The new energy future is already here

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Adjust your watches! The energy revolution is underway; driven by pure economics, the world’s largest mining companies, and China. But where is Australia?

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futureHow many dramatic industrial revolutions have you witnessed in your career?  I’m not referring to something as simple as a category-killer new product.  I mean innovations that have changed whole industries, or even created them.  If you reflect on the amazing technological progress over the last fifty years, the truth is that we have all seen a surprising number of them.

Information technology has invaded almost every area of our lives – and yet when I first started work in the 1980s, the vast majority of people did not have a computer on their desks.  As a child, international phone calls to my grandparents at Christmas had to be booked days in advance, and you could barely recognise the voice at the other end of the line.  Meanwhile Star Trek style mobile communications were little more than a figment of science fiction imagination – at least until Motorola unveiled the Startac mobile device which weighed in at just 88 grams, much lighter than today’s phones.  And throughout this period, more or less everything has been dramatically miniaturised, resulting in the birth (and death) of products as revolutionary as floppy disks, video-tapes and the Sony Walkman.  Meanwhile there is every sign that digital cameras are going the same way, as they are replaced by ubiquitous mobile phones.

These developments have led to profound changes in many industries.  At the most fundamental level, what we have seen is the removal of constraints on design, function and location and other critical determinants of capability and performance.  IT and communications have shrunk tasks and distances and reduced unthinkably challenging problems to the work of the newest and least experienced staff.  Businesses can now provide goods and services across borders and time zones, making global competition a reality of everyday life.  Meanwhile marginal costs in many industries have been reduced to minimal levels by scale economies or automation, allowing the smallest businesses to rent access to the largest and most complex services on entirely affordable terms.  Nowhere is this truer than in raw computing power, where with nothing more than your Amazon login details, anyone on the planet with a few cents to spare can dial up access to some of the world’s most powerful computers in just seconds, with no need to book in advance.

Very few boards or management teams saw any of these changes coming.  Indeed only a small minority even recognised these revolutions once they began to take hold.  If your reaction is to disagree with this bald statement, ask yourself this question.  If big business was so adept at riding the revolutionary waves, why is it that so many of the winners in this new age of technology have been new companies, often founded by kids with no prior business experience?  And why is it that so many old world companies – who had the scale, the credibility and the paying customers from the beginning – have seen their businesses hollowed out or destroyed so quickly?

I am happy to admit that I too did not see the full implications of many of these innovations at the outset. But I did recognise that their effects would be dramatic, and that the only solution was to start working with the new technologies as rapidly as I could.  In 1979, a forward-looking maths teacher by the name of Ian Soutar insisted that my school purchase a Tandy TRS 80 (the personal computer before the PC was invented).  Although the cost was extraordinary, it seeded the knowledge that computers could do amazing things and an instinct that they would change the world.

So when I arrived in my first office job, I knew that I should grab the first desktop PC that I could and use it to start automating basic working procedures.  The first time around, there was no advantage beyond rather neater output than my unimpressive handwriting.  But each time I repeated a task, I found an immediate time saving of at least 80%.

Despite this, to be really brutal, even today there are some well known businesses in sectors such as technology and digital media that have still not grappled with the profound changes to the environment in which they are operating.  These companies insist on trying to recreate their old business models in the new world, and simply cannot let go of the status quo.  They resemble nothing so much as a poisoned insect lying twitching on the floor, still unaware of its own certain impending death.

So, be warned!

One of the most significant revolutions of the last 200 years is under way, right now.  It will transform the structures and economics of many of the world’s greatest industries.  From agriculture to construction to mining to transport, many sectors will be completely reshaped.  Activities which today are technically and economically unthinkable will become the daily norm.  From the centre of New York to the wilderness of Africa, some aspects of today’s world will be absolutely unrecognisable within ten years.

