Carbon Tracker was set up 10 years ago as an independent financial think tank focused on the impact of the energy transition on financial markets. Kingsmill Bond has been a New Energy Strategist for the firm for the last two years. At Carbon Tracker he has written about the impact of the energy transition on financial markets, domestic politics and geopolitics. He has also authored a series of reports on the myths of the energy transition, looking at the many arguments made by incumbents to deny the reality of change. Before that, he spent 25 years as a financial market analyst and strategist focusing on emerging markets and major strategic themes.
Kingsmill believes that the new energy transition may be the trend that drives change in financial markets as we know them today. The Nossa Capital team interviewed Kingsmill on this topic and what it may mean for investment managers.
What it most comes down to is the speed of change. Investment managers need to look at:
The speed of cost drops in the alternative energy space
The speed of growth of those technologies.
Those are the key drivers of this transition.
The consensus view on this, a view which is advanced by the incumbents, is that change will be very slow and gradual. It will not be a problem for the existing market players. The reality we would suggest is that change is rapid and incumbents will be damaged by this change very early. The energy transition is extremely important to the incumbents.
If we look at history, this seems obvious. We have plenty of examples of this happening in the past we can draw from. It is reasonable for incumbents to be in denial about change because, why wouldn’t they? What is surprising is how many investors are unaware of what is going on and unaware of the risks they are holding in their portfolios.
I think it is because they get most of their information from the incumbents, from organizations which are ultimately – part of the status quo. Whether that is BP, Shell, Exxon. This too, is a common phenomenon. People who have very deep expertise in one area fail to see the speed with which growth from an external area is challenging them.
We have seen this happen before. The rise of the PC challenging the mainframe or the rise of the internet challenge retail. It’s quite common and in that regards, we shouldn’t be that surprised about it.
The most recent, one that is actually happening around us right now, is one aspect of the energy transition, that is the electricity transition. Specifically the electricity transition in Europe. For someone to understand how things happen, they can see how quickly the new competition was able to enter the European market and hurt demand for the incumbent providers. You could look back 100 years to understand comparisons and how they impact markets – but that is not actually necessary. You can look at what is happening right now.
Of course. As in any sector, there are companies which are very quick to shift. While it depends on the specific subsector, an example within oil and gas that is often praised for their quick transition is Ørsted formerly DONG. It transitioned from utilizing oil and gas to becoming one of the world’s leading wind developers quite quickly.
Within electricity there are companies like Engie which are acting much more rapidly to embrace the transition than others.
There are two drivers that you need to use to calculate the peak of demand for fossil fuels. We calculate it based on the following methodology:
1. The speed of growth of energy demand.
2. The speed of growth of solar and wind.
As some point, everyone will accept that any rapidly growing technology – such as solar and wind – will take all of the growth in the system. That is the current framework we think about and we base our calculations and assumptions off of this methodology.
The most recent time we have calculated demand was with the latest 2018 data. That calculation suggests we will have a peak in fossil fuel demand in 2023-2024. Focusing on those two drivers helps us understand how quickly change is happening. With that in mind, given all reasonable assumptions – it is predicted that fossil fuels will see a peak in the 2020s due to the rapid growth of this technology.
However, if we saw a significant slowdown in global energy demand, the peak will come much sooner. If there is a big fallback in energy efficiency – then it could take until the end of the decade.
First, as we all know, fossil fuel demand peaked in developed markets ten years ago. All of the recent growth in energy and fossil fuel demand has been coming out of the emerging markets. We expect you will continue to see the fossil fuel demand decline across developed markets and will see peaking demand in one emerging market after the next.
In terms of the large emerging markets, we think fossil fuel demand in China will peak in the mid 2020s, in India early 2030s at other markets at different times. The key here is that each of these emerging markets countries are all facing near term peaks.
One subject we often like to discuss with this is the emerging market energy leapfrog. What we mean by this is that because the costs of renewable energy and electricity transport has fallen so much, if you are a policy maker in India, China or another emerging market, you now have a choice that you have never had before. You can choose the old technology of fossil fuels or the new technology of renewables. Not surprisingly, we have seen them choosing renewables. This does not come down to just a questions of cost, it is also a question of pollution which is impacting India in particular at the moment. It is also a question of apolitical dependencies. India is currently importing 80% of its oil and 40% of its gas. They are desperate for domestic solutions.
You see, there are other factors apart from global warming and cost that are encouraging people to make the decision to use renewables.
We have a slightly different view on greenwashing. Greenwashing damages the greenwasher more than anyone else.
This is one of the lessons we saw from the 2000s when they also tried greenwashing. In a capitalist system, you get caught out if you do not actually keep up with the latest technology.
While greenwashing is a real problem, I believe it’s a problem that markets solve best, markets are able to see through the rhetoric. In fact, in the case of a company that is talking big game to no results, other market players will come in and short them. In fact, I know of at least 5-6 hedge funds which are specifically set up to short the losers of the energy transition.
I would encourage everyone to read a book called Engines that Move Markets by Alasdair Nairn. It serves as a handbook of what happens during technology transitions. The book makes it very clear the speed of which this transitions can happen and how incumbents might struggle.
Also, just generally, it is important to focus on the facts and not just the propaganda. For example, the Lazard data on the cost of renewable energy came out this month. Another example is the work that is being done by Bloomberg New Energy Finance indicating the speed of which battery costs are falling. Or the work being done by The Rocky Mountain Institute showing how quickly US coal and gas assets are being impacted by this transition. There is a lot of great work being done, it is just a question of being aware of it.
Finally, it is important that people do not allow ideology to obscure their investment judgement. For example, I recently met with someone who said: “I don’t believe in the energy transition because I don’t believe in manmade global warming.” However, what I said to him was it doesn’t really matter if you believe in this stuff, it is happening anyway. If you try to distort reality to your ideological constraints, you are just going to lose money.