The Polar Capital Sustainable Thematic Equity team project that electricity is set to rise from 20% of global energy use today to nearly 60% by 2050. In this Q&A Thiemo Lang, Senior Portfolio Manager of the Polar Capital Smart Energy Fund, explores how the portfolio is positioned to capitalise on this long-term structural trend. Thiemo also offers some reflections as the Fund approaches its five-year anniversary later this year and gives his outlook for the next five.

Q1: Decarbonisation is a long-term trend. What are the main drivers and what are currently the biggest challenges? What impact can shorter-term policy or geopolitics have on the trend and your portfolio?

A: Decarbonisation has been driven by initiatives worldwide aiming to reduce carbon emissions through moving to carbon-free power generation and implementing energy efficiency measures. Decarbonisation and the electrification of end markets are closely interlinked. Shorter-term policy and geopolitical developments can create volatility, particularly in areas such as subsidy regimes, trade restrictions or supply chains for critical materials. However, the Fund is constructed to focus on solution providers rather than policy-dependent outcomes. Many of our holdings benefit from electrification, efficiency and infrastructure investment regardless of the precise pace or direction of individual policy measures. This is especially evident with the recent surge in demand driven by AI data centres. Geopolitical uncertainty generally strengthens the argument for energy security, grid resilience and localised supply chains, all of which align with the Fund’s core investment themes.

Q2: From an investor’s perspective, what are the most interesting investment opportunities in Smart Energy?

A: The most compelling opportunities today sit at the intersection of rapidly rising electricity demand and structural bottlenecks in the system. This dynamic is particularly apparent in AI infrastructure, where data centre operators are increasingly constrained by the speed at which new power connections can be secured. Grid constraints, delays in getting permits, the intermittency of renewables and shortages in key electrical equipment such as transformers, switchgear and cables have become blockages. This is accelerating investment not only in grids, but also in behind-the-meter solutions such as onsite generation and large-scale battery systems that allow operators to manage peak loads and secure faster project timelines.

Over the next few years, access to reliable and sufficient power rather than computing hardware is expected to become the primary bottleneck for AI deployment. The current rush to build out data centres is shifting gears: from “time to power” to a mission for maximum efficiency. Due to grid transmission inefficiencies, power conversion losses, and the rigorous cooling needs of liquid-cooled chips, the total electricity required at the source is approximately twice the amount used for actual computation. This is driving strong demand for energy-efficient electrical infrastructure, transformers, power semiconductors, power supplies and cooling systems – all areas where the Fund has significant exposure.

Besides the investments linked to the build-out of IT power infrastructure, the “electrification of everything” trend encompasses a wide range of opportunities across the transportation, building and industrial sectors.

Besides the investments linked to the build-out of IT power infrastructure, the “electrification of everything” trend encompasses a wide range of opportunities across the transportation, building and industrial sectors. Barring further external shocks, we expect the visibility into the industrial electrification segments to improve considerably. Given the very lean inventories, this should notably profit the industrial semiconductor companies supplying the industrial automation segments.

Global energy storage systems (ESS) are expected to maintain robust capacity growth in 2026 of >40% y/y, underpinned by increasing grid-stability requirements, accelerating electricity demand from AI-driven data centers, and ongoing improvements in system costs and efficiency. In addition, expanding revenue opportunities in capacity and ancillary services markets are strengthening the investment case for storage.

2026 will also be the year where we will see first major rollouts of humanoid robots. Rapid advances in AI, combined with falling hardware costs, are accelerating this transition, enabling robots’ deployment beyond traditional industrial uses and into services and households. As humanoid robots become more sophisticated and widespread, their power demands are becoming a wider issue, having significant impact on their overall economics. Energy-efficient robots will operate longer per charge, require fewer battery replacements and have lower maintenance costs, ultimately improving total cost of ownership.

Q3: How do you implement those opportunities to construct a diverse, thematic portfolio? Could you give a few examples?

A: The Fund is structured around four core investment clusters that together capture the electrification megacycle: clean power generation, energy transmission and distribution, energy conversion and storage, and energy efficiency.

Within each cluster, we invest across multiple subsectors and geographies to maintain diversification and avoid overexposure to any single technology or regulatory risk. Portfolio construction is driven by bottom-up fundamental research, with sustainability analysis fully integrated into the investment process.

This approach allows the portfolio to capture multiple points of value creation along the energy system, from upstream electricity infrastructure to downstream efficiency gains inside data centres, factories and buildings, rather than relying on any single technology or policy outcome. Position sizing reflects conviction, liquidity and risk contribution, ensuring that no single theme or stock dominates overall portfolio outcomes.

