Energy Transition: Electrify and Decarbonize #1
Understanding the Mega-trend
The challenge humanity is facing: Climate Change
The burning of fossil fuels if unabated will make the planet uninhabitable. The Carbon dioxide emissions from our activities need a reset for the sustainability of future generations, flora and fauna, and the planet’s ecosystem.
How do we consume Energy?
Do you know that electricity accounts for only 20% of global energy consumption!! Further, this 20% of electricity includes electricity generated from non-renewable sources of energy!!
Are you kidding Pankaj, you are showing me a global picture. It must be the developing economies that are not electrified?? The answer is a big NO.
Only a handful of countries are electrified. The countries that account for the majority of the global energy consumption consume only 15%-30% of their energy via electricity.
And remember a vast majority of this electricity is generated through fossil fuels. So, we have a long way to go in this energy transition as our energy needs are predominantly fulfilled by burning fossil fuels.
Electrify & Decarbonize
Increasing consumption
Our energy needs are still increasing led by increasing demand in the developing economies as their economies grow, growing population, and increased energy requirements for AI and data centers. IEA estimates a consumption of 1,000 TWh on data centers as early as 2026 more than doubling from 460 TWh in 2022.
What is the solution? The way forward is to electrify and decarbonize.
Electrify energy consumption and further Decarbonize the grid
The decarbonizing of the grid is already underway. Over 30% of the global electricity is renewable. However, more renewable capacity needs to be added. More electrification will not make sense if our grid is not green.
Themes for investment: Renewable power generation; Solar and Wind ecosystem; increased investments in gridDecarbonization of Transport
Fossil fuels mostly drive transportation. Rail which accounts for only 1% of the transportation is the most electrified mode of transport. While it is difficult to electrify aviation and shipping soon - electrification of road transport is not that far (EV adoption).
EV emission math
Initially, electric vehicles do have an emission deficit; but cumulatively the benefits far outweigh. The benefits will be even better when the grid is comprised of 95%+ of renewable energy.
Themes for investment: Electric vehicle OEMs, Ancillary, Battery Systems, Charging InfraDecarbonization of winter heating via residential and commercial heat pumps
In colder countries like in US, Europe, Canada, etc. winter heating of buildings is required. This use can be electrified by the use of heat pumps, however an expensive proposition as compared to natural gas. This scenario will change as the cost of electricity decreases through electrification. - mass adoption is far
Decarbonization of industrial production
The industrial sector is the largest fossil fuel end-user on a global basis. Could some industrial processes be electrified to eventually use more renewable energy as the grid is decarbonized? And where electrification is not an option other means of decarbonization.
Plastics, cement, steel, ammonia/fertilizer, and other industrial materials are fundamental to the modern world. To reduce carbon emissions, we can take several steps, such as increasing the use of electricity for industrial heat, replacing fossil fuels used for process heat, and increasing the amount of renewable electricity generated on the grid.
Industries by electrification potential
*CHP: fuel combustion waste heat
Use of Green Hydrogen in Industrial Manufacturing processes: for energy storage and as an alternative to fossil fuel
Other use cases - eg reduction of iron using hydrogen instead of carbon. This can also lead to substantial cuts in emissions e.g. India’s steel industry contributes to around 2% of its gross domestic product, but also accounts for 12% of its carbon dioxide (CO2) emissions.
Hydrogen is a topic in itself. so we will cover this in a separate post.
Themes for investment: Green Hydrogen, Heat Pumps, Electrolyzers So to sum up, incrementally we should be putting more and more renewable electricity capacities. Further, wherever the other energy use cases can be moved to electricity we should make that mainstream, and where electrification is not an option we should decarbonize energy through cleaner ecosystems.
Challenges in the Transition
(These limiting factors may also be viewed as areas of opportunity. The faster we resolve them, the accelerated transition we may see.)
