatt hours. Mills says, “It requires both the extraction and movement of a quantity of materials equal to or greater than the quantities of materials that humanity extracts and moves and grows for all other purposes combined. The world's not capable of doing that with the technologies that exist.”

Where is all this new metal going to come from? To take a mine from exploration and discovery to production takes 16 years. Even if you relax regulation (unlikely) and accelerate investment (not so easy) you are only at best going to shave a few years off that.

To go out and explore for mines and develop them requires investment, which the industry has been starved of since 2011. What’s more, there’s no guarantee you will even get a payback: exploration has a success rate of about one in a thousand and what if commodity prices come down? You lose a lot more than your shirt.

Then there’s the political risk. Burkina Faso's energy & mines ministry issued a statement on Tuesday saying it had "commandeered" 200kg of gold from Endeavour Mining’s operations for "public necessity". The company will be compensated for its value, the statement added without providing further detail.

Mining is starved of finance yet “the mining industry needs to deliver new projects at a frequency and consistent level of financing never previously accomplished,” says energy research company Wood McKenzie. Currently, the world is not even investing 10% of what’s required.

Then there is the issue of refining. This is a major geopolitical and strategic issue. China dominates refining. 40% of the global copper supply is refined there, 35% nickel, 65% cobalt, 87% rare earth, 58% lithium.

Never mind the strategic questions of handing China that much power, how environmentally friendly do you think Chinese refining is going to be? Chinese coal production for power generation hit a record last year.

What will happen to metal prices in all of this? A sustained increase in the price of metals and energy of 300% or 400% will push up overall inflation. There is only so much you can hide with subsidies.

Now let’s look at another cost, the environmental cost.

As humans have extracted natural resources from the earth, they have become increasingly difficult to find and extract. A hundred years ago average copper grades were 4%. That is to say for every hundred tonnes of ore you process you might get four tonnes of copper. Today average grades have fallen to 1%.

“A half tonne battery,” says Mills, “requires 250 tonnes of ore to be processed somewhere”.

Could the energy transition lead to more pollution?

To produce the materials needed to realise Net Zero “will see the world consume fuels and emit carbon dioxide at levels that are unprecedented in mining history”, says Mills. Just nuts.

Every time someone buys an electric vehicle (EV), they are essentially purchasing the previous consumption of 25 barrels of oil equivalent - half oil, half coal and natural gas. These hydrocarbons will have been burnt before even the first electron moves into its batteries on the road.

By the time the electric vehicle first makes it to the parking space outside your home, it has already emitted 14 tons of CO2, compared to the 5 tonnes for the conventional vehicle. It’s not until the vehicle passes 60,000 miles that you end up with a net reduction.

Humans require more and more energy as we grow more sophisticated. The Industrial Revolution increased energy demand and today’s arms race in drones and robots and AI are all going to increase energy demand.

Surely, the answer is not to turn our backs on fossil fuels. The focus should be on developing cleaner and more efficient fossil fuel technologies, as well as improving renewable technologies.

Unfortunately, the focus on renewable energy technologies has diverted attention and investment from the development of the cleaner and more efficient fossil fuel technologies we need.

How to invest in the Net Zero transition

So how to play all this? Do you think Net Zero diktats are going to change? I don’t. Governments are too scared of the environmental lobby to change tack.

The way to protect yourself, I’d say, is to be long energy and long commodities. The likes of BHP or Glencore are at the safer end of the market to junior resource companies at the risker end.

However, what I have described above is not currently being displayed in energy and metals prices.

Either the market has already digested and discounted the story, or it feels it is too far away to matter, or it thinks that governments will pivot, or it is not yet priced in. What do you think?

The case for a secular bull market in commodities remains strong.

(1) International Energy Agency (IEA). (2020). Renewables 2020: Analysis and forecast to 2025. Paris: IEA. Retrieved from https://www.iea.org/reports/renewables-2020

Today we consider energy and oil and gas stocks once again.

While oil and gas prices have done a great deal over the last six months – up a bit, down a bit, then sideways – the associated companies have done very well: the producers, the service companies and so on.

Many years of bear market belt-tightening are now paying off.

However, in my opinion, we are not yet at that point of excess and decadence that marks the end of a cycle – crazy mergers and acquisitions, insane valuations and Bacchanalian behaviour from the executive classes. So I venture today, as last week, that there is still plenty of gas left in the tank of this bull market.

With that in mind, I wanted to share a few charts with you today that give an idea of what is possible.

Oil and gas stocks are on the rise

The first chart shows the ratio between energy stocks and the rest of the market.

Indeed, without energy stocks there would not be a rest of the market. This a simple point that many, especially those who make policy, don't seem to understand. The world we live in today and the economic benefits we enjoy, relative to our ancestors, have been made possible by fossil fuels.

So here is the energy sector relative to the S&P 500. The higher the chart goes, the bigger the relative market cap of oil and gas stocks.

You can see that, even with the rally we have seen in energy companies since 2020, on a relative basis, energy companies are, give or take, where they were at the turn of the century, when oil itself was around $10/barrel and that secular bull market was only just getting started.

You can also see that we are in an uptrend. Energy stocks are increasing in value, while the broader S&P500 is flat or falling.

It’s also worth noting that the relative market capitalisation was almost three times as large in mid-2008 when oil went to $147/barrel.

The inference is that the bull market has a lot further to run.

Oil and gas stocks are cheap compared to the broader market

Next, the ratio between oil – West Texas Intermediate – and the S&P 500.

You would expect this chart to trend lower over time because oil production and extraction techniques should improve over time, while broader economies and the companies that operate in them grow.

Nevertheless, we are below the levels we were in the early part of the century. You can see how high this ratio went in 2008 – and how low in the corona panic of 2020, when oil futures, somehow, went into negative territory.

Relative to the S&P 500, oil is roughly where it was three or five years ago – I’d say it’s at its three- or five-year average. And it’s a lot cheaper than it was throughout that entire 2003 to mid-2014 timeframe.

So even with the gains of the last two years, oil does not look expensive relative to the S&P 500. It is at the cheaper end of the range. Another sign there is more gas left in the bull market tank.

Here's the price of oil relative to gold. These two – as hard commodities – tend to trade in a much tighter range over time, but my observation again is that it is in the low to middle of the 20-year range and not at one of those points of extremity whereby you might consider rolling out of one and into the other.

For sure we are nothing like where we were went oil went to $147 in 2008. In fact, we are below where we were for most of the 2000s. On the basis of this chart, oil is probably the cheaper of the two.

As regular readers will vouch, oil is a drum I have been beating since 2016 when it was $25 or so, declaring it our “trade of the lustrum”. A lustrum is a five-year period – a useful and underused word, I’d say.

That lustrum is now becoming a decade. We continue to beat the drum on oil, gas, coal and related oil and gas stocks. Fossil fuel demand will continue to grow until at least 2030 the IEA has forecast (2040 in the case of natural gas).

There is still a strong case for fossil fuels

That means it is not just enough to maintain current production levels; they need to increase. Yet there have been seven or eight years of underinvestment – leading to today’s shortages.

There are multiple reasons why production isn't keeping up with demand. ESG policies are deterring investment, capital is flooding into green energy-related companies rather than fossil fuels and the excesses of the previous oil bull market still needed to be purged.

Still, the market conditions remain good and I think oil and gas stocks will go higher in the long term.

