For years we’ve had the theory that the next energy revolution would come from the declining costs of solar energy and battery storage.
According to research by Bloomberg, the most cost-effective way to provide new electricity generation for two-thirds of the Earth’s people right now is either solar or wind. The pattern is clear: green energy is winning.
Green energy costs continue to drop. Battery storage is 50% cheaper than it was two years ago. Wind projects are benefitting from larger scale. Solar photovoltaics continue to improve efficiency as time goes on.
These studies are based on actual costs of utility-scale projects. Compelling economics are the key factor—not a shift in consumer behavior. It remains to be seen whether dispersed generation and storage in user-owned systems reshapes the utility industry in the future.
Battery technology improvement has an impact on the price of electric vehicles, since batteries can represent about 30% of the total vehicle cost. Despite advantages in maintenance and fuel expense, acquisition cost remains a hurdle to wider adoption of electric cars and trucks.
But current trends point to a future in which electric vehicles cost less than those powered by internal combustion engines.
We think about winners and losers as the future unfolds. Companies that produce and transport fossil fuels for electricity generation may face a dimmer future. Those that provide the materials needed for the new equipment may prosper. Less expensive electricity will have effects we cannot predict, just as past energy revolutions reshaped society.
We will continue to research and think about these issues. Clients, if you would like to talk about this or share your views, please email us or call.
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Our work involves looking at trends and striving to figure out if there is a way to make appropriate investments that may have a good chance to work out well. More than two years ago, we put together a pair of trends and made a forecast. It’s time to check in and see how the forecast is working out.
The cost of electricity from solar sources was said to be declining 10% per year, while the cost of electricity storage by battery was also declining. We felt then that this would lead to a revolution in energy production.
Installed solar generating capacity in the US grew 19% last year. The Solar Energy Industries Association projects that capacity will double in the next five years. In terms of new generating capacity by source, solar has ranked first or second each year for the past six years.1
Groundbreaking projects are going up around the world, too. The World Economic Forum reports that Abu Dhabi switched on the world’s largest virtual battery plant, able to store 648 megawatt hours. That’s enough to keep the city supplied for up to six hours in the event of a generating outage. This is feasible because the price of lithium-ion battery storage has dropped by more than 75% since 2012.2
As this combination of solar power generation plus battery storage commands a bigger share of global energy production, it seems to us that a lot of copper will be used. At the recent Global Copper Conference, a keynote speaker talked of record demand in the years ahead.
With prices on some mining companies that produce copper off by 75% or more from peaks of a few years ago, we see opportunity. This idea has not made large piles of money for anyone over the past few years, but the trend looks favorable. We believe we know how this turns out, so we are sticking with our convictions.
Clients, if you would like to talk about this or anything else, please email us or call.
The gap between consensus expectations and reality as it unfolds is where profit potential lives. This is why we put so much effort into studying trends and the ramifications for investors.
Here are four trends we’ve been watching for some time:
1. The cost of solar electricity and battery storage, being forms of technology, are declining year by year. In some places around the world, this combination may already be the most cost-effective way to provide new electrification. We believe we will see the end of fossil-fuel-powered generating plant construction within the next decade or so. This will not happen because of environmental activism, but because of compelling economics.
The investment ramifications are manifold. There will be winners and losers, and we have been investing in accordance with our developing understanding of how this is going to play out.
2. The world’s most populous democracy, India, may be poised for decades of economic growth much like China experienced over the past thirty years. Moreover, by 2050 India is projected to be the most populous country in the world. China will be surpassed as a result of its short-sighted ‘one child policy’ that created a huge demographic challenge with an aging population.
By getting in early, even a small investment allocation may make for significant potential gains over years ahead. No guarantees, of course.
3. The airline industry, after nearly a century of cutthroat competition that resulted in wave after wave of bankruptcies, has consolidated into a handful of companies that compete much more gently, to their mutual profit. The energy revolution may result in lower prices for fuel in the future—a large part of airline operating costs. And continuing development around the globe bodes well for air traffic volume trends.
The consensus expectation in the market seems to be for a return to the bad old days of costly competition. But we believe the industry has fundamentally changed due to the dramatically lower number of competitors after years of mergers and consolidation. Consequently, stocks in some of the major airlines appear to be bargains.
4. The Federal Reserve and other central banks around the world are set to begin unwinding the interventions used to effect the so-called “zero interest rate policy”, the policy by which the Fed kept the effective federal funds rate close to 0% following the recession of 20081. While restoring returns on bank savings and certificates may be a good thing for savers, rising rates on bonds will cause the value of existing bonds to go down. When you think about it, a 2% bond cannot sell for its full face amount in a 4% world.
Many parts of the fixed income universe appear to be distorted by the central bank policies. We believe that massive amounts of money flowed into mispriced assets in an attempt to find safety.
Clients, these are the things that have caught our attention. We cannot know the future, but it makes sense to try to get a better handle on it than the average market participant. We can offer no guarantees except that we will continue to put our best effort into the endeavor. If you have any questions or comments or insights to add, please email us or call.
1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
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