Developing a global energy transition model to understand the impact a transition to a lower carbon economy will have on different businesses in the investment portfolio
Nick Stansbury, Head of Commodity Research and Energy Strategy at Legal & General Investment Management (LGIM)
“Understanding the impact of the energy transition on investment portfolios is a first order issue for investors delivering long term returns. The model allows us to understand the interaction between changes of individual parts of the system. It’s a huge benefit over comparing different reports.”
Energy is a foundational building block in the global economy. At the heart of this is the energy system and the way it will evolve as we transition to a lower carbon economy and meet the changing energy needs of the population: how we generate power, heat our homes, provide energy for industrial processes, and transport ourselves and freight, and provide power for industrial processes.
To provide the best service for its clients, Legal & General Investment Management (LGIM) needed to understand how the energy system will evolve and the resulting impact on businesses in different sectors.
Baringa designed, developed and tested a framework to model the global energy transition, researched and derived key data points and populated the framework to solve the system up to 2050. The model is passed through rigorous testing and validation to ensure validity.
The tool allowed Baringa to run two scenarios for LGIM, analyse the results and understand key sensitivities in the system. Going forward, LGIM will be able to run the model independently, change scenarios and continue to test sensitivities.
Outcomes and Impact
We developed a model that allows LGIM to run different scenarios, investigate and interrogate the long term global flows of energy and the interaction effects between the different parts. It allows for example to explore different projections of electric vehicle uptake, while at the same time changing variables around CCS (Carbon Capture and Storage) projections.
The outcomes allow L&G to understand the impact of each scenario on their investment portfolio.
Cris Lowery, Senior Manager and Project Lead, Baringa
“The global energy system is very complicated, and replicating it in a computer model is not easy. We developed a framework to model the system, collected and derived around half a million data points, and then ran an optimisation engine. The work made the most of our optimisation, visualisation, financial service and energy markets capabilities.”