Electricity Lights Up A City

The World is Moving Toward Electricity as the Primary Source of Energy Consumption

Electricity in 2014 only accounted for 18% of global energy consumption, this is predicted to grow to 80% by 2050

This increase in demand for electricity is being driven by two primary macro trends:

  1. As electric vehicles are more commonly adopted, electricity will likely replace oil as the transportation fuel of choice. Most of the oil consumed today is used as fuel in the transport industry and to create HGL’s for the petrochemical industry to produce plastics, fibers, and resins.
  2. The technology and digital revolution will require more electricity in the future due to data storage, connected devices, advaned manufacturing and general global digitization.

These predictions of electricity production doubling and providing 40% of our total energy supply by 2030 and 80% by 2050 would have profound implications on how we generate and supply energy. 80% of total final energy consumed in the world today is in the form of fossil fuels. This pie chart will give you a snapshot of how we are currently consuming energy.

 

Total final consumption by fuel

International Energy Agency: ‘Key World Energy Statistics 2016’

Electricity is not inherently clean. It has historically been primarily generated using coal, natural gas, nuclear, or other fossil fuels. The pie chart below is an illustration of how we are currently generating the 18.1% of electricity referenced in the graph above.

U.S. 2014 Electricity Generation By Type

U.S. 2014 Electricity Generation By Type

 

If 80% of total energy is going to be consumed in the form of Electricity in 2050, we should make sure our electricity generation is cheap and clean

Most of our electricity today is generated by burning fossil fuels. Coal, currently at roughly 40% of electricity generation, will be replaced with gas and renewables due to carbon emission policies and price efficiencies. Global consumption of coal in 2016 was 3,732 million tons at $60 per ton, equating to a total annual production worth $224 billion. This is a simple example to give you an idea of the magnitude of the change and the opportunity, which starts to present some very exciting prospects for alternative energy technology.

 

As we move toward a world powered by electricity, are there any predictable consequences?

Germany was one of the first nations to try and move toward 100% renewable electricity generation and provides an obvious case study. Germany has been dependent upon Russian and Middle Eastern Oil and Gas since the second world war. The country has spent over $100 billion on the renewable crusade since the Energiewende Act was written into policy in 2010. This was an unprecedented move toward fossil fuel independence.

One obvious consequence of these efforts has been the rapid decline in the share prices of two traditional German energy utility providers’ below. RWE and Eon were two of the largest energy utility companies in the EU and RWE have been around since 1898. The graph below shows how their share prices have performed since 2010. The drop of over 80% was due to investor sentiment on the future and consumers generating and trading their own household solar energy.

 

Q. If electricity is increasing in demand, then why would the stock prices of the two largest German Electricity Utility providers, E.ON and RWE look like this?

Race To The Bottom: E.On (ETR: EOAN) vs RWE (ETR: RWE)

Race To The Bottom: E.On (ETR: EOAN) vs RWE (ETR: RWE)

A. Because they are old world, industrial era companies that are accustomed to using fossil fuels as the primary means of generating electricity.

Although this example is not a predictable outcome in other countries, we’ve seen a changing of the guard in the Fortune 5000 list from old world, industrial driven companies, to world, technology-driven companies. This paradigm presents both an opportunity to be aligned with new world distributed energy players and a risk that your portfolio consists of old world industrial era energy utilities. The shakeup is ongoing in the energy industry and presents an incredible investment opportunity over the coming decade. Electricity and technology are inextricably linked.

Valuations and the Risk of Old World, Industrial Era Companies

Below are the trend lines for Tesla and Ford share prices over the past 5 years, no prizes for guessing which stock is the rising green trend line.

Tesla and Ford share price growth and decline. The fall of the fossil fuel auto industry

Tesla and Ford Share Prices

 

This is one of the more obvious examples of how speculation around new technologies and their impact on the future is affecting valuations. Tesla has positioned itself as the future of energy, creating virtual power plants with solar panels and battery storage. There are many other players with compelling solutions for a world powered by clean electricity that we will explore in future posts.

We are interested in the new disruptive technologies that will change the energy game as opposed to existing incumbent players trying to fool the public by shifting to a face value, ethical mission at a leisurely pace.

Our next post will focus on the US electricity industry, the dominant players, and potential investment opportunities.

The Ask

Are there any old-world companies in your portfolio?

C2C

 

The information provided is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs.

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