I’m a big believer in narratives within markets. The fossil fuel story is only slowly starting to change. Many are realising just how important they are and what they have made possible. Indeed, there is a strong moral case for them, not against them.

But the narrative is not yet at end-of-cycle levels. When people start talking about Peak Oil again – that’s the sort of thing you want to be looking out for. The need for alternative energy sources is not because fossil fuels are bad, but because we have consumed them all.

I don’t know what the end-of-bull market narratives will be – that’s a story that is yet to be told. But if legislators and subsidisers start abandoning electric vehicle initiatives because the ultimate source of electricity remains the burning of fossil fuels, and it’s really quite inefficient, never mind hypocritical – that is one possible scenario

So hold on to your positions in oil and gas stocks – enjoy the ride.

Oil stocks are the biggest winners in the S&P 500, enjoying a rise of over 100% so far in 2022, according to data from online trading platform CMC Markets. If the upward trend continues, investors looking to take advantage of the S&P 500 best performers could do well from crude oil stocks.

Despite concerns around a global economic slowdown, the price of a barrel of Brent crude oil has been sitting around the $92 mark for some time now, and Opec+ announced a cut in production earlier this month that should ensure prices don’t fall again sharply even if major economies enter a recession.

We look at the best performing crude oil stocks in the S&P 500.

Best performing oil stocks

The best-performing stocks in the S&P 500 as of August 2022 were all oil stocks. Occidental Petroleum (NYSE: OXY) topped the chart, with a 126.8% share price gain in the 12 months to August.

Coterra Energy (NYSE: CTRA) and Hess (NYSE: HES) enjoyed gains of 61% and 51.9% respectively. Earnings for both companies reached new heights in the fresh half of 2022 as they both benefited from the fuel crisis in the US.

Exxon Mobil’s stock (NYSE: XOM) jumped 58.4%, benefiting from the increase in crude oil prices in the first half of the year.

Enphase Energy (NYSE: ENPH), which develops and manufactures solar panels and batteries, came fourth in the top five, benefiting from an increase in demand for solar power as energy prices soared throughout Europe.

Overall, oil and energy stocks’ success is probably due to surging energy prices in recent months and the maintained demand for crude oil, according to CMC Markets. In addition, some oil and gas companies “boast impressive dividend payments, which could have made them increasingly attractive to shareholders,” according to CMC Markets’ chief market analyst, Michael Hewson.

“It’s clear that these energy stocks are performing really well, as a direct result of what has been happening around the world over the last eight months,” he said. “However, because of this, it is not unlikely that these percentages will experience a drop-off by this time next year.”

The S&P 500’s worst performers

Many stocks that enjoyed great gains throughout the pandemic have struggled to maintain them. Tech companies in particular have suffered as investors worry that their good run might be over as life returns to normal. “People are back to travelling, socialising and commuting now, and this would definitely have had an effect on the stock price for certain companies,” said Hewson.

Netflix (Nasdaq: NFLX) is the biggest loser in the S&P 500, having dropped 62.7% so far this year. The company reported yesterday it had gained 2.4 million subscribers, which helped its share price. However earlier this year it warned subscriber growth had shifted into a reverse, which spooked investors.

Align Technology (Nasdaq: ALGN) saw a 57.2% dip in its share price. The company manufactures Invisalign, an “invisible” alternative to braces. Sales have dropped so far in 2022, which isn’t really surprising. The treatment is lengthy and costly, and consumers could choose not to invest in discretionary health products as they struggle with the rising costs of living.

Cruise operator Carnival (NYSE: CCL) has seen a 55% decline in its share price as it struggles to recover post-pandemic.

PayPal (Nasdaq: PYPL) came in fourth, possibly because its former CFO announced he was leaving the fintech firm for Walmart earlier this year which investors could see as a “possible threat to stability”.

Finally, Facebook’s parent company Meta Platforms’ (Nasdaq: META) share price declined 52.7%.

After peaking at a multi-year high at the beginning of June, oil prices have tanked over the past couple of weeks.

The price of Brent crude oil has dropped more than 15% over the past month while WTI crude has slipped nearly 17%.

As oil prices have fallen, oil companies have fallen out of favour with investors. The MSCI Europe Energy 35/20 Capped Index, which is designed to provide investors with a benchmark of large and mid-sized European energy companies, has fallen by nearly 11% over the past month, although it remains up 21.9% year to date.

However, the performance of oil futures and oil stocks is becoming increasingly disconnected with the situation on the ground.

The supply and demand fundamentals of the oil market

Now that Russia has been ostracised from global oil markets, especially in the West, other producers are struggling to fill the gap.

Short-term disruptions such as lockdowns in China, the rising cost of living and the potential for an upcoming recession might push demand lower in the near term. But over the longer term, the prospects for the oil market still seem attractive.

According to projections from the Opec cartel of oil-producing nations, average oil demand is projected to rise by 2.7 million barrels per day next year to 103 million overall. Supply from non-Opec countries is expected to grow by 1.7 million barrels a day leaving the group to pick up the remainder. That could mean the region will have to raise output to as much as 33 million barrels per day.

Of course, these are only projections and I would caution against reading too much into the data. Opec has no idea how the economy will react to current pressures and there’s already some indication that high prices are having an impact on demand.

Still, the most important figures are production figures. The International Energy Agency (IEA) estimates that Opec can only produce 34 million barrels per day in the best case scenario, which includes output from Iran.

It’s not clear if this group of oil producers will even be able to meet this target as many nations are already under-producing compared to their existing output targets.

Then there’s the Russia wildcard. Russia produces around 10 million barrels per day. If its production drops by 10% or 20% it’s unclear if the world would be able to move quickly enough to replace that production.

Take all of these factors into account and while there is a risk that oil demand could drop and put further downward pressure on prices, I think it’s more likely prices will remain buoyant. As such, I reckon there’s an opportunity to buy shares in oil producers after recent declines.

Picking London’s best oil companies

I looked at London-listed oil and gas companies with a market capitalisation of more than £50m, and which have generated a positive free cash flow over the past 12 months. There are 17 of them.

The big oil companies, namely Shell (LSE: SHEL) and BP (LSE: BP) sit at the top of this list. These industry behemoths are by far my favourite ways to invest in the industry. Their diversification gives them a level of protection against oil price uncertainty and their size means they can achieve substantial economies of scale when dealing with suppliers.

Still, smaller producers offer more leverage to higher oil prices (although they do come with more risk). That’s why, if I was looking for a leveraged play on the price of oil, I would also own a basket of smaller production companies.

Excluding Shell and BP leaves 15 names. Of these I’m going to throw out Hurricane Energy (LSE: HUR) and EnQuest (LSE: ENQ) due to their weak balance sheets. Enwell Energy (LSE: ENW) is also out as most of its operations are based in Ukraine. Phoenix Global Resources (LSE: PGR) is out because it’s heavily loss-making (although it did generate a positive free cash flow last year).

Of the remaining names, Genel Energy (LSE: GENL) and Gulf Keystone (LSE: GKP) both focus on the Kurdistan region of Iraq. Meanwhile, Seplat Energy (LSE: SEPL) and Savannah Energy (LSE: SAVE) both have interests located in Nigeria and West Africa. Nigeria and Kurdistan both have a history of economic volatility and political uncertainty. As such, I’m not entirely comfortable investing alongside these companies.

