Investec’s Energy Transition conference: The Reprise

In an earlier post, I argued that the Energy Transition (ET) needs to be seen holistically, and highlighted the dangers of narrow ‘spotlight’ viewpoints that miss a wider and deeper energy stage, where elements are constantly changing.

Ian Marchant developed this argument for investors at our recent conference. He drew on F. Scott Fitzgerald to outline the extent of the current investment challenge: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function”.

The ET is as much about the decarbonisation of the fossil-fuel industry as it is about clean technologies. Investment strategies focussed on only one end of the spectrum may miss diversification opportunities. We need to constantly keep in mind changing risk-return parameters, liquidity trade-offs, and other complexities across the full energy system, not just within a part of it.

But Ian went further. While acknowledging the importance of change across the full energy spectrum, he moved on to train his attention on the rate of change in energy variables as a critical issue for investors. He pointed to our human frailty when it comes to appreciating the consequences of exponential growth and decline, rather than purely linear movements that we find easier to process in our minds.

More specifically, early stages of the ET may be practically unnoticeable to the public eye, and missed by less-experienced investors, also. Then take-off happens. The ‘tipping point’ implies a double-edged sword - earnings acceleration in the small, distributed, solar-based part of the industry, but a heightened danger of stranded assets in the big, centralised, carbon-based sector. The message for investors is that such an inflection point is close – this is the disruption decade.

The conference yielded another important takeaway for investors – the energy sector has its own idiosyncrasies, but there are resonances and patterns in other sectors from which we can learn. Laura Sandys argued persuasively that there are lessons within the food value chain for the energy sector – her comparison of the fridge and the future home battery was right on the money in terms of how a small technology in the home can have large impacts right through an industry supply chain.

John Flaherty, Nigel Pocklington, and Rob Trezona, a trio with profound experience across the full energy sector, were all explicit on how the market is being reshaped by the breaking waves of digitalisation and democratisation. We have seen technology-driven transformations already in other sectors, including finance. This provides clues on what to expect – how customer service will drive future energy solutions, in stark contrast to the old passive-customer model.

My overall conclusion is that the ET is in safe hands in the UK, if only we can persuade our political masters that regulation must be designed to put customers first, to encourage competitive tension in industry, and to support continuing innovation through our education system. It is not that we lack budding entrepreneurs or technologies. As is often the case, the biggest identifiable domestic dangers are policy myopia, wilful or otherwise, and thoughtless bureaucracy.

The question that remains unanswered in my mind is the situation beyond the UK’s shores. The ET is a global challenge. As Fatih Birol, Executive Director at the IEA, commented in the Financial Times: “A range of transformative developments are speeding up the emergence of a new clean energy economy and bringing forward the expected peak in the world’s fossil fuel demand.”

So, the decarbonisation trend seems global, which is the good news. Exponential growth rates in wind, solar, battery-storage installations and EV sales across much of the world testify to this.

However, world energy demand is more than movements of molecules and electrons, be they carbon or silicon based. In the background are unavoidable issues about our species agreeing a common, peaceful existence, with a fair distribution of wealth, and a respect for our full biosphere. Without this, all the renewable solutions in the world are unlikely to augur a bright future for our descendants.

The deeper truth is that a successful ET requires a change of how we think about creating a sustainable global village in our little corner of the universe. And on this stage, my friends, Romans and countrymen, we must never forget that “the evil that men do lives after them. The good is often interred with their bones.”