you've been hearing about the energy crunch and counting the cost of rising prices. So what are the five things you need to know about why this is happening and how it might change where energy supplies come from in the future. I'm Jonathan pierce from the money mine team and I have with me, Stephanie Holzer jen, chief investment officer for Asia pacific at Deutsche Bank International and David Broad Stock, senior research fellow at the Energy
Studies Institute, National University of Singapore. I guess the first question would have to be as bad as things are, How much worse can they get? David is manifesting right now as an energy crisis and this energy crisis has very important foundations, but it also is a broader commodity crisis. We cannot ignore this detail what's been happening in europe is really a consequence of what happened
back in february. The start of the Ukraine Russia war that created an immediate geopolitical tension in energy supply chains and natural gas became what many people refer to as a weaponized commodity and the supply of natural gas into europe. And the pipeline infrastructures were used to respond to tariffs which were imposed Russia. This is a very concerning problem, but at the
same time, the conflict has broader ramifications. Supply chains for food based commodities were directly impacted this of course, immediately tells us that we can expect inflation across multiple areas of commodities. What some people don't realize is also how there are second order impacts that there's spillover consequences if we take, for example, the rising cost of fuel for oil, particularly in recent months? although it's depressed to
some extent. Now we can translate that into a rising cost of transporting goods and services and so these food commodities which need to be shipped from one country to another, then become more expensive to transport themselves and this will not stop at food commodities. The spillover will carry on into other commodities to for the regular consumer, this is going to translate into higher costs for products like TVs or any of the things we consume on a daily basis and
higher prices for energy, which Asia is still very much reliant on fossil fuel. Energy resources as well has impacted inflation numbers. Higher inflation has impacted GDP growth, has also put governments into the forefront to tackle that potential cost of living crisis doesn't really spill over into Asia. We have seen central banks needing to react to higher inflation by taking interest rates up of course, making other parts less affordable
or maybe also constraining investments. The realization has not only in Asia but also in the rest of the world, is that we have an energy security crisis and that is actually two fold number one is you want to make sure that you actually politically sustainable so that you diversify the energy resource imports that you need from partners that are reliable, that are aligned and that you can
work with going forward. And secondly, there's also this question around environmental sustainability because some of the fossil fuels like coal may be more abundant than others, but in china a long time ago already has been understood that cole has not passed down in terms of energy consumption going forward before the crisis started, we had a focus more on natural gas, for instance, to produce energy, to not pollute the country that much
now, David, these impacts that we have discussed, are these just a bump in the road? Or could they have long term consequences? In some ways, it may still be a tiny bit too early to actually determine whether this is just a bump in the road or something else. The reality is for major fuel commodities. We've had double digit percentages essentially taken off the table on the supply side.
We are bumping into the seasonal time of the year, where especially in in europe, there's a huge demand for additional energy to provide heating this energy needs to be provided immediately and there's a very certain short term consequence that we have to consider health and security over sustainability. And this is a very challenging position for governments that they need to face. I don't think there's any need to contest the idea that sustainability remains a top priority.
But the question as to whether or not health it becomes a secondary priority is something that governments obviously cannot ignore.
Will it have long term consequences at the moment. You know, if we look towards the futures markets for many commodities or if we even look towards the spot markets for gas markets, the prices are at almost historical highs that oil markets spiked close to historical highs, although are beginning to come down, We're seeing an important detachment between the oil and the gas prices, which historically hasn't always been the case. They
tend to track each other fairly closely. So we're seeing some new conditions and the futures markets point towards a certain durability in the events that we're seeing at the moment towards the price outcomes. And so then the question becomes, well, if I'm an economy, if I'm planning to purchase fuels to run my economy, and I take the traditional approach of consuming apart from spot markets using perhaps my own resources, if I have them and then setting up futures contracts or long term
supply contracts to complement the rest of my supply. Maybe I can't find access to desirable long term contracts. But if those long term contracts are not desirable and the spot prices are also very undesirable, then you find
yourself in a very awkward situation. And what becomes a question of needing to provide a short term resilience to the economy to maintain and say public health, then slowly creeps into a longer term question of, well, how do I endure this for an indefinite amount of time things to keep in mind, it's more than just an energy crunch. Rising prices are spilling over into other commodities and as europe heads into winter, governments may have to increase fossil fuel production to tide people over
Stephanie. This energy crunch comes just as the world is also opening up after the pandemic. Could this double whammy derail the energy transition to net zero that many asian economies have committed to.