This revolution will destroy hundreds of the world’s largest companies, and hundreds of billions of dollars of shareholder value.  It will also create hundreds of new industry leaders, collectively worth trillions of dollars.  As in previous revolutions, the incumbents will be best placed to win as the new commercial world order takes hold.  But thanks to complacency, arrogance or wilful ignorance – all symptoms of what Cassandra Kelly calls the supremacy gene – many will follow once great companies like Kodak and Nokia into corporate oblivion.  Happily some of the new businesses already exist today, meaning that those investors who are ready to look up from the mouse wheel of the status quo and look out into the future will be able to achieve extraordinary financial returns.

So, what is this revolution?  You may be surprised to know that I am not talking about big data (despite its amazing potential), nor the extraordinary revolutions which will be seen in healthcare over the coming decade, nor the mind-bending potential of ubiquitous low cost 3D printing.  Nor am I thinking of the ongoing revolutions in mobile computing, social networking, the internet of things or open systems and open data.  I am, of course, referring to the Energy Revolution.  Readers of Pottinger Perspectives will recognise this theme, but the dramatic changes that are hard upon us are so great that we have felt compelled to write about them in more detail.

Much of the debate in relation to changing the way in which the world uses its resources has been a highly vexed one.  Passionate and persuasive arguments have been put forward by academics and businesses and politicians around the world.  Whilst some are clearly motivated by trying to encourage a more far-sighted, thoughtful approach to decision-making, others represent more subtle attempts to shift how people think, Don’t Think of An Elephant style.  Quite a few, however, have been nothing more than self-serving attempts to occupy the limelight, by representing more controversial views, all too often for immediate personal gain.  And, in numerous countries around the world, some of the political discourse has been even worse.

With all this noise and distraction, it has become increasingly hard for rational perspective and objective analysis to cut through the sticky tar of public discussion.  So it is time to try a little magic instead.  As we all know, if you are trying to see through an illusion and understand what is really going on, you must ignore the hyperbole and flashy distraction and instead watch the hands very, very closely.  There are three particular sets of hands that are especially instructive to watch – the silent hands of pure economics, the rough hands of the world’s largest mining companies, and the powerful and determined hands of China’s long term planners.

The practical economics of power in the 21st century

For thousands of years, mankind has derived energy for heat, transportation and industrial processes from fossil fuels. Starting with the wood that was used for the cave-dweller’s campfire, mankind progressed to using peat and coal in early metal refinery.  Some 4000 years ago, oil was discovered, and was originally used for purposes such as lighting.  Following the invention of the internal combustion engine, it came to provide a highly transportable, energy-rich fuel critical to the birth of the automotive industry, supported by long and complex supply chains that wind their way around the globe.  The advent of electricity networks allowed power generation to be centralised, in very large, very efficient power stations.  Almost overnight, electricity could be distributed over long distances, bringing heat and light to most homes in the developed world.

Mankind also discovered that both wind and water could be used to generate energy as well.  For thousands of years, these have been used to drive mills that grind grains into flour.  And since the late nineteenth century, hydro-electric power generation has been the norm in countries such as Spain and Sweden where water flows are plentiful.

But as the decades have passed, fossil fuels have had to be extracted in more and more challenging locations, using more and more complex extraction processes.  As an example, most new gas supplies coming on stream are either from very deep below the ocean, or involve the extraction of gas from coal seams and shale beds.  Exactly as predicted by the Hubbert curve, these sources have become steadily more expensive.  As a result, the cost of crude oil has risen at an underlying rate of around 4% to 6% a year over the last century or so.  Although the technology for extracting energy from fossil fuels has improved, we are already close to theoretical limits, and further gains have come at a rate of only 1% to 2% a year.

In very stark contrast to this, the cost of energy from renewable energy sources has declined substantially over the last 100 years.  This reflects dramatic increases in the efficiency in technologies such as solar panels and battery storage.  Pottinger estimates that the cost of energy from solar PV has halved approximately every seven years since the 1960s (with more rapid reductions in recent years).  Meanwhile, over recent times the cost of battery storage has been halving every 18 to 20 months.  Importantly, there is still a considerable way for these technologies to improve before theoretical limits are reached, meaning that further step-changes in capability remain probable over the near to medium term.