#1 Transmission/Distribution of Electricity
Tougher than building wind/solar capacity and moving vehicles, furnaces and other devices on electricity might not be the hardest part. Building more transmission might be. Utilities spend almost as much on transmission and distribution as they do on power generation.
The grid needs a higher load and high clean energy growth. To compound this problem a more distributed storage necessarily results in lower transmission needs.
The existing grid infrastructure even in the major countries like the US, Europe, and China will need to be substantially replaced or expanded by 2030 and 2050.
a. Transmission and distribution grid requires substantial growth.
b. China has been at the forefront of rising to the challenge. India is moving but the developed world is lagging.
c. The Transmission intensity of the grid itself increases as the share of Wind and Solar in electricity generation increases.
Themes for investment: Cables, Transformer, Switchgear, Energy Storage Systems, etc.#2 Intermittency in Solar and Wind
Wind and Solar Energy is not available at our whim. External factors like weather can severely impact generation. Hence, it is not a like-to-like comparison for 1GW generated through a gas-fired plant vs 1 GW of Solar. The transition requires to have redundancies built in generation and augmented with storage systems.
The decarbonization plans entail the need to build transmission and integrate large amounts of intermittent power. These challenges may be met in the long run by a substantial increase in the battery (negligible today) and by a lot of “demand response i.e. consumers shifting their load demand to match electricity supply (Maybe advanced algorithms/ AI can help in this). Both these changes would be major departures from today’s energy systems.
#3 Need for a lot of basic and critical minerals.
Let’s look at the mineral requirements of energy transition:
Although these transition materials are abundant, the challenge lies in the reliability of supply, given the fact that many of these minerals are sourced from high geopolitical risk countries and the time required for these minerals to be mined and processed elsewhere. There is also a concentration risk as China is a dominant player in the renewable supply chain.
Investment themes: Circular economy/recycling, Mining & Processing minerals & metals etc. Final Thoughts
Clean energy has become the mainstay in global investment. Clean energy investment and deployment have increased rapidly in response to the market signals and financial incentives provided by governments, with mass-manufactured technologies such as solar PV, wind turbines, and EVs leading the way and will require larger, smarter, and repurposed electricity networks; large quantities of low-emissions fuels; more nuclear power; and scaling up near zero emissions materials production. And, as part of an equitable pathway, almost all countries need to bring forward their targeted net zero dates.
A lot of investments are already being poured towards this cause. (See below- with China spearheading the transition). The energy transition is very different from the transitions in technology, healthcare, and other sectors. It is a sum of multiple transitions happening at once and interacting with one another like Solar & Wind, EV, Battery, and Hydrogen which are accelerating independently and interacting with one another. This transition is also aided by the fact that it empowers countries to be self-reliant on their energy needs.
This also allows us as investors to identify new economic models and companies that emerge and capitalize on these trends because the change is inevitable and long-lasting. Getting one right winner with decent allocation can do wonders for the portfolio returns
Some Themes:
References:
IEA, BP Energy Outlook Reports, JP Morgan Reports on Clean Energy, Avendus Report on Green Hydrogen
*****
Invest in yourself…. be a learning machine
These communities have helped me a lot in learning the nuances of investing. Why not check them out? - Join the community of learners.
This Substack will never be paywalled. I don’t want to accept voluntary payments for future unknown work.
But if you got this far, chances are you find my writing valuable. So please spread the word! Sharing, liking, and commenting all help spread the word! 😀
Thanks for reading. Please do share your feedback.
Connect with me on Twitter: @pankajgarg_ciet
Disclaimer: I am not SEBI registered. The information provided here is for educational purposes only. This is not buy or sell advice. I will not be responsible for any of your profit/loss based on the above information. Consult your financial advisor before making any decisions.
Disclaimer: I am not SEBI registered. The information provided here is for educational purposes only. This is not a buy or sell advice. I will not be responsible for any of your profit/loss based on the above information. Consult your financial advisor before making any decisions.
Far sight article,