Q4: Renewable power producers currently play a relatively minor role in the portfolio. Why?

A: Renewable power generation is essential to decarbonisation, and the buildout of new solar and wind capacity over the past two decades has been impressive. Meanwhile, as the market share of solar and wind has already significantly increased in many developed markets, their intermittency affects supply and pricing during periods of high generation. Any further buildout of renewable power generation must therefore be accommodated by even more investments in grid infrastructure or storage solutions.

The energy transition is not linear, with technologies, end markets and winners evolving over time. Focusing on companies with strong balance sheets, technological leadership and exposure to multiple structural growth drivers has been critical to navigating volatility while maintaining long-term thematic purity.

Battery-based storage solutions can be economically used for daily load shifting, but are not suited for seasonal storage. A compelling way to store surplus renewable electricity over a longer period of time would be its conversion into green hydrogen. Though we still believe this will be a very viable long-term option, we do not expect a more meaningful launch in green hydrogen storage solution before the next decade.

We therefore expect a further buildout of solar and wind over the next years, but we are not expecting strong growth rates in this segment compared to grid and battery storage solution investments.

Q5: The Fund celebrates its five-year anniversary in September this year. What are your main reflections on the first five years and what is your outlook for the next five?

Reflections on the first five years

The first five years have demonstrated both the cyclicality and the resilience of clean energy investing. The period has included sharp market rotations, rising interest rates and shifting policy environments. Throughout this, the importance of active management, fundamental research and diversification across the value chain has been reinforced.

The energy transition is not linear, with technologies, end markets and winners evolving over time. Focusing on companies with strong balance sheets, technological leadership and exposure to multiple structural growth drivers has been critical to navigating volatility while maintaining long-term thematic purity.

This experience has reinforced the importance of flexibility within a long-term thematic framework, as new demand drivers can emerge faster than expected.

Outlook for the next five

The “electrify everything” trend is set to further accelerate over the next five years. AI data centres are emerging as a strong new demand driver, placing unprecedented pressure on existing power generation assets and grid infrastructure. Various solutions are currently being investigated and processed to cover their surging electricity needs, including onsite power generation and battery storage and further buildout of the electrical grid. Even data centres in space are being discussed, eliminating the need of sophisticated liquid cooling, and the power needs covered by solar panels in space, permanently oriented toward the sun, providing uninterrupted energy. We are also witnessing a renaissance of nuclear power, as their supply of baseload power fits perfectly well the round the clock energy needs of data centres. Advanced reactor designs have incorporated passive safety systems designed to shut down without human intervention, and new modular solutions are expected to drive down manufacturing and installation costs.

While the global discussion on rising energy consumption is currently centred on the buildout of AI data centres, we should not forget that this trend is so far mostly heavily met by the US market. In other geographies such as Europe and Asia we still have other meaningful demand drivers such as the further electrification of the transportation sector through electric vehicles, as well as further deployments of heat pumps and HVACs.

Big Data, humanoid robots, heat pumps, EVs and green H2 driving strong demand Electricity demand growth from 2020

Source: Polar Capital estimates as at July 2023; BNEF for historical figures. Forecasts contained herein are for illustrative purposes only and does not constitute advice or a recommendation. Some information contained herein has been obtained from third party sources and has not been independently verified by Polar Capital. Neither Polar Capital nor any other party involved makes any express or implied warranties or representations.

As a matter of fact, the share of electricity in energy use is currently at 20%, and is expected to grow to close to 60% in 2050 according to our estimates, offering significant investment opportunities over a wide range of all the different end markets over many years to come. The rise of physical AI is also supposed to emerge as a significant new driver of electricity demand, though the full scale of its future electricity requirements remains difficult to quantify at this stage. To ensure cost-effectiveness, humanoid robots, autonomous vehicles and other smart mobile devices must prioritise energy efficiency. These systems process real-time data to sense, think and act, with their efficiencies determining battery capacity and overall weight.

Through the new demand drivers, the opportunity set across Smart Energy will just become even more diversified across end markets and geographies. System optimisation through pushing energy efficiency innovations will be key for market participants to compete successfully against peers, be it in industrial, automotive or building end markets, or in the new areas of data centres and physical AI. Looking ahead, the energy transition is entering a new phase, often termed the “electrification megacycle”, where surging demand in new areas of activities such as AI data centres, electrified transport, heat pumps and industrial automation is adding momentum to the decarbonisation targets. In an even more forward-looking approach, emerging initiatives using solar power in space for orbital computing, or to beam the energy back to Earth via microwaves might offer fascinating new possibilities.