Investing in the Future of Energy
Major Implications for Investors Not Aligned With the Future
Bloomberg's New Energy Finance (or BNEF) does a first-rate job of monitoring the field of energy investing.
For example, their most recent global survey found a record level of renewables investment in 2015, record levels of new installment, and a dramatic rise in developing world energy investment, fully $156 Billion in 2015.
Arguably this last bit is most important when you consider coal use being most polluting, and so the opportunity to leapfrog the developing world countries such as those in Southeast Asia emerges as mission critical when it comes to solving longer term for climate change.
BNEF has also now forecasted energy production, use, and technology development through 2040 in its New Energy Outlook report.
Eight Findings From This New Report
- "Coal and gas prices stay low. A projected supply glut for both commodities cuts the cost of generating power by burning coal or gas, but will not derail the advance of renewables." - Implications abound for this first finding alone including the perhaps permanent economic failure in countries such as Russia and Venezuela as well as regions such as Alberta, and also permanent asset stranding in regions such as the Arctic which will not be economic to pursue. Fortunately, as the Carbon Tracker Initiative has been reporting there is a correlation between "High Cost" and "High Carbon" so that future use of oil can be lower carbon in this regard
- "Wind and solar costs drop. These two technologies become the cheapest ways of producing electricity in many countries during the 2020s and in most of the world in the 2030s. Onshore wind costs fall by 41% and solar PV costs fall by 60% by 2040." Exciting to say the least, while the winners on the investment side may be less clear, losers will abound, especially utilities stuck with old business models and commitments. Investors have the opportunity now to protect themselves from downside risk exposure. A hedge fund could have made a fortune the last few years playing these trends correctly, and at a time when many hedge funds are struggling to justify their ongoing fee structures.
- "Asia-Pacific leads in investment, representing 50% of all new investment worldwide. Despite slower growth in the near-term, China remains the most important center of activity." Expect the rise of the middle class in China and throughout developed Asia to exacerbate other issues such as pollution and food quality, all with opportunities for investors to consider.
- "Electric car boom. EVs increase global electricity demand by 8% – reflecting BNEF’s forecast that they will represent 35% of new light-duty vehicle sales in 2040, some 90 times the 2015 figure." Expect the electrification of transportation to accelerate, not only with cars (Germany just required all new cars sold to be electric by 2030) but also trucks. Here in the US, turning transportation into lower carbon will be high priority very soon, again with major implications for investing.
- "Cheap batteries everywhere. The rise of EVs further squashes the cost of lithium-ion batteries, boosting power storage and working with another flexible capacity to help balance renewables." Storage is now a race for who will succeed and who will innovate fastest. An enormous opportunity, and one to not miss the upside of, let alone the increase in jobs maintaining this new storage category, as well as of the other new technologies above. This at a time when new jobs are badly needed as other industries automate (including truck driving).
- "A limited ‘transition fuel’ role for gas outside of the US, with only 3% growth in gas demand for power to 2040, and generation peaking in 2027." Here again is a danger sign for investors, over-eager on gas, there may be challenges ahead, and for the oil majors trying to become gas companies. Qatar is expected to have the world's cheapest gas over these next 20-25 years.
- "Coal’s diverging trajectories. Coal generation plummets in Europe and peaks in 2020 in the US and in 2025 in China; however, it increases 7% globally due to rapid growth in other Asian and African emerging markets." Coal is an economic and environmental disaster and contains the majority of the world's remaining carbon dioxide in the ground. Expect coal mines to be bought to be retired.
- "2⁰C scenario. On top of the forecasted $9.2tn investment in zero-carbon power, an extra $5.3tn is needed by 2040 to prevent power-sector emissions rising above the IPCC’s ‘safe’ limit of 450 parts per million." These trillions of dollars are likely insufficient for the purpose, especially if the world continues to warm year by year as it has been. Accelerated efforts by 2020 seem perhaps most likely, hence getting on the inside now in the right energy technology may turn into a great investment idea.
While it can be hard to impossible to fully predict the future, or to time markets, these changes above are coming, or worse environmental disasters, either way, are fully expected by scientists.
Investors are behind where they need to be, but there's still time to fully inform and take the right posture, develop the right strategies and build your capacity to understand these issues before they bite.