There's a big differentiation going on in terms of the shorter term and the longer term impact where initially there was this fear that if you don't invest into the traditional energy resources, you're missing out on performance. We've In this in some of the Morningstar data, global sustainable funds, the inflows dropped by more than 60% compared to the previous three months. It looks like a bit of a rethinking on a very short term basis or to reallocate.
Although don't forget that the overall market has been constrained a lot as
well and according
to the global sustainability fund flows report from Morningstar that product category, sustainable investments is actually held up quite well and this is where the medium and longer term perspective is now coming in handy. And I think this is also ultimately showing in the products and the focus are put on E. S. G. Compliant products. The growth path of energy transition investments in
the AsIA pacific region are actually profiting twice. So we have 368 billion us stellar that were recorded being the highest investments Worldwide into the Asia Pacific region making up for almost 50% of last year's global energy transition investments. I think that's a very powerful statement. The region has showed the strongest surge in 2021 with an increase of 38% year on year.
The opportunities around these investments and the money that is flowing into the region to support the sectors that are looking at tackling these problems will ultimately end up in portfolios, the companies and the indices the stocks, the efforts behind it. In terms of the range of investment opportunities, we see great opportunities for different parts of companies.
So you have the climate transition enablers. Then you obviously have also the companies that already working in technologies and looking at renewable energy, the usage of electric cards, heat pumps, anything that is also look into redesigning the infrastructure and dealing with climate change as we see it right now, rising sea levels, hotter temperatures, climate tech. So there's plenty of opportunities, the money is flowing into this part of the world, much more so
than in the rest of the world. And ultimately in the medium and longer term horizon that will display in opportunities that you can put in and already can put in portfolios.
Now, David some argue that the energy crunch has in fact highlighted the importance for countries to move to renewables and wean themselves off foreign oil and gas. What's your take the conflict has brought to the attention of economies and investors. Business is what it means to be locked into fuel sources and what it means to be locked into those fuel sources where we are also import dependent. And this
is creating questions. We don't normally give a high level of attention because often we imagine that the world can simply supply us With the fuels that we need to power through our economic activity. But now we're seeing that there are legitimate risks to those fuel sources in Europe. They're having to switch the lights off in towns in order to make sure that there's enough energy to heat homes. And this
is very unfamiliar territory. This is not something that anybody has really experienced since a world war times back in the 1940s. It certainly does open up those questions. Do we now have the ability to move away from oil and gas And versus do we have the desire? And the desire is obviously increasing, but the ability is still constrained by other factors. In order to shift away from oil, we need to have something to shift to
localize this with the Singaporean context. If we think about the Singapore context, we could shift away from oil in the use of transportation and we could substitute that with electric vehicles. But in the case of Singapore, for example, those electric vehicles are powered using natural gas and so you only shift from one problem to another of the same types of problems, but with a variation around the risks. Other economies will have better opportunities.
An important aspect to keep in mind is that any transition from one fuel source to another fuel source will take time and the amount of time it takes depends on the ability to scale up the infrastructure. And this in turn will be impacted by existing development pathways that have been deployed within the economy as a whole, companies can do their own thing. You know, some companies have land, they can create their own self generation and become resilient to x
external power risks, but many companies don't have that. And so you have to be in a position where the company can access resources provided by the government and if the government themselves have not engaged in a trajectory to start developing alternative fuels, then you won't be able to transition very quickly. So Stephanie as countries go about this slow transition, what can they do in the meantime is diversification the key.