That leaves seven names:

1. Serica Energy (LSE: SQZ)
2. Tullow Oil (LSE: TLW)
3. Harbour Energy (LSE: HBR)
4. Parkmead (LSE: PMG)
5. Jadestone Energy (LSE: JSE)
6. Diversified Energy (LSE: DEC)
7. I3 Energy (LSE: I3E)

Avoiding the companies that are struggling to create value

Diversified Energy has the highest dividend yield in the FTSE 250, at a staggering 13.4%, but there have been some questions about the company’s accounting practices and the cost of maintaining its production. As such, while I like the dividend, these operational corners put me off the business.

I’m avoiding Tullow for a similar reason. In recent years the company’s production has slumped due to operational errors. I’m not sure the business will be able to turn it around.

Parkmead’s market value sits at just £56m so it’s a tiddler in the market. Nevertheless, the firm’s portfolio of low-cost onshore gas assets in the Netherlands could help it generate revenues of £11.6m this year, according to Refinitiv analyst estimates, up from £3.6m. Net profit will hit £3.3m from a loss last year.

I3 Energy has assets in the UK and Canada, but it is spending heavily to maintain and grow production. While profits are expected to jump this year, high levels of spending could eat into shareholder returns in the long run. The company has already increased the number of shares in issue by 11 times in the past two years.

Jadestone has a much better record of shareholder value creation. After growing production by 10% last year, management is planning to boost output further by 36% this year from its US and Asian assets.

The group reported $180m of cash at the beginning of June, which is enough to fund its growth plans and return $100m to investors. Refinitiv analyst estimates have the company earning $114m this year putting the stock on a forward price/earnings ratio (p/e) of 4.5. The yield stands at 2.1%.

North Sea producers lead the pack with high profits

The last two companies, Serica and Harbour are both North Sea oil producers. While the government’s windfall tax will hit earnings, the fact that both are established businesses in a stable jurisdiction, with low production costs and strong balance sheets are all reasons to buy in my opinion.

It looks as if Serica is going to merge with Kistos (LSE: KIST). Both have made offers for each other in recent days, and I wouldn’t be surprised if one company wins out. Kistos only listed on the stockmarket last year and is half the size of its peer. Combined, the two would have production of 40,000 barrels per day and would be a force to be reckoned with in the North Sea.

Serica earned £28m in 2020 and that shot up to £415m last year. Analysts think the firm will earn £808m in 2022. Kistos (which will have to borrow heavily to buy its larger peer) has a portfolio of low-cost assets, and it is projected to see its earnings rocket from £64m last year to £441m this year. If I had to pick two producers for a portfolio, I’d buy both ahead of a deal.

Harbour Energy is the North Sea’s largest independent producer with production averaging 200,000 barrels per day. High oil prices are enabling management to put the business on a stable footing for the foreseeable future. It expects to be debt free by the end of 2023 even though it is ramping up capital spending. Harbour’s Tolmount gas field will increase the UK’s gas production by 5% when it comes onstream next year.

Along with Serica, Kistos, Jadestone and Parkmead, I’d buy Harbour Energy as part of a basket of London-listed explorers to capitalise on the tight oil market that’s expected to prevail for the foreseeable future.

In early October 2020, shares in BP (LSE: BP) fell to a multi-decade low as investors rushed to dump their holdings of the oil and gas giant, questioning its very survival.

Today the firm’s outlook could not be more different. A mismatch between supply and demand was already causing prices to rise at the beginning of the year, before the war in Ukraine added fuel to the fire.

What followed has to be one of the biggest ever U-turns in global energy policy. Only a couple of months ago, policymakers were setting out plans to reduce global hydrocarbon production for good, but now they’re rushing to drive up supply.

The government recently approved Shell’s (LSE: SHEL) Jackdaw field, east of Aberdeen, which has the potential to produce 6.5% of Britain's gas output, after rejecting it on environmental grounds in October.

Unfortunately, it is going to take months if not years for supply to match the world’s seemingly insatiable demand for hydrocarbons. Even major swing producers – namely the Opec cartel – are struggling to ramp up output despite higher production targets.

The supply and demand imbalance has sent prices surging

Global oil and gas markets have responded the only way free markets know how when demand outweighs supply – prices have spiked.

The Brent crude oil benchmark has jumped to $120 a barrel, returning to levels not seen since 2008. Meanwhile, natural gas prices in the US are up by nearly 160% in the past 12 months (while in the UK and European markets prices have risen by 150% and 227% respectively – gas is not a global market). Some analysts are now speculating that oil prices could hit $180 or more in the months ahead.

In this environment it is not surprising that BP and its Big Oil peers are minting cash. BP announced bumper profits for the first quarter of 2022 while Shell’s quarterly income hit a record. Refinitiv broker projections for BP are currently estimating a 48% jump in income for 2022. Shell’s earnings look likely to more than double, from $1.72 per share to $4.80.

Rishi Sunak’s windfall tax on North Sea oil producers has done little to dampen City growth expectations. According to analysts at Citigroup, because of spending on decommissioning of aged-out infrastructure, these Big Oil producers are already “tax negative” in the UK. That said, analysts at Jefferies have estimated that the tax could cost BP $100m in 2022 and $800m in 2023, just 5% of total group net profit.

Investors should not overlook BP’s progress

BP is not the organisation it was the last time the price of Brent crude was above $100 a barrel. Its return on average capital employed (ROACE) – the company’s preferred measure of operating performance – hit 12.1% in 2021 compared to 9.9% eight years ago.

The company has also moved on from the 2010 Gulf of Mexico disaster, reduced its debt and outlined a plan to reduce its exposure to oil and gas by boosting renewable energy output.

Still, at face value, the stock does not seem to reflect the company’s improving trading performance. Shares in BP are selling at a forward price/earnings (p/e) ratio of 4.9 according to Refinitiv broker estimates. Shares in Shell command a valuation of just 5.8.

These multiples also do not seem to be taking into account these companies’ plans to return more cash to investors. BP currently yields 4.3% while Shell supports a distribution of 3.8%. It is also expected to spend $12bn repurchasing its own shares, according to analysts at RBC and Bernstein. This was the biggest cash return in the sector until American oil giant ExxonMobil (NYSE: XOM) outlined plans to buy back a staggering $30bn worth of stock.

They’re making money today, but investors shouldn’t forget the fact that these two businesses jointly announced some of the largest losses in British corporate history in 2020 after the price of oil briefly turned negative. And these hefty losses forced both companies to reduce their shareholder payouts, underlining the fragile nature of oil company dividends.

A constant struggle to maintain output and maintain profits

Oil and gas producers face a constant struggle to maintain production. An oil well requires continual investment to maintain production, and sooner or later, the well will run dry. BP and its peers are always looking for new prospects and this costs huge amounts of money.

According to equity analysts at Bernstein, BP has spent about $87bn on oil and gas and green projects since 2016. That’s compared to operating cash flows over the same period of $113bn. Without the surge in oil prices last year, the group would have struggled to cover its capital spending plans.

These figures illustrate the biggest issue these operators face: the need to keep investing and keep spending even if oil prices collapse.

BP and its peers are also having to invest large sums of money in developing green energy projects. These projects are not going to produce returns immediately, and could prove to be a drag on profits for years to come, only adding to the uncertainty for these enterprises.

