Here comes the sun

27 November 2018

In the West, it is widely thought that robotics, AI and digitisation will drive the Fourth Industrial Revolution, but in the East, they believe it’s renewable energy that will fuel the new age.

The consensus at this year's World Economic Forum in Davos was that the rise of exponential
technology will be at the forefront of the Fourth Industrial Revolution. But at the East’s equivalent forum, held in Dalian, China, delegates' attention was squarely focused on renewable energy. Michael Power of  Investec Asset Management is placing his bets on the East.
 

Why renewable energy will drive the Fourth Industrial Revolution

 

Investec Asset Management's Michael Power on how an explosion of renewable energy can result in free water

Investec Asset Management's Michael Power on how an explosion of renewable energy can result in free water

 
In a recent presentation to Investec staff, Power explained how thermodynamics evolve economies – in other words, each industrial revolution is preceded by an “explosion” of energy: a change in the way energy is created, harnessed and then utilised to drive the world forward to the next level.
 
There have been three big explosions in the modern era, explains Power: “The age of steam gave us the first industrial revolution; the second was the age of electrical energy around the 1880s, and the third was the age of computing energy after World War II.”
 
Power believes we are now at the apex of the third industrial revolution, which has been flowering with things like digitisation, artificial intelligence and automation. But these are not, in themselves, the start of the next industrial revolution.
 
Using transportation as an analogy, Power explains that the first industrial revolution, steam, gave us mechanisation (think railways); the second, electricity, gave us assembly lines (think car production); and the third, computing energy, is giving us digital technology (think self-driving cars).
 
The problem with the West, says Power, is that its productivity is now gravitating towards zero: “It’s been called The Great Stagnation by [USA economist] Tyler Cowen. The West, if it is to continue growing in any meaningful way, needs a massive boost of productivity to reignite growth; it basically needs an energy revolution.”
Michael Power
"The West, if it is to continue growing in any meaningful way, needs a massive boost of productivity to reignite growth; it basically needs an energy revolution.”

Michael Power, Investec Asset Management

The advent of “free” energy

 
Power believes that a true industrial revolution is defined by four hallmarks. The first is that a new energy source is released into the system. The second sees the two arms of economics – supply and demand – take that energy source and create “magic” with it.
 
“Third, on the demand side,” says Power, “we see the adoption rate of that energy grow geometrically. People suddenly can’t have enough of it. But the real magic happens on the [fourth] supply side, because the people who produce that energy are able to produce it at lower and lower costs.”
 
So what burst of energy will drive the next industrial revolution after steam, electricity and computing energy? Renewable energy in the form of wind, solar and hydropower, which also brings us into the age of “free” energy, says Power.
 
“I put ‘free’ in inverted commas for a very important reason. Up until now, virtually every feedstock that we’ve used to provide energy, we’ve had to pay for – whether it be oil, uranium or coal. But we will not have to pay for wind and sun – the feedstock will come free.”
 
What we will need to pay for is what we need to combine with the feedstock in order to create the energy; solar panels for example ‒ the price of which, notes Power, is dropping at an unbelievable rate. “This is going to have a huge effect on boosting productivity all over the world.”
The world's largest solar farm in Huainan, China has a capacity of 40 megawatts (MW), and another 150 MW facility is planned for the same region by 2019.

Renewables around the world

 
“The interesting thing about renewables for South Africa is that we end up being in the best of both worlds – we have good wind and good sun. So the opportunity here is greater than is generally found in most other parts of the world. The question is going to be: ‘To what extent is the government going to allow us to harvest wind and sunshine?’”
 
For now though, it’s predominantly in the East where countries are seriously moving into this space – to produce energy from renewable sources, at a cheaper price, than they can from coal and gas.
 
Using the Gobi Desert as an example, Power notes: “Mongolia has 250 days a year when there’s not a cloud in the sky. So the Chinese are now building sun farms there; they’re harvesting sunlight in the middle of nowhere. They’re taking a part of their country that, up until now, has been a waste of space and turning it into an incredible opportunity.”
 
This includes developing a system to send huge volumes of ultra-high voltage transmissions, which had previously resulted in huge loss of electricity over long distances. With the new system in place, loss has been reduced from 40% to 5%.
 
“The Chinese are putting solar panels everywhere – in deserts and on lakes, including the
largest floating solar plant in the world, in Huainan.”
 
Imagine, says Power, what this could mean for South Africa: “What’s happening at the moment is that the private sector – and sometimes at the very micro-level – is taking it upon itself to move forward.” He cites De Aar in the Northern Cape, that have gone off the grid by selling farmland to Spanish developers who have put in a solar panel farm. The town is now home to the biggest solar energy farm in the southern hemisphere.
 

A water revolution

 
“The interesting thing about the renewable revolution is that it’s a one-two punch: “The obvious ‘one’ is the energy revolution. The ’second’ though less obvious – but especially here in South Africa, just as important – is the water revolution that follows.
Investec has collaborated with the Entrepreneurship Development Trust and Innovation Africa to build solar-powered water pumps that provide free clean water to rural villages in South Africa.
“Desalination is something we know how to do. We just haven’t done it in a widespread way because the cost of energy required for desalination has been so high. But if you can give me free energy, I’m going to give you close to free water, and that is what we here in South Africa can start to look forward to if we can get our act together. In fact, not just South Africa – India and Australia will be huge beneficiaries from this ‘first energy – then water’ revolution that is coming.”
 

Storage – the “Holy Grail”

 
Another area in which the Chinese have also become adept, along with a number of northern European countries, is wind: “The UK is number one in harvesting offshore wind, as it lies at the end of a wind tunnel that blows off the North Atlantic. Then, in order, come Germany, China, Denmark, the Netherlands, Belgium and Sweden. They’re just in the right places to capture it.”
 
The storage of renewable energy is what has, however, become the “holy grail”. But Power notes that strides being made that will see this market double six times by 2030, just as battery costs will continue to fall. And again, China leads the race, with a number of companies dealing with the
production of electric batteries.
 
The one to watch is CATL, having just listed on the Hong Kong Stock Exchange, says Power: “Within a couple of years, CATL will be the biggest producer of batteries in the world.”
 

The move away from nuclear

 
Indeed, renewable energy is causing a paradigm shift in the way most countries and companies think: the biggest worldwide producer of nuclear at a national level is the French utility EDF and it’s now shifting to solar. North Korea is abandoning nuclear. China has cancelled 103 coal-fired
power plants. General Electric is on a campaign to save itself and is going into wind power to rebuild the company’s earnings.
 
Adds Power: “Even the world’s largest sovereign wealth fund, Norway, which made its money from oil, now rather wants to invest in oil companies that are diversifying into renewable energy. Which is, of course, exactly what the big boys are doing, at least in Europe, from Chevron and BP to
Shell.”
 
How does this affect implications for investors? Power is clear on this: “Green is gold. What we’re experiencing at the moment is profound.”
 
Power, who has been with Investec Asset Management as a strategist since 2002, specialises in understanding how the shift in the centre of economic gravity from West to East is impacting on global investment and, in particular, how it is opening up new investment opportunities for Investec’s global client base. 

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