"Drill, baby drill" in a new way: The opportunities of geothermal energy in thematic funds
The U.S. government under President Donald Trump aims to massively promote the oil and gas sector. However, this industry also holds the key to advancing electricity generation through geothermal energy. Those interested in investing in thematic funds and sustainability should take note.
"Drill, Baby, drill": Right from his inauguration last January, U.S. President Donald Trump declared a new golden age for fossil fuels. This slogan from the American government has since captivated investors interested in sustainability: They now need to ask under what conditions the transition to a more climate-friendly and decarbonized economy can take place.
But what if oil and gas producers could use the same technology they currently employ to extract fossil fuels to tap into a new energy source? An energy source that, according to the Director of the International Energy Agency (IEA), Fatih Birol, is "versatile, clean, and secure"?
Why haven't the opportunities of geothermal energy been widely realized?
We are talking about geothermal energy. It is becoming increasingly clear that this sustainable energy source could be applied much more broadly. However, to realize the opportunities of geothermal energy, initial government support measures are needed. This would, in turn, trigger large-scale private sector investments. According to the IEA, geothermal energy could become competitive with other energy sources within a decade.
This would also put geothermal energy on the agenda for those interested in investing in thematic funds and the sustainable investment theme of decarbonization and climate.
But first things first. Although the opportunities of geothermal energy have been recognized for decades, it still holds a niche status among electricity generation sources. It covers less than 1% of global energy demand. So far, geothermal energy has primarily been harnessed in countries where access is relatively easy due to volcanic and tectonic activities near the Earth's surface, such as Iceland, Italy, Turkey, the USA, and the Philippines.
Which technologies help seize the opportunities of geothermal energy?
Thanks to new technological advancements, this niche status could soon be a thing of the past. These technologies include kilometer-deep horizontal drilling and hydraulic fracturing, which have been refined through the often-criticized shale oil and gas extraction in North America. These methods could tap geothermal energy up to 8 kilometers deep. At depths of 5 kilometers, the Earth's crust's basement rock is believed to hold great potential for electricity generation. According to IEA calculations, drilling to this level could already provide more energy than the so-called technical potential of wind energy (see chart below). Unlike wind, geothermal energy has the advantage of being weather-independent.
Opportunities for geothermal energy: a comparison of the technical potential
Following the IEA's scenario, up to 80% of the technology and expertise from the oil and gas sector could be used to harness geothermal energy. Various methods are available to utilize geothermal energy (see graphic below). In the promising Closed-loop Geothermal (CLG) systems, the heat transfer medium – water, brine, or CO2 – is circulated through a loop of pipes to the depths and back to the surface.
These Systems Could Unlock the Opportunities of Geothermal Energy
How much electricity could be generated thanks to geothermal energy opportunities?
These technologies are currently being tested in pilot projects. If applied on a large scale, significant funds would be needed – the IEA estimates investments equivalent to USD 1,000 billion by 2035. Companies specializing in harnessing this energy source, as well as broadly diversified energy corporations, could benefit from this.
But it is not just this potential that should catch the attention of investors interested in the long-term and sustainable investment theme of climate and decarbonization. The widespread use of geothermal energy could also be crucial in meeting the increasing electricity demand (see box below) expected with the transition to a decarbonized economy. Additionally, geothermal energy can be utilized in many countries, reducing the need for energy imports and supporting energy security.
According to the IEA, continuous technological improvements and reduced project costs could enable geothermal energy to meet up to 15% of the global electricity demand growth by 2050. This would mean the cost-effective deployment of up to 800 GW of geothermal power generation capacity worldwide, producing nearly 6,000 terawatt-hours (TWh) per year – roughly equivalent to the combined electricity needs of the USA and India.
Geothermal energy as an alternative to nuclear power?
The attraction of tapping into the opportunities offered by geothermal energy is that it promises continuous output: geothermal power plants can operate at maximum capacity day and night, all year round. In 2023, the average utilisation of global geothermal capacity was over 75%, according to the IEA, compared to less than 30% for wind power and less than 15% for PV. This also makes geothermal energy suitable for base load. It could thus make a significant contribution to the stability of electricity grids and be positioned as an alternative to nuclear or coal-fired power. However, this will probably require large investments and state funding as a first step.
Why investing in thematic funds can help unlock geothermal energy opportunities
This also exemplifies why a long-term horizon is essential when investing in the sustainable investment theme of climate and decarbonization: The opportunities of geothermal energy can only be realized over time. It requires initial government support and a stable regulatory environment in the long term.
To position oneself early for the opportunities of geothermal energy, a lot of expertise is needed. It is also advisable to represent this promising sector in the portfolio with quality companies that can offer higher return opportunities. Thematic funds managed by experienced experts can therefore be a possible solution; the expertise of the sustainable thematic fund "Swisscanto LU Equity Funds Sustainable Global Climate" already dates back 17 years, and the investment strategy focuses on several sub-areas, including energy efficiency, renewable energies, sustainable mobility, and resource efficiency.
Conclusion: what to consider when investing in geothermal energy opportunities and thematic funds
- According to the IEA, geothermal energy could meet up to 15% of the global electricity demand growth by 2050 thanks to technological improvements. Geothermal energy is weather-independent and can provide baseload power.
- For a breakthrough, initial government support and stable regulatory frameworks are needed to trigger large-scale private sector investments. This creates opportunities for investors interested in thematic funds focused on decarbonization and climate.
- To position oneself early for geothermal energy opportunities, a lot of expertise is needed. Therefore, investing in professionally managed thematic funds can be advisable.
Investment theme «Climate»: Insights
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Legal disclaimer Switzerland and international
This document only serves advertising and information purposes, is for distribution in Switzerland only and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF). This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com as well as at Swisscanto Fondsleitung AG, Bahnhofstrasse 9, CH-8001 Zurich (also acting as representative of the Luxembourg Swisscanto funds in Switzerland) or in all offices of Zürcher Kantonalbank. Paying Agent for the Luxembourg Swisscanto funds in Switzerland is Zürcher Kantonalbank, Bahnhofstrasse 9, CH-8001 Zurich. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088. The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision. The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933).
Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
This document only serves advertising and information purposes and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF).
This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective published legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com/. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088.
The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision.
An overview of investors' rights is available at https://www.swisscanto.com/int/en/legal/summary-of-investor-rights.html.
The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933). Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
