One trend that cannot be stopped

I hope you’re having a lovely start to your bank holiday weekend. This one is as well-deserved as they come.

While lovely, there are tough elements too though. It’s Easter but we can’t see our families or friends. It’s sunny outside but we daren’t linger. Markets are closed, but our investments remain a concern. (Almost all global markets are closed on Friday, but most will re-open on Monday, though not the FTSE.)

And while the novelty has worn off, the virus continues to cause grief and destruction across the country. Although it is now growing at a slower rate here in the UK, I still want to wish everyone the utmost health and safety, including our prime minister and I’m sure you’ll all join me in that.

Here where I am, I can confirm that Haruki Murakami’s A Wild Sheep Chase has started beautifully, as always. Of the new PS4 games, Batman: Arkham Knight is the pick of the bunch so far. The Predators Top Trumps pack is still fun after a 15-year stint in the cupboard, and playing a game of “the floor is a vector” can keep children occupied for hours, moving from chair to stool to table to fridge. Oh, and adults too, if there’s electric lemonade involved (RISK WARNING! Your limbs can lose mobility as well as gaining it).

Anyway, as I won’t be writing to you like normal on either bank holiday, I have pre-prepared a special two-part series for you.

I have been writing about the exponential curve quite a bit – because it’s what the virus tracked in its early stages (pre-lockdowns, it doubled every few days).

A single case doubling every three days gets you only 1,000 cases after a month, but 500,000 after two months and 500 million by the end of the third. Because the result gets doubled each time.

That’s the negative side of the exponential curve, but it demonstrates its power more clearly than anything. Now though, I want to turn that negativity on its head, and show you a positive example of exponential growth.

I want to spend today and Monday delving into my favourite investment sector – energy.

And what better time to be talking about it than right now, with oil price volatility at record highs. A 60% fall, a 50% gain, renewables coming over the horizon and emissions falling to multi-decade lows.

What I want to focus on though, is the energy transition.

Everyone is kind of aware of it, in a variety of ways. You probably know that a few houses have solar panels on them. Maybe you’ve driven past a wind farm, or perhaps you were disrupted by Extinction Rebellion, and have seen the odd Tesla driving around. There are a few new renewable utilities too – I’m with one of those.

But perhaps you don’t know that globally, fully three quarters of all new electricity production capacity built in 2019 was for renewable sources.

Source: Irena via The Guardian

In the UK, nearly 40% of our electricity was produced by clean sources (solar, wind, nuclear, and hydro).

That figure was only 6.5% in 2010, well short of the government’s 10% target.

Globally, the cost of producing solar and wind power has fallen by 85% and 50% respectively. Energy storage, which can store power for use at night or when winds are calm, is also seeing rapid cost declines.

And the thing is, no one, not even the most optimistic forecasters, saw this coming.

They were all operating on linear scales. But the costs for these technologies are falling exponentially. By something like 10% or 20% a year, depending on where you look.

Things like scale, efficiency, technological improvements, supply chain, size and international cooperation have all intertwined to bring prices down year after year.

That’s why renewables now produce cheaper electricity than coal in over half of the world.

In fact, solar power with energy storage was recently bought for the cheapest cost-per-kilowatt of any electricity ever. Of any technology, at any time, anywhere.

Renewables are no longer some hazy, pricey moral obligation that governments or lairy protestors need to force down our throats.

They are now an economic imperative.

But what about all the fossil fuel jobs?

Well, according to Forbes, 3.3 million Americans work in clean energy, outnumbering fossil fuel workers three to one.

Coal plants are no longer economically viable in the US, and despite Donald Trump’s attitude, he will go down as the president who closed more coal plants than any others, while renewables have boomed under his objecting gaze.

But won’t the lower oil price make fossil fuels cheaper and more competitive?

You might think so, but in fact, since the middle of 2018, the performance of shares in renewables companies has unhitched from the oil price. Previous lows in oil pulled all clean energy stocks down with it, but recent falls (until the corona-crash of course) were almost uniformly ignored, as the new economic advantages of renewables overpowered that argument.

The political and social impetus behind the move to cleaner energy sources is now more powerful than ever before.

What about electric vehicles (EVs) then?

EVs of all shapes and sizes are breaking up traditional relationship in the energy industry.

Because they need electricity rather than oil, their motors can be powered by solar and wind, while there was no fuel substitute for petrol cars. Hydrogen may also have a role to play in powering our future mobility, in certain sub-sectors.

The rapid adoption of EVs is also following an exponential growth curve, growing not by a number of vehicles each year, but by a percentage amount.

Source: CleanTechnica

That chart records 58% annual growth in EV sales since 2013. It’s a truly remarkable feat, given the impressive range, power and functionality of modern vehicles.

The effort to get any new technology into the auto market successfully cannot be underestimated. With such established players, brands and technologies which performed so well for what people needed, to forcefully carve out a niche, shows that the technology EVs are offering must be truly preferable for the consumer.

The first 5% is harder than the next 50%, according to most specialists in the field of technology adoption, which explains the famed S-Curve in which a slow build-up is followed by an explosion of growth.

Source: Mckinsey

The oil and corona-crashes make the case for renewables more compelling in my eyes.

A few key arguments appeal to me.

Firstly, as the head of the International Energy Agency said, when rebuilding the world economy in a low interest rate environment, what better pursuit than building clean energy infrastructure? It ticks environmental boxes, helps the construction industry, brings new and valuable skills to people, and creates jobs and growth away from cities – ie, London.

Secondly, the ability of governments to resort to fiscal stimulus in the face of a crisis is a new and powerful precedent, and I would be in no way surprised to see similar powers directed at the climate crisis once the current health crisis has been dealt with.

Finally, resilience. The carnage caused by the oil industry with its cartels, unprofitable businesses and international imbalances is now clear for all to see. In the last 12 months we’ve seen tensions reach extreme highs in the Strait of Hormuz, the US contemplate war with Iran, and Russia and Saudi Arabia distorting global energy and financial markets. Also, cities are now without pollution for the first time in decades, if not centuries, and it’s rather nice!

This whole thing has highlighted that we don’t just need renewables from a global environmental perspective, we need them from a geopolitical, financial and physical perspective too.

With rapidly falling costs, unprecedented social and political support, a plethora of incredible new technologies, and EVs ready to fill the auto market vacuum left by coronavirus, here is one trend which will skip over the corona-hurdle, forging ahead on its unstoppable path.

On Monday, I’ll share with you a special interview that I recorded with one of the leading voices of the energy transition, Gregor Macdonald.

Author of the prescient book Oil Fall (2018), Gregor has been well ahead of this particular curve for well over a decade. I spoke to him about the oil crash, the pandemic, the end of oil and the impact on renewables, so keep an eye out for that hitting your inboxes on Monday.

Until then, have a truly wonderful weekend.

All the best,

Kit Winder
Investment Research Analyst, UK Uncensored

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