These two curves – the upward-sloping cost of energy from fossil fuel sources, and the downward-sloping cost of energy from renewable sources – are about to intersect.  Indeed in remote locations with reasonable amounts of sunshine, this has already happened, with solar PV now materially cheaper than traditional sources such as diesel fuel.  This explains the increasingly widespread use of renewable power in remote resource-mining communities and pacific islands, as well as other locations that are far from existing grid connections.  The high rate of change in relative pricing means that the boundaries that define where conventional, grid-sourced power remains cheaper than renewable alternatives are moving rapidly.  Our own analysis suggests that it will be cheaper to move off grid in downtown Sydney – with a solar + battery system installed by some of the world’s most expensive electricians – by as soon as the end of 2015.

In sunny countries, this means that campaigners for urgent action on climate change can simply encourage consumers to buy cheaper energy (from renewable sources).  This is a powerful win-win outcome for consumers, combining clean energy with lower cost.  This is clean, reliable, affordable power at its best.  In addition, access to power will no longer be dependent on highly capital intensive electricity transmission and distribution networks.  This will dramatically reduce the overall end to end cost of connecting users with the power they need.

Combine this with electric vehicles and consumers can be set free from another enormously complex and expensive supply chain – the one that brings petrol to within easy reach of their homes.  With Tesla’s all-electric Model S now offering some 300 miles of range, it can be combined with a sufficiently large solar array to offer complete independence from fossil fuels.  Remember how expensive petrol is in remote locations, and the attractiveness of this proposition becomes very clear.

Of course, all of this is not a true benchmark of the overall cost of solar energy systems, as it compares a self-sufficient solar installation with the cost of generating and delivering power over electricity networks that have already been built.  Where consumers are not already connected to the grid – and where they will have to bear the cost of creating that initial connection, the price differential between solar + battery and power from the grid becomes even more dramatic.  One simple way to measure this difference is in the number of power poles that you have to buy before grid power is priced out of the market.  In Australia (with those very expensive electricians) the number is something like three poles.  So anyone who is building a new house that is located far from the grid should already be choosing power independence on purely economic grounds.

All of this is of critical importance to emerging nations, including in Africa, where there is little power distribution infrastructure outside the larger conurbations.  Delivery of power to these energy deserts is becoming cheaper and cheaper.  Importantly, it can be delivered a few kilowatts at a time, as and when funds allow.  Whilst the absolute costs of power in any form remains too high for many people, the ability to pursue individual projects community by community at a cost of a few thousands of dollars each offers intriguing potential for change that is both incremental and transformational.

As one example, Pottinger alumni Annabel Chauncey founded School For Life in 2008.  The school provides education and a home for severely disadvantaged children in Uganda.  From the outset, it has been run with a vision that the school must become sustainable as a first priority.  Whilst donors may find it more appealing to build new schools rather than ensuring that the existing school can run forever, the founders have focussed on building a symbiotic relationship with the community, and building an endowment to ensure that every child that starts their education at School For Life can complete it.  As the cost of solar energy fell, in 2011 the school was able to install solar panels to provide electric power, along with battery storage so that this could be used so that the children had decent light to read in the evenings – a tiny investment that will change the lives of thousands of children over the decades ahead.

This is a beautiful and romantic story, which illustrates very clearly the incredible changes that will be wrought by the Energy Revolution.  Remote communities, which could never have afforded to buy a weekly supply of diesel, shipped expensively by tanker hundreds or thousands of miles across country, can be given light for decades via a single, relatively modest investment.  Extraordinary.

Most to lose, or most to gain?

The world’s largest resources companies are often thought to have the most to lose should the world start to take strong action on climate change.  In particular, the leaders of companies or indeed countries whose fortunes are highly dependent on coal or oil will feel particularly threatened by campaigners who are seeking to limit global carbon dioxide emissions.  We have already seen this play out at the recent G20 meetings in Brisbane – just a small foretaste of the drama to come.