As such, while shares in Shell and BP do look cheap at first glance, investors need to carefully consider where these businesses are heading and the challenges they may face going forward. Windfall oil profits may only be temporary, while capital spending obligations are forever. Investors need to consider the risks of both before adding these stocks to their portfolio.

SEE ALSO

• What is a windfall tax?

• BP’s profits surge, but the company’s growth is far from guaranteed

• Is the oil market heading for a supply glut?

Oil prices have risen sharply since the outbreak of the conflict in Iran, and the chances are that you’ve felt the consequences in your portfolio as well as at the pump. But some investments can offer at least a measure of protection against higher oil prices.

Brent Crude oil futures have closed above $90 every day since 11 March, with the conflict in Iran having effectively closed the Strait of Hormuz – a critical shipping lane through which around 20% of the world’s oil passes.

“The huge disruption to oil and natural gas supplies in the Middle East over the past three months has materially tightened energy markets near-term,” said Mark Hume, co-manager of BlackRock Energy and Resources Income Trust. “The impact on liquified natural gas exports, primarily to Asia, has been even more pronounced.”

When oil prices rise, some of your other investments are likely to fall.

Given most of the world’s industry relies on oil and gas as inputs, higher oil prices have caused chaos in most stock markets and economies.

But high oil prices aren’t bad news for everyone. Some companies – such as oil and energy suppliers – could profit from higher oil prices.

British oil major BP (LON:BP.), for example, reported on 28 April that its underlying replacement cost profit (a measure commonly used by oil and gas companies that factors out inventory gains and losses) more than doubled to $3.2 billion in the year to Q1 2026.

BP’s profit jump was boosted by higher prices, according to Mark Crouch, market analyst at investment platform eToro.

“In many respects, BP has both absorbed and benefited from the same geopolitical tensions, with volatility once again proving a tailwind for an integrated major,” said Crouch.

Its success saw BP make the list of the most popular stocks among DIY investors using Interactive Investor’s platform during May.

How else can you profit from oil and energy price rises, and compensate for all the increased cost that rising energy bills and petrol prices bring?

The risks of investing in oil

Before going into how to invest in oil and energy you should remember that, as recent events have proven, oil prices are highly volatile.

“Investing [in oil and energy] via an exchange-traded product (ETF) that aims to follow the price can risk being whipsawed,” said Rob Morgan, chief investment analyst at Charles Stanley Direct.

Morgan also cautioned that many investors might already have reasonable oil exposure within their portfolios, if (for example) they hold assets tracking the FTSE 100 which includes several oil majors like Shell (LON:SHEL) and BP.

“It is important to avoid unwittingly doubling up on exposure,” said Morgan.

How to invest for higher oil prices

That said, it could make sense, depending on where else you are invested, to allocate a small part of your portfolio to focused oil investments in order to shield yourself from price shocks and the consequent inflation.

“Energy equities can protect a portfolio in certain inflationary scenarios but can also underperform for long stretches when the commodity cycle turns or policy shifts,” said Morgan. “This is why they should generally only be held in small quantities, for instance up to 5%.”

As well as holding oil price-friendly assets, it is also important to remain diversified.

“Diversification and explicit geopolitical hedges remain essential,” said Daniel Casali, chief investment strategist at wealth manager Evelyn Partners. “These include gold, hedge funds, inflation‑linked bonds, short‑duration sovereign bonds and energy equities.”

If you feel your portfolio could do with a barrel or two of extra oil price exposure, then there are several ways you can add it:

• Oil and energy stocks like Shell, BP or Harbour Energy (LON:HBR). These stocks gained 5.8%,19.8% and 12.5% respectively between 27 February and 27 April.
• Funds or ETFs that invest in oil and energy companies, offering diversified exposure to stocks like these. Some examples are the SPDR MSCI Europe Energy UCITS ETF (LON:ENGE), which tracks large- and medium-cap energy companies in Europe, and the iShares Oil and Gas Production UCITS ETF (LON:SPOG), which has a broader international footprint (nearly three quarters of holdings are based in the US and Canada, with most of the rest hailing from Australia, Japan and Norway).
• An exchange-traded commodity (ETC) can act as a simple way to track the oil price. One example is WisdomTree WTI Crude Oil (LON:CRUP), which offers investors total return exposure to WTI Crude Oil futures contracts.

Additionally, several investment trusts offer exposure to oil and energy companies. These include:

^{Source: theaic.co.uk / Morningstar (as at 21/05/2026 based on latest available published portfolio weights).}

Rishi Sunak‘s decision to introduce a windfall tax on North Sea oil producers has divided opinion. Some are pleased to see the government re-distributing the “excess” profits of these companies to the poorest in society. Others have complained that it will result in reduced investment in the sector over time.

The new tax has certainly muddied the waters for investors and companies. It is bound to create winners and losers, and due to the complexities of the new regime, it’s not entirely clear who will benefit and who will struggle.

The North Sea tax regime was already fiendishly complex before the new windfall tax was introduced. The sector has to contend with a 40% corporation tax rate, and a 10 percentage point supplementary charge. There is also a zero-rated petroleum revenue tax and multiple other investment and capital allowances.

The new tax introduces a 25% levy on the “extraordinary profits” of oil and gas companies, but also brings in an 80% allowance on capital spending, allowing companies to save 91p for every £1 they invest. The new windfall tax is supposed to be temporary, although a 2025 sunset clause suggests it might be more permanent than the government is willing to admit.

A quirk of the new tax is that companies cannot use prior losses or decommissioning spending to offset qualifying profits. This looks like it is intended to draw more money out of Shell (LSE: SHEL) and BP (LSE: BP). These Big Oil producers are already “tax negative” in the UK, according to analysts at Citigroup, because of spending on decommissioning of aged-out infrastructure.

That said, these businesses have already laid out multi-billion pound capital spending programmes over the next couple of decades, and are better positioned to bring future projects forward to capitalise on the investment deduction. Bringing spending forward could mitigate additional tax charges.

The cost of the windfall tax for companies

Considering all of the above, I think it’s probably sensible for investors to take any projections or estimates about the effect of the levy on company earnings with a pinch of salt. With so many moving parts, these estimates are almost certainly going to be incorrect.

Still, the initial numbers emerging from the City do give us some guide as to where the windfall tax will fall the hardest:

Estimated figures. Source: Jefferies

As the table shows, the large integrated producers, Total, BP and ENI, are unlikely to see much of a dent in their earnings due to the windfall tax. Total (part of TotalEnergies) is currently expected to book the largest charge in 2023 with a cost of $900m. The tax only applies from 26 May, which is why takings are expected to be far higher next year.

The levy will have a bigger effect on smaller North Sea producers. Serica Energy is particularly exposed. Stifel analyst Chris Wheaton notes that the company has a low proportion of capital expenditure compared to earnings before interest, depreciation, amortisation, and exploration.

EnQuest, which specialises in squeezing oil and gas out of mature fields is also exposed. The company also has over $3bn of tax losses, which cannot be used to offset the new tax.

At the other end of the spectrum, Harbour Energy and Aim-listed Deltic (LSE: DELT) (not in the table above) are expected to escape rather lightly as both have plans to make large investments in the next few years. Later this year Deltic will start drilling with its partner Shell on the Pensacola North Sea prospect, a major potential natural gas resource.

The windfall tax will create winners and losers

The windfall tax is an unwelcome development for North Sea oil and gas producers and as the table above shows, some businesses will be able to mitigate its effects better than others.

