‘This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning’

A few things came together for me in the last week or so including; reading an article about the continued low returns from fossil fuel investments; the continued extreme high temperatures in the UK and much of Europe and the USA; the passing of Trump’s ‘Big Beautiful Bill’, (‘BBB’); and a text conversation with a pioneer of sustainable finance who categorised his work as ‘early skirmishes’. His phrase inspired me to continue my military inspired theme from my blog of 2 June, ‘Are energy engineers fighting the last war?’ in today’s title.

The energy transition, (and the wider drive towards net zero), like all economic and social transitions, can be characterised as a war – a war between the incumbents who will fight tooth and nail, using all their resources and powers, to protect their existing business, and the disruptors. It is a familiar story from the innovation literature as well as history. The early skirmishes have been things like the work on sustainable finance and the adoption of renewables using various forms of subsidies in the early days. Now we are in a situation where economics, the really powerful driver – the big guns if you like, are widely, (if not universally yet), in favour of electrification, renewables, batteries and flexibility and against fossil fuel driven systems. The relative economics makes capital flow but of course changes in the direction of capital are not instant and there is considerable inertia in the system caused by several factors, including the long life time of many assets and investors wanting to maintain at least the illusion of financial performance by not publicly admitting losses.

The incumbents are clearly facing a rising tide that in time will wash them away – but until that happens they will build every barrier they can. We see that in the ‘PR’ (actually propaganda) against EVs and heat pumps, and we see it very clearly in the ‘BBB’ which will end tax credits for renewables as well as open up Federal lands for oil and gas drilling and coal mining. In the words of the President of the American Petroleum Institute, ‘It includes almost all of our priorities’ so they have won that battle in the US but it doesn’t mean they have won the war.

Meanwhile the Institute for Energy Economic and Financial Analysis reports that:

• Fossil fuel stocks reported a 5.72% return in 2024, barely one-fifth of the S&P 500’s return of 25.02%
• The fossil fuel sector has under-performed the S&P 500 in seven of the last 10 years, delivering the lowest returns and highest volatility of any of the S&P’s sectors over the period.
• At the end of 2024 the energy sector made up only 3.2% of the S&P’s total value, compared to 30% in 1980.
• Fossil fuel investments are now an implicit bet on geopolitical disruption and near-term destabilisation.
• The sector’s free cash flow remained weak.
• The shift of capital away from fossil fuels continued as more major pension funds divested.

This shift was also reflected in the IEA’s 2024 World Energy Investment report which showed that the investment into clean energy of $2 trillion is almost twice that into fossil fuels.

Investors consider returns and risks – low returns and high volatility are bad, higher and stable returns which can be generated by electrification and renewables are inherently more attractive. The big guns of economics and the shifting capital flows are just getting started. The battle ahead will not be easy and will not be without its losses, but the outcome is clear.

Note
The quote in the title is from Winston Churchill’s speech on the Battle of Egypt in the Mansion House, 10 November 1942.