The stakes in this game are very, very high, in both a financial and reputational sense.  Over the next decade, at most, the rules of the energy game will be dramatically rewritten, as the cost of solar energy continues to fall.  In parallel, it is increasingly likely that major nations will take action to encourage transition to these newer, cleaner and cheaper sources of energy.  Whether this is driven by public concerns relating to climate change, or environmental impact, or simply economics, does not matter at all.  What does matter is that, during this incredibly dynamic period, leaders of businesses, governments and investment funds must exercise their judgement as to how to invest their commercial, financial and political capital in the face of dramatic, impending change.

As with previous revolutions, the impacts of the Energy Revolution will be felt far more rapidly than many leaders anticipate at the outset.  As a result, the quality of their decisions will be revealed with exciting (or terrifying) rapidity.  In the business sector, it is already clear that the motor companies which do not have a well established electric vehicle programme are in terrible trouble.  They are fortunate indeed that Tesla’s ambitions lie in reshaping the whole motor industry, not just winning for themselves – Tesla Motors has made its entire patent portfolio accessible by its competitors for no charge, so long as the companies concerned are genuinely committed to building electric vehicles.

Meanwhile, around the world, many incumbent electricity generation, distribution and retailing companies continue to spin their wheels grappling with whether, when and how to adjust their strategies in the light of these “new emerging trends”.  I use quotes, as these trends have been in place for decades – it is merely the cross-over point that is now upon us, like a fast train approaching a sleepy country station.

And what of petrol retailing?  Electric vehicle ranges now reach 300 miles – more than even the typical urban taxi driver covers in a day, making hybrid vehicles and battery switching stations obsolete.  In the US, only 1% of journeys are more than 100 miles in length – and Tesla has addressed even these by positioning quick recharge stations along the major long distance routes.  These are, of course, solar powered, and free for Tesla owners to use.

The voices of the past make a lot of the fact that it will take 20 minutes to part fill your Tesla’s tank at one of these stations, compared to three or four minutes to fill a petrol tank completely.  But if you are on a 400 mile journey, likely to last six to eight hours, which of the following would you choose?  Would you opt for a single four minute stop, accompanied by a bill of $50 to $100 (depending on where you live). Or would you prefer a twenty minute stop, and perhaps a coffee and a light lunch, where the energy you need to complete your journey is provided for free?

This may be an interesting story, but let’s remember that to understand the magic trick we need to focus on what the hands are doing and not get taken in by the rhetoric.  In particular, how do the strategic actions of BHP and Rio, two of the world’s largest resources companies, give a window on the minds of their respective boards and management teams?

In 2010, BHP attempted one of the largest ever hostile transactions in the history of the resources sector, when it launched a $40 billion bid to acquire Potash Corporation of Canada.  Potash is one of the key inputs to the world’s agricultural sector, and one that will remain in increasing demand for the long term.  In particular, the world population is set to grow by 32.4% to roughly 9.4 billion over the next 35 years.  During this time, wealth effects will mean an increasing demand for proteins, particularly in the form of meat.  These are ultimately much more intensive to produce, with each kilo of beef requiring 5 to 7 kilos of grain as input.  As a result, demand for agricultural output will increase by 70% over this period, forcing more land into agricultural production and driving greater demand for nutritional inputs such as potash.

Thus BHP’s attempted acquisition represented a highly logical diversification of its extractive activities into a commodity that had strong underlying long term growth prospects and which has very little explosure to the risks of fossil fuels.  Although few commented on this at the time, the proposed deal was clearly an investment in a higher growth, lower carbon area of resources.

Meanwhile, in 2013, Rio announced that it proposed to exit part of its aluminium refining activities.  In thinking about the strategic logic, remember that the process by which aluminium is refined is a highly energy intensive one, requiring large amounts of electrical energy.  The proposed sale included the Gove refinery in Northern Australia and the assets of Rio’s Pacific Aluminium business including smelter operations in Australia and New Zealand.  Although the company made no mention of this in its initial press release, it is very interesting to note that the facilities to be sold were largely powered by fossil fuel sources.  Meanwhile the refineries to be retained were almost entirely powered by hydro-electric power.

Once again, although few commented on this at the time, to Pottinger the proposed deal was clearly and simply a divestment driven by ensuring long run competitiveness and reduced risk by eliminating dependence on fossil fuels and the associated carbon pricing risks.