Rather than trying to pick winners and losers, investors should focus their efforts on companies that are well positioned to navigate the uncertainties of the commodity sector and the energy translation. Indeed, the UK’s new levy will not affect the global shift towards renewable energy, we could even see more carbon taxes introduced as countries including the UK try to drive capital away from fossil fuels.

That’s why I’d focus on the Big Oil companies. Not only are they better positioned to manage the changing tax environment, but they also have more capital to invest in green energy projects.

And I should also acknowledge that hydrocarbon prices may not stay at current levels forever. It was only two years ago that the price of oil traded below zero. That might not happen again any time soon, but investors should consider all eventualities. Diversified Big Oil companies are always going to have the edge over smaller producers in navigating these environments.

SEE ALSO

Here’s how the government plans to cut consumers’ energy bills

Is the oil market heading for a supply glut?

Should you buy BP shares? The oil giant looks cheap, but approach with caution

Shell unveils record profits, but should investors back the oil giant

 Shell has been one of the best-performing investments in the FTSE 100 over the past three years. Including dividends, the stock has returned 28% per annum, compared to 11.8% for the blue-chip index since mid-2020. 

The company has benefited from surging oil and gas prices, following Russia’s invasion of Ukraine at the beginning of 2022, although that’s not the only factor. The pandemic crushed demand for oil and gas, but when the economy reopened, production could not keep up with demand and prices jumped. 

Today, we are still seeing the impact of this sudden jump in demand, as well as the impact on the market from Russia’s warmongering.

Shell’s fortunes start to turn  

Sadly, for Shell’s investors, it looks as if the run of bumper earnings is coming to an end. The group reported its lowest quarterly profit in almost two years today after oil and gas prices fell. More importantly, refining profit margins also slumped and this arm has been a key profit engine for the group - Shell is one of Europe’s largest hydrocarbon refiners and oil traders.

The company reported adjusted earnings of $5.1 billion for the second quarter, below analyst expectations of $5.6 billion. In comparison, in the second quarter of 2022, Shell generated earnings of $11.5 billion.

These results illustrate the challenge the company and its investors face. Oil and gas is a highly cyclical and risky business. There are many different factors which go into pricing hydrocarbons and no single producer has any impact on the market price.

And I’m not just talking about oil and gas here. I’m also talking about refined products. All of these markets are global and hypercompetitive, meaning no one business can take advantage to try and earn consistently higher profits.

This is the reason why I think Shell will always trade at a discount to the rest of the market. 

Based on current projections, the stock is trading at a forward price-to-earnings (p/e) multiple of 7.3 according to Refinitiv analyst estimates. That looks attractive. However, if oil and gas prices fall in the second half of the year company will have to make do with lower earnings. Then the lower multiple won’t look so outrageous.

Still, where the company can make decisions to boost its profits and cash flows it is. It has revealed plans to reduce capital spending from a range of $23 billion to $27 billion dollars down to $23 billion dollars to $26 billion dollars, it has also laid out plans to reduce costs from operations to improve profit margins.

Cash flow boost for shareholders 

The company has made substantial strides in reducing its debt over the past couple of years, using extraordinary profits to pay off credit or obligations. Net debt has fallen from $78 billion at the end of 2019 to $40 billion at the end of June 2023. With interest rates spiking, it looks as if this was the right decision and should save the company billions of dollars in interest payments.

The group has also been using its windfall to reward shareholders. It increased its quarterly dividend by 15% for the second quarter of 2023 and has committed to repurchase $3 billion in shares by the end of October. Over the past 18 months, the group distributed $26 billion to shareholders representing almost 10% of its market value through a combination of dividends and share repurchases. The stock offers a dividend yield of 4.6% today. 

The bottom line  

 So what does this all mean for investors? The numbers clearly show this is a cyclical business where earnings can jump up and down. Shell has made a lot of money over the past two or three years, and it has used this cash wisely, but it’s unclear if the company will be able to repeat this performance as its future will be determined by the state of the global oil market. 

That’s something investors need to keep in mind if they’re considering adding this stock to their portfolio. 

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Oil major BP reaped the rewards of a volatile energy market in the first quarter of 2022.

Supply disruptions and worries about a possible Russian oil and gas embargo sent hydrocarbon prices surging to multi-year highs, handing producers such as BP a windfall.

BP reported an average realised oil price of $50.90 per barrel for the first three months of 2022, compared to $26.84 a year ago. As a result, the business reported its highest quarterly profit in a decade.

Underlying profit on a replacement cost basis hit $6.2bn for the first three months of the year, up 138% year-on-year and smashing analyst projections.

However, the group also booked a pre-tax charge of $24bn on its 19.75% stake in Russian oil producer Rosneft, which meant that it incurred a paper loss of $20.4bn for the quarter.

BP pushes forward with growth as cash flow booms

Despite the Rosneft writedown, which everyone knew was coming, BP’s report was full of good news for investors.

Strong cash generation means the company is both able to reduce debt and invest heavily in managing its transition towards “greener” energy. Net debt fell to $27.5bn at the end of March, down from $30.6bn at the end of 2021 and $38.9bn at the end of 2020.

Capital spending during the period totalled around $3bn, with just under $1bn going on gas and low-carbon energy projects. BP made several deals to advance its position in wind power throughout the quarter, including a ScotWind lease option award of 1.45GW net. It also pushed ahead with its hydrogen strategy, announcing plans to develop H2-Fifty, a 250MW gross green hydrogen plant in Rotterdam.

BP expects to spend $14bn to $15bn on capital projects in 2022. This will partly be funded through asset sales, which raised around $1.2bn this quarter and are expected to total as much as $3bn for the year as a whole.

Shareholders are also set for bumper returns. During 2022, BP plans to return 60% of surplus cash flow via share buybacks, with the other 40% dedicated to strengthening its balance sheet.

That translates into BP buying back $2.5bn of shares in the second quarter after buying back $1.6bn in the first quarter, all while maintaining its current dividend.

Over the next three years, management believes the company can “deliver share buybacks of around $4bn per annum” and dividend growth of 4% a year. Those projections are based on an oil price of $60, which doesn’t seem overly optimistic.

BP keeps pursuing its “net zero” ambition

Windfall profits from high oil and gas prices are also allowing BP to push ahead with its plans to become a “net zero” business by 2050. The company aims to sell $25bn-worth of “legacy” assets by 2025 and cut its hydrocarbon output by 40% within the next decade.

At the same time, it will boost spending on low carbon and green energy projects including £18bn on the UK energy system. This move seems partly motivated by politics – oil majors are keenly aware of growing calls for a windfall tax on energy companies, so they need to show that they are willing to invest in the UK and to try to help deal with the cost of living crisis.

In all, BP’s first quarter figures appear to show a business firing on all cylinders – but as I have explored before, oil and gas production can be a tricky market. There’s no guarantee this good fortune will last.

Refinitiv broker estimates imply the company will report earnings per share of $0.89 (71p) this year, suggesting a forward price/earnings (p/e) ratio of 5.6, which does look cheap.

Still, if oil prices fall back next year, BP shares might not look so cheap. A dividend yield of 4.6% and share buybacks sweeten the appeal, but as I have explored before, BP’s future is far from certain. This uncertainty deserves a discount.

• See also:

Should you buy BP shares? The oil giant looks cheap, but approach with caution

What is a windfall tax?