There's also already a lot of calculation around how much over the next 10 years, Asian countries are actually able and are expected to increase their share and power generation based on renewables. So just to give investors a flavor as to how meaningful this is because we're talking about almost doubling for some of the countries in china for instance, the share of energy from non hydro renewables
in total
generated electricity is likely to rise from 15 currently to almost 30 so 26% in 2031. Likewise India will grow from 11 to 21 also almost doubling Japan is going from 15 to 23 South Korea from 7.5 to 19.5%. We talk about very meaningful investments in the next 10 years into the space, which ultimately will end up in portfolios. It's then for picking the companies that are looking into using technology or developing solutions around the space definitely here in Asia.
Now, what options do we have to diversify our energy grid in Singapore? And it certainly highlights that we can expect to see fuel sources like nuclear, potentially geothermal, the extent of which
is being explored at the moment? Geothermal for example, would be very interesting for Singapore's case because there's no discontinuity in the supply, it's a very reliable supply because it's all controlled underground in a very moderated regulated environment and its local, there's no import risks, barrier import risks, imported electricity is an option that the economy has been looking into very seriously. But this requires significant infrastructure.
If it's a cable from Australia to Singapore, it will take time to develop. And if that exists, then questions around why, what are the further options from that? Are you importing to supply your own economy? Are you importing to build into a regional grid and then that leads into the
question of, well, what about regional grid dynamics? Singapore is centered within a cluster of countries that have a history of coordinating with each other And within that also a history of trying to develop regional grids and regional power-sharing arrangements, either through fuels or
through final electricity that's sent over wires. But they also with that have a history of struggling to coordinate in the most optimal fashion perhaps for example, within the past 12 months or so that there have been shifts in the agreements between countries within the region which have resulted in countries wanting to retain green electricity and not sell green electricity across the border. This is
an interesting shift in the landscape. From my own perspective, I think this was a shift in the landscape which occurred pre Ukraine crisis. Following on from the global reorganization of energy markets after the Ukraine crisis? That idea of needing to question whether or not you can send green electricity across the border is something which concerns me that this may gain more traction
and may limit the potential opportunities. And in the context of a country like Singapore, that could be very important because we don't have many places for renewables deployment. We don't have indigenous resources being able to be central within a connected network of countries that are happy willing to share the cleanest versions of fuels in a way, which benefits the whole group is an important piece of the puzzle. Last question to you, how should investors navigate this energy crunch
markets will remain volatile. So what is important is that you are proactively managing portfolios, not just invest and go away as maybe in the past. Also in terms of making sure you emphasis the themes that you see out there. I think it's very visible. It's very important to understand that climate change resource allocations. We also have agricultural shortages that you know, we look at food security, there's so many aspects that are right now tackled that will ultimately have to result
into governments addressing these issues. Money to be flowing into these themes solutions to be found to make things more sustainable for the medium and longer term. It's to identify these enablers early, put them in the portfolio and then just brace for the volatility. Let's not abandon the E. S. G. Theme. Quite the contrary I think has happened not just in Asia but also in the rest of the world
brace for volatility. And if you want to invest, look at the issues we are facing right now like climate change and food security which will see government action and business solutions. Countries and companies do need to look into diversifying their power grid and energy needs. But the transition won't be immediate and could involve other tradeoffs bear in mind that this is a broader commodity crisis and rising prices will
spread as europe heads into winter. Governments may have to increase fossil fuel production to keep the heat on but it's unlikely that investing in renewables or E. S. G. Will be impacted negatively. We've been talking about the five things you need to know about the energy crunch and my guests, Stephanie Holzer jen, chief investment officer for AsIA Pacific at Deutsche Bank International and David Broad Stock, senior research fellow at the Energy
Studies Institute in En US Money. Mine is every saturday at 10:30 p.m. On media cops c n A. You can also catch us online at CNN dot ASia or on youtube.