It is easy to identify the significant downside risks to these companies of any reduction in world demand for fossil fuels, whether in the form of coal or oil.  Globally, this theme has been played out in financial markets over recent years, with the share prices of coal companies and oil companies having fallen substantially even at a time when the underlying resource prices have been very high.  Simple comparisons which equate the proportion of existing reserves which are monetised with the end-state impact on global temperatures have focussed minds on the likelihood that a decent proportion of existing reserves will never be extracted.  The relevant figures are set out below.

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Source: Carbon Tracker, 2014, Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?

Nevertheless these incumbents need not be the losers in a transition to a low carbon economy (although many, of their own volition, will be).  These companies have enormous financial resources, which can be accessed by cutting back heavily on exploration and development expenditure, and extracting cash from their existing mines.  These huge cash flows can be redirected away from investment in fossil fuels to investment in other mining activities (potash!) or investment in other energy sources.  As I write this note, Rio has announced a strategy almost exactly along these lines.

These strategic conclusions play out most clearly amongst the larger, diversified resources companies, whose value rests principally on existing producing mines.  For exploration and development companies, that have secured prospective mines that have not been brought into production, the future is much bleaker.  To bring these projects to life, these companies will require significant equity raisings, accompanied by large debt facilities, to finance the billion dollar cost of building the infrastructure required to commence production.  Many of the world’s largest lending banks – including HSBC, Citi and Deutsche – have become enormously more wary of such projects, and the risk that demand for output may fall materially within the multi-decadal life of the projects in question.

Just as businesses and financial institutions have become more sophisticated over the decades, so too have environmental campaigners.  Organisations such as 350.org have looked out beyond their immediate concerns with environmental sustainability and focussed on the financing of major new projects.  Whilst part of their strategy is simply to focus public interest and emotion on issues of the global environment, the razor sharp focus on financing flows is highly sophisticated.

Over the last few years, many of the world’s largest investment banks have published research on the relative oversupply of fossil fuel resources, compared to likely demand as a transition is made to renewable energy (whether for environmental or cost reasons).  This has increased awareness of these issues in the financial community, and given credit officers something new to think about.  Long term debt facilities are critical for most resources companies when they are seeking to finance a major new development, the cost of which may run to billions or even tens of billions of dollars.  Without debt, rates of return will be depressed, and large, dilutive equity raisings may be required.

The challenge for lenders is that, in advancing such loans, they have to look a long way into the future.  In particular, if the loan in question cannot be repaid out of cash flows during the life of the loan, the lender needs to be extremely confident that the loan will be able to be refinanced in due course.  This forces consideration of likely cash flows, not just in the first five to ten years of a project, but the decade after that as well.  Given the highly dynamic nature of world energy markets, financing large coal-related projects has become enormously more challenging.

The Great Wall of renewables

In any discussion of adaption to climate change, and reducing dependence on fossil fuels, attention rapidly focuses on the role of China.  The country is undergoing a period of extremely rapid industrialisation, urbanisation and wealth generation, which translates into huge increases in the demand for power.  As one of the world’s most populous nations, it will soon have amongst the largest demand for energy of any country, placing it at the centre stage in the transition to renewable energy.

With this in mind, it is interesting to look at the strategic initiatives that China has undertaken to position itself for a world powered by renewable energy.  It is already the leading provider of solar panels, and number two in wind power.  Indeed, whilst much has been made of China’s “irrationality” in driving the cost of solar panels down over the last couple of years, a long term thinker might see this as a modest short term investment in order to own the manufacture of the world’s primary source of power for the next 50 to 100 years.

Meanwhile, over the last three years, China has invested heavily in the development of the thorium nuclear power cycle – the next generation of nuclear power that offers much lower risks and much less environmentally dangerous radioactive by-products.  Originally developed at Oak Ridge in the US at the same time as uranium cycle nuclear power, the latter was chosen as it offered the ability to manufacture nuclear weapons.  A similar programme is under way in the United States, led by Flibe Energy.  We are watching both programmes with great interest.