In response to the war in Ukraine, many people have pointed out that Europe must restart using coal-fired power plants and buy more liquified natural gas (LNG) from shale gas sources in the US to replace fossil fuels supplied by Russia. In our view, this narrative is misleading. Doing so would mean climate change mitigation is no longer a priority.

Coal, crude and natural gas did not become any more investible, cleaner, cheaper or less volatile since the invasion of Ukraine. Security of supply is a top priority for all countries – the EU in particular due to its reliance on Russia – and the need to accelerate the transition to clean energy remains undeniable.

Our global power industry was built around large, centralised power stations, mostly powered by coal and natural gas. But all of that is changing. The two key short-term solutions are in the hands of consumers: to embrace energy efficiency and, whenever possible, to produce electricity at the point of consumption.

Until recently, generating electricity “behind the meter” – ie, on the user’s site – has been challenging for technical and economic reasons. But substantial declines in the cost of solar panels and batteries have made these solutions price-competitive.

The companies in our portfolio help the world to decarbonise. They are also digital, decentralised, and deflationary. Renewable energy generation is a greener, more cost-efficient alternative to an ageing and increasingly obsolete centralised electric power system.

A solar future

Meyer Burger Technology (Zurich: MBTN) is a European producer of higher-end solar rooftop panels. The European Commission is aiming to install 15 terawatt-hours’ (TWh) worth of solar rooftops by the end of 2022, which would require seven gigawatts (GWs) of behind-the-meter solar panels to be added to the system. Almost 26GW of solar was added to the grids across the 27 EU member states in 2021, bringing the total installed capacity to nearly 165GW. (Current capacity predominantly consists of utility-scale installations.)

Smarter storage

Stem (NYSE: STEM) is a US-based smart energy storage and energy management software company, which combines hardware, software and artificial intelligence to create storage solutions that maximise renewable energy generation to build a cleaner grid. The company had a market capitalisation of $1.69bn at the end of last month. The clean energy storage market in the US alone is likely to grow over 120 times by 2035, and Stem is very well positioned to profit from this opportunity.

Improving efficiency

Ameresco (NYSE: AMRC) provides energy efficiency solutions, which is irrefutably one of the few short-term answers to the current energy crisis. It operates in the US, Canada and Europe and revenues for its 2021 financial year reached $1.2bn. The company has reiterated guidance for what it expects to be another year of strong growth. Revenues for 2021 are forecast to come in at between $1.83bn and $1.87bn, and adjusted earnings before interest, taxes, depreciation, and amortisation (Ebitda) between $200m and $210m. Energy conservation to generate cost-savings is a top priority worldwide, and Ameresco is a key player in the sector.

Energy prices are on the rise everywhere. Here, wholesale natural gas prices have just hit record highs – up 100% in a month. In the US, petrol prices are at their highest for seven years. In China the government has begun to ration electricity. In India, coal supplies are so low (a few days’ worth) that power cuts are almost definitely on the way. It rather looks, says Gavekal research group, as if the world is “in the grip of a full-blown energy crisis”. There is lots to think about as a result. You might want to have a good look at just how diversified your portfolio is: energy crises have a history of opening the door to inflationary spirals. That’s a particular risk when combined with rising wages and rising taxation. Are you ready (see this week's magazine for how much markets hate stagflation)?

But there is something else you should do: check the environment, social and governance (ESG) criteria your fund manager uses when it chooses – and rejects – possible investments. They could be part of the problem. These last few years, it has been all the rage in the investment industry to signal concern for society by announcing that you will not invest in grubby stuff. Only last month, Harvard University said it would divest its $42bn endowment from filthy fossil fuels. It joins another 1,337 institutions globally, managing over $14trn, who have made the same commitment.

That sounds nice. But as we are finding out, the consequences are not. The immediate causes of the energy crises in different countries vary, but drill down, says Gavekal, and they are all due to “market distortions caused by deliberate policies” – policies that in large part reflect the desire to go green. This is theoretically laudable. But we can’t go fully green anywhere near as fast as activists and governments think we should.

Global energy use tends to rise at about 2% a year. And regardless of how fast we build renewables, we will need fossil fuels as back-up for decades to come, not least because building renewable energy capacity takes a lot of energy in itself. As Edward Chancellor notes on Breakingviews.com, it takes four to five years to recoup the energy that goes into making turbines and other renewables. That means the $16trn of green investments planned globally will mean concurrently soaring demand for oil. Want clean energy? You need dirty energy.

A shame then that investment in fossil fuel production and exploration is falling sharply and that oil majors are loath to invest in big new projects, for the simple reason that no one will back them. Over the last five years, the world has discovered about 12 billion barrels of oil a year and consumed three times as much (more on this in next week’s magazine), while global oil and gas upstream capital spending has fallen from nearly $800bn in 2013 to below $350bn this year. The result will be unpleasant – in terms of growth, in terms of living standards and in terms of the actual goal, our ability to efficiently attempt our energy transition.

So look at your fund manager’s policies. They may be divesting from fossil fuels. They may feel good about all the ESG boxes they can tick. Their policy, they will tell you, is ESG-compliant. They’ll be right. But if that ESG policy is not practical – if helps create inflation, falling living standards and general misery – and if it turns the public against the idea of the green transition... is it also ethical? It’s a question worth asking.

Yesterday, Brent crude oil hit the $75 a barrel mark for the first time in more than two years.

It’s a far cry from the depths plunged just over a year ago. Brent never turned negative (unlike the US benchmark) but in April last year, you could’ve had yourself a barrel for less than $16 (we’ll ignore the question of where you could’ve stored such a highly toxic gift).

So what’s next?

What’s next for the oil price?

As Dominic pointed out last week, commodities have been having a tougher time of it in recent weeks. The Federal Reserve’s somewhat hawkish turn didn’t help on Wednesday. But it was going on before that.

However, one commodity stands out for its staying power: oil. Oil is the most important publicly-traded commodity (water matters more, but you can’t easily trade it – please, no jokes about illiquidity, it’s too early in the week).

Brent hit rock bottom in April last year. It then rallied strongly until June. We then had a more gently rising trend during the excitement of temporary re-opening. Then a period of flattening misery as Covid just kept on coming.

Then in November, we got news of the vaccine and the price surged into the end of 2020 and didn’t really stop until March, when it took a breather after breaching the $70 a barrel mark. We saw a brief retreat below $60, and then it took off again near the end of the month and has steadily ticked higher ever since.

Now, I wouldn’t be at all surprised if oil prices take a break for a bit. There’s the simple reason that prices don’t go up in straight lines, for one thing. There’s also the concern that it’s an inflation trade which hasn’t yet buckled under fear of the Fed.

And then there’s the surefire contrarian indicator which is analysts starting to make cocky forecasts. Bank of America suggested yesterday that oil might hit $100 a barrel in 2022, which is – according to Bloomberg – “the strongest call yet among major forecasters for a return to triple digits”.

Don’t get me wrong, that’s not a showstopper – if he’d said $200 I’d be thinking it was the end of the line – but it’s just a sign that there’s a bit of exuberance in there that might need deflating.

Of course, none of this really matters unless you’re daytrading oil, and as I always say, if that’s what you’re doing then I can’t help you, other than to recommend that you don’t.

Supply is recovering while demand is being held back

However, beyond a bit of bumpiness I’d expect oil to stay around these levels or go higher. You’ve got demand recovering and you’ve got people likely to be driving more during the summer (particularly in America).

On the supply end, you’ve got the Opec+ cartel (that is, Russia and the Gulf countries) being surprisingly disciplined. That could well change.

But beyond that, you’ve got lots of pressure on most of the listed oil majors to “go green”. That is going to crush investment on any sort of marginal project.

Similarly, the fracking industry in the US shale fields has also apparently learned from the boom and bust years, and has now imposed capital discipline.

As Bloomberg reports, these companies are actually generating cash flow now as opposed to burning through investors’ money. That’s at least partly because they have held back on new supply. “They’re saving cash instead of spending money to ramp up output at all costs.”

All in all, US oil output has dropped by around 1.9 million barrels a day compared to its pre-Covid peak. Notes Bloomberg again, that’s like knocking both Nigerian and Venezuelan production out of the market.

So you can start to see why the oil price is being so resilient.

We’ve been suggesting you own or hold oil stocks since the coronavirus crash back in March last year and I still think it’s a valid argument. Companies are only going to keep coming under pressure not to dig or drill more. And in turn, that just means supply won’t be getting any bigger.

If companies spend less, and the stockpiles of the product they sell increase in value, then that means they’ll be more profitable. So even if it’s only a matter of time before the industry is a relic (and that in itself is a very contentious statement), then there’s still plenty of money to be generated.

So I’d hang onto your energy bets. We’ve covered this regularly in MoneyWeek magazine, and will almost certainly do so again in the near future, so if you don’t already subscribe, then get your first six issues free here.

And if you haven’t heard our latest podcast, have a listen to it now. Merryn has a suggestion on one market that should benefit in particular from the ongoing oil price strength. It’s not one you’ll all be happy about investing in – but it’s worth hearing the case nonetheless.

Shell has one of the most full-on emissions strategies of the big fossil fuel companies – a target of cutting the carbon intensity of its products by at least 6% by 2023 (from 2016 levels), 20% by 2030, and 100% by 2050.

That might sound impressive, but it isn’t impressive enough for everyone (is anything ever? ). Last month, egged on by climate campaigners, a Dutch court ordered it to go further, lowering its total emissions by 45% by 2030 from 2019 levels. The ruling only applies in the Netherlands, but given how clear the direction of travel is here, Shell is obviously having a bit of a think about what to do.

One possibility is the review of its operations in the Permian Basin in Texas. Shell could, says the Times, be on the edge of selling its operations in “what has been deemed the world’s most important oil and gas site” – and one that generated about 6% of the firm’s revenues last year.

Campaigners will be thrilled; they love it when oil and gas companies sell oil and gas assets. However, just like the analyst who greeted the news with the comment that this will underline how fast the industry is moving on emissions, they miss the point completely.

First, nothing like this tells us anything at all about how fast the industry is or is not moving on emissions. The bit of the Permian Basin currently owned by Shell will not disappear because it has been sold by Shell, it will merely be operated by someone else – possibly someone without the compliance, public profile and reputation issues a large public company such as Shell has to contend with (I wrote about this here a few months ago). There might be less transparency around the Basin in future, but there will definitely be no fewer emissions.

Demand for oil isn't going away

The key thing to remember here is that we need oil. It would be nice if we did not, but we do – and we will do for some time to come. Right now, wind and solar power – while growing fast – still represent “just 5% of global primary energy consumption” say JP Morgan analysts in their latest Annual Energy Paper. The energy transition may be happening, but it is happening a lot more slowly than optimistic energy futurists might like.

That’s partly a function of rising overall demand: the world might get more energy efficient every year (which is nice) but even so, as developing worlds keep developing (also nice) total levels of emissions just keep rising (not so nice). Note that, while Japan and Europe have reduced primary energy use by 4%-6% over the last decade, “developing world increases were six times higher than their reductions.”

African energy use is rising from per capita levels last seen in Europe in the 19th century – there is a long way to go before Africa meets European levels of consumption.

But rising demand is only half the story, of course; the other half is supply. And the main issue here is that renewables mostly produce electricity – and that doesn’t work for everything.

A mere 18% of global final energy consumption is in the form of electricity. Reducing emissions, then, means not just massive investment in wind and solar as well as new transmission mechanisms, but also massive electrification of transport and industry (all at the same time – China is doing lots of electrification but making electricity from coal – which doesn’t quite count).

Things are changing, but it will take time

This stuff doesn’t happen fast (it’s not just about money, it’s about technology and planning too). Those unconvinced should look up the progress of the huge Viking wind farm in Shetland as well as the cables that will connect it to the mainland: after “more than a decade of working with the community” the project (which will be the UK’s largest wind farm) is finally going ahead.

Add it all up and, on IEA numbers, in 2040 70%-75% of global primary energy consumption may still be met by fossil fuels.

The key in this whole discussion is a simple one, says JP Morgan’s Michael Cembalest. It is not that the transition will not happen, it is just that “the behavioural, political and structural changes required for deep decarbonisation are still grossly underestimated”. That means that “the companies we all rely on for dispatchable, thermal power and energy will need to survive and prosper” for longer than most think.

With that in mind, does it really make sense to bully the big companies in this space into dumping the oil and gas assets that produce that dispatchable thermal power – particularly if the buyers turn out to be not quite as easy to supervise as the sellers?

The truth is that forcing listed companies to dump assets doesn’t make any difference to emissions – just to how we see them. That doesn’t seem like a good thing to us. Campaigners with any sense should not be trying to make Shell divest its vital oil and gas assets. They should be persuading them to keep them - and to manage them well.

Following one of its “worst years on record” oil giant BP is gaining confidence. It plans to boost returns to shareholders after “higher oil prices and strong trading results buoyed its first-quarter earnings”, says Sarah MacFarlane in The Wall Street Journal. It made a profit of $3.32bn in the first three months of 2021, compared with a loss of $628m a year earlier. Having sold assets to cut net debt to $33bn from $39bn in the previous quarter, BP said it would buy back $500m of shares in the second quarter.

The reported profits were boosted by a $1bn gain on the sale of a stake in an Omani gas field, says Emily Gosden in The Times. However, even if you remove this gain and other “one-off factors”, underlying profits still more than tripled and were “well ahead” of analyst forecasts. BP’s CEO Bernard Looney believes that the “strong result” reflects two main factors. First, higher average oil prices of $61 a barrel, compared with $50 in the first quarter of 2020, have boosted margins. Cutting costs and trimming capital expenditure helped too.

Going green won’t be easy for BP

BP’s management hopes that the windfall will satisfy short-term pressure from shareholders, says Jillian Ambrose in The Guardian. However, the stock’s relatively low valuation suggests the market still needs to be convinced that BP will be able to make renewable energy and clean-burning fuels as profitable as its existing business. Analysts believe that it will “take many years” for BP’s low-carbon businesses to reach “sufficient scale” to convince investors of its financial potential and to compensate for the expected cuts of 40% to oil and gas production that will be necessary for BP to achieve its plan “to become a carbon-neutral company by 2050”.

Still, the oil companies sticking with fossil fuels are facing problems of their own, says Kevin Crowley on Bloomberg. Unlike BP, the US energy giant ExxonMobil insists that oil and gas have a “profitable future for decades to come” and has “resisted publishing a mid-century net zero emissions target”. However, it is currently locked in a “rare proxy battle” with an activist hedge fund, Engine No. 1, which thinks that ExxonMobil’s strategy “fails to meet the needs of the energy transition” and is therefore trying to overhaul the board of directors. Although the fund only owns 0.2% of the company, it has already won the support of several large stakeholders.