Much is also made in the West of the number of new coal-fired power stations that China is building.  Such commentators very rarely make any mention of the amount of renewable energy capacity being installed or the number of nuclear power stations under construction, let alone the overall mix of power generation capacity being added by China.  Indeed I suspect a number of such writers have no idea of these figures at all.  As ever, the numbers are telling, and provide intriguing evidence of China’s long term plans.

The chart below shows the composition of new power capacity added in China over the last fourteen years.  It’s important to remember how these years match up with the nation’s five year plans.  The figures show very clearly that, over the last five year period to 2012, new coal fired plants represented 60% of overall capacity added, and that this fell from 80% in the previous period.  The current period reflects just 40% investment in coal, and it seems entirely probable that in the subsequent period this figure will fall further.  Certainly by 2025, China should begin to have functional thorium nuclear power technology available to provide baseload power, offering the intriguing prospect that it can begin to replace older coal-fired power stations with zero emission thorium generators, re-using grid connections to keep costs down.

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Source: The Climate Institute

Before we get too caught up in all this, let’s go back to the magic trick and look again at how the hands are moving.  In particular, how has China invested money offshore over the last decade or so?  There has been plenty of well advertised investment in property and agriculture and the key resources required to support China’s economic growth.  But how much investment has there been in fossil fuels and coal?  In other words, let’s ignore the loud mouths of expert and inexpert commentators around the world, and look at where the money is going.

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Source: The Heritage Foundation, China Global Investment Tracker, 2005 – 1H 2014. Note that “Energy” investments include oil, gas, coal, alternative, utilities and renewable energy investments

If the answer surprises you, then your advisers have not been doing the right homework.  Over the last decade, Chinese organisations have invested approximately $1.1trn in acquiring businesses and assets offshore.  This includes investments by both state owned enterprises and private companies, as captured in the Heritage Foundation’s China Global Investment Tracker.  Of this, approximately $444bn or 51% has been invested in transportation, metals, property, technology, agriculture and finance.  Meanwhile, only $59bn, or just 7%, has been invested in coal.  To put this into context, over the same period, BHP and Rio have together spent more than $215bn on capital expenditure.

And if you look just at M&A transactions, the figures are even more telling.  Investment in all types of energy has fallen from some 70% of all outbound M&A from China in 2005 to just 10% or so in the last couple of years.

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Source: CapitalIQ, Pottinger analysis. Note that “Energy” investments include oil, gas and consumable fuels

If China thought that it had a long term need for coal from offshore, surely you would expect to see it acquire businesses to ensure supplies over the long term?  The acid test of this interest will come in the year ahead, with many coal company share prices at the lowest levels they have been for some time.  For the record, our own expectation is that China will continue to focus the vast majority of its resources on other areas, for environmental, social and economic reasons.

An electric shock for pension fund trustees 

All of the above raises some very significant issues for long term investors, not to mention the boards of trustees that oversee pension funds.  There is now an extensive body of scientific opinion in relation to the likely path of global warming, and its implications for the planet.  If the scientists are right, governments will be forced to begin to take much stronger and more direct action on climate change within the next five to ten years.  These actions will necessarily be detrimental to the financial interests of owners of companies that are high emitters of carbon dioxide, and in particular to the resources companies that provide the fossil fuel inputs.  But, as I’ve shown earlier in this story, these actions may not be detrimental to the interests of consumers or economies at all.  Indeed these new sources of energy will have much lower environmental impact and will be cheaper than alternative fossil fuel sources in the near future.  Critically for emerging nations, they can be built a few kilowatts of capacity at a time, with no need for massive up front investment in centralised generation, not to mention electricity transmission and distribution networks and associated load balancing systems.

There is also extensive long run evidence that the costs of renewable energy is falling, and that the cost of fossil fuel power sources is rising.  As I’ve described above, this means that solar energy is rapidly becoming competitive with grid power without the need for any type of subsidy at all.  The Energy Revolution will drive dramatic shifts in value between old world companies and new world companies – and to judge by the past, many of the former will not make the transition successfully.