The conflict, likely to be one of “the most-watched US shareholder proxy battles in years”, is primarily focused on whether ExxonMobil faces an “existential business risk” by “pinning its future on fossil fuels”, say Derek Brower and Justin Jacobs in the Financial Times. However, it comes at a time when shareholders are irritated with ExxonMobil’s general performance after years of “heavy spending and mounting debts”. Last year Exxon wrote off $20bn of assets, recorded four straight quarterly losses and was “booted” out of the Dow Jones index.

Oil major BP has said that it expects to start buying back its own shares again, after hitting its targets for reducing its debt load earlier than anticipated.

“We are pleased to announce that we now expect to have reached our $35bn net debt target during the first quarter 2021,” said BP’s chief executive, Bernard Looney. “This is a result of earlier than anticipated delivery of disposal proceeds combined with very strong business performance."

Net debt at the end of 2020 was $38.9bn, meaning that BP has sliced nearly $4bn off its debt pile in the past three months.

The group will update with more detail when it reports on its first quarter results at the end of this month (27 April). For now, BP noted that it is committed to “returning at least 60% of surplus cash flow to shareholders by way of share buybacks, subject to maintaining a strong investment grade credit rating.”

So why has net debt declined so rapidly? BP made more money from selling assets than it had expected. Deals included the sale of a petrochemicals business to global chemical giant Ineos, the sale of a stake in software group Palantir, and the raising of more than $2.4bn from the sale of an Omani gas development. As a result, the group now expects sales proceeds to hit the upper range of its earlier $4bn to$6bn estimate.

The group also benefited from the strong rebound in the oil price earlier this year.

What does this mean for your portfolio?

BP’s share price cheered the unexpectedly positive announcement, gaining around 3% to trade at around 300p a share.

As Mark Nelson of Killik notes, the shares still look reasonably priced “on a price to December 2021 earnings ratio of 11.3 times” plus “a prospective dividend yield of 5.3%”. Meanwhile AJ Bell analyst Danni Hewson reckons that the share buybacks raise the “prospect of more generous returns to shareholders”.

Long story short, if you hold BP already – and we’ve been pretty positive on oil stocks so a lot of you probably do – this is another reason to hang on. And even if BP isn’t your preferred play, we’d suggest having some exposure to the sector – fossil fuels will be around for a while longer and the market still doesn’t look to have priced in all of the rebound potential from the Covid-19 lockdowns.

In April Shell slashed its dividend for the first time since World War II. Now, however, even though third-quarter profits were down by 80% year-on-year, it has decided to reverse course to some extent, say Simon Foy and Rachel Millard in The Daily Telegraph. Shell has raised its quarterly dividend, although it is still two-thirds lower than its pre-crisis level. The group has justified the move by arguing that the “lower operating expenses, well write-offs, depreciation and strong marketing margins” mean that it now has enough cash flow to “expand while also raising shareholder payouts”.

The decision to restore the dividend partially suggests that Shell’s management is aware that the huge cut in the spring, in order to enable “significant investment” in clean-energy resources, may have “upset existing shareholders”, says Rochelle Toplensky in The Wall Street Journal. With the company “nowhere near far enough down the path of energy transition” to attract enough environmental investors to compensate for the lost income investors, it has found itself stuck between two stools. It’s no wonder that Shell’s share price is down by 60% this year, “underperforming European oil and gas peers, which have fallen 46%”.

Will the stock bounce?

Shell may be hoping that a slight increase to its dividend will help it “woo investors and reverse the downward slide in its share price”, which is now “languishing at 25-year lows”, says Louise Lucas in the Financial Times. However, such a “short-term” strategy is likely to prove “short-sighted”, especially given the “far from conducive backdrop”, with oil prices “skittering” and the economic toil of coronavirus “adding further pressure”.

Instead of returning more cash to shareholders, it should be using the money to speed up its attempts to reshape itself as a “climate-friendly carbon-neutral company”. Shell is not alone in this dilemma, say Laura Hurst and Javier Blas on Bloomberg. Every major oil company is walking a “treacherous path”, torn between shareholder demands for “generous and reliable dividends”, and the longer-term need “to shift into renewable energy”. To make matters worse, there is “scant evidence” that clean energy can generate “comparable returns to the traditional oil and gas business”. BP is in a similar bind.

Sensible or not, Shell’s dividend raise has been welcomed by “cash-starved investors”, says Simon Freeman in the Evening Standard. The share price jumped by 5% on the news. Shell’s decision to raise its dividend is the latest sign that the rate of cancelled and cut dividends has been “gradually arrested” over the past few months. Year-to-date total payments have reached £36bn across the FTSE 350, up from £33.5bn in July – though still much less than the expected annual average of around £70bn.

BP has announced that it will slash $17.5bn off the value of its oil and gas assets as it takes a “downbeat” view of longer-term oil prices in the wake of the pandemic, says Anjli Raval in the Financial Times. The company now thinks that Covid-19 will not only have a “lasting impact” on the global economy but will also “accelerate the transition towards cleaner energies”. As a result it is cutting the long-term price assumption for crude oil and natural gas by over a quarter to $55 a barrel in the case of Brent Crude, and to $2.90 per million British thermal units for gas.

BP’s move is long overdue, says Nils Pratley in The Guardian. The recent plunge in crude left BP’s assumption that long-term prices would be around $75 a barrel, already a more bullish outlook that its rivals’, “looking silly”. Still, it means that a chunk of BP’s current oil and gas assets “will never be developed”. This should encourage CEO Bernard Looney to speed up his plan for “greening BP and supporting energy transition”. At present BP’s spending on renewables is limited to a “tokenistic” $500m out of an investment budget that will be $12bn even after the recent “sharp trim”.

Time to go green?

The revised expectations of future oil prices could remove one of the major barriers to increased investment in renewables: higher returns from putting money into oil and gas have “simply been too tempting” for oil majors, says Chris Hughes on Bloomberg. There is even a possibility that BP could decide to “make a virtue of diversification”, offering large business clients “energy from multiple sources in a way that combines security of supply with an increased proportion of renewable provision”.

However, in the short run the immediate impact will be to weaken BP’s balance sheet by increasing its gearing, the ratio of debt to net assets. Since gearing is a “closely watched ratio”, BP will be under pressure to take action to reduce it, says Emily Gosden in The Times. One option is to reduce debt through asset sales. However, the fact that this is a “terrible part of the cycle” to be selling means that it’s not going to get much cash. This leaves cutting its dividend, at $8.5bn a year the biggest in the FTSE, as the only other option. With rival Shell having already chosen to cut its payout to shareholders, many think it is a question of “when not if” BP will follow suit.

Cutting its dividend could risk anger from shareholders, especially since many think the pandemic will “encourage more people into their cars, pushing up fuel consumption and oil prices”, says George Hay on Breakingviews. BP’s $30-odd billion of cash also allows it to maintain the dividend “for now”. Still, since keeping the payout will hamper further investment in renewables, BP’s choice may be between “annoying shareholders today, or in the future”. In any case, BP’s shares now yield 9%, suggesting investors have already priced in a cut.