This creates some very asymmetrical risks those who are custodians of other people’s money.  If you make asset allocation decisions to reduce exposure to fossil fuels and related businesses, you will be able to justify your decision with reference to a large body of scientific opinion.  And, at an anecdotal level, you can also reassure yourself that you are following the same path as Harvard and the Rockerfellers.  On the other hand, if you dismiss these issues and make investments which turn out to be a financial disaster, how forgiving will unit-holders be?  These risks are no longer just related to climate change considerations – they are also being driven by pure economics.  With literally trillions of dollars invested in fossil fuels, twentieth century energy systems and the associated twentieth century supply chain, I can only imagine that class action litigators and their funders are looking forward to a bumper decade.

On the other hand, if low cost carbon capture and storage or other technologies or unexpected inventions extend the life of fossil fuels, then those who invested away from this trend will have had solid basis for their decision.  In this context, it is worth noting that the world’s largest coal, oil and gas companies have invested massively more money in exploration and development than they have in supporting the development and commercialisation of carbon capture and storage.  Once again, the hands tell a story.

Ultimately, whatever your personal views on the likely path of value or creation or destruction may emerge from the Energy Revolution, the position of investment company trustees will be an exceptionally uncomfortable one.  Their only solution is to look very hard at the future, and the economic and other factors which are driving these changes.  As I have said to many people in the last few months, if you are still operating in the present, it’s time to change your watch.

Where to from here?

As with magic, even if you watch the hands very carefully, it can be very challenging to understand what is really going on, or indeed how the show will end.  In commerce, finance and government policy, the biggest challenge is that the entire decision-making paradigm employed around the world is not well suited to making sense of dramatic inflexion points.  Financial markets judge performance quarter by quarter and electoral cycles come around all too quickly.  Meanwhile even the apparent rigour of discounted cash flow models focuses attention on the first five to ten years of any project and is slavishly based on base case assumptions which rarely, if ever, turn out to be exactly right.  It is precisely this unthinking emphasis on near term outcomes which explains why large incumbents in industries undergoing revolutionary change have been so singularly unsuccessful in riding the waves of innovation that have occurred decade by decade over the last hundred years.

There are many examples of these failures, and the increasing pace of change and growing complexity only increase the risks that decisions made with a focus on the expediency of short term outcomes will turn into financial disasters in years and not decades.  There are, happily, both qualitative and quantitative answers to these challenges, as I have outlined in The Long Term Starts Tomorrow (available online, in forward-looking bookshops, and from Pottinger)

Whatever your views on climate change, environmental sustainability and the long term future of our jewel planet, the choices for companies and investors and governments are simple to enunciate.  You can face up to the implications of what we see as a fast approaching inflexion point in world energy systems, and take decisions, make investments and set policy to prosper once the revolution takes hold.  Or you can bet against a tsunami of change that will have implications that reach far beyond what we can see clearly today.

Over the very short term, the latter may prove effective – so long as investors and voters don’t see the short-comings of your strategy.  But the lessons of the last century are very clear.  The innovators will be carried far further and higher and faster by the wave of innovation than is imaginable as the wave begins to rise.

As Mike Baird commented on my book:  “Whether in Government or business, the daily challenge is how to deal with the short term crisis whilst balancing long term needs?  Nigel Lake provides a clear framework to address this challenge whilst also detailing the need to change to survive on any journey. Change involves risk however it also may be the very reason that you remain in your job.  A must for any manager, leader or Minister – compelling reading.” At a deeper level, the Energy Revolution will mark a turning-point in corporate fortunes with implications far beyond the industries that are immediate impacted.  Long-established companies, with old traditions and backward looking decision-making have been some of the biggest losers of the last decade.

In absolute contrast to this, the RedBull revolutionaries from Silicon Valley have been some of the biggest winners in the last fifteen years.  Over this time, the top twenty technology companies (many of them founded by college graduates and dropouts) have created nearly two trillon dollars of value.  They achieved this extraordinary feat at a time when the world is changing more and more and more rapidly.  This is a one way shift which will never, ever be reversed.  To put this into perspective, the agricultural revolution lasted nearly two centuries.  Smart phones have revolutionised the lives of billions of people in the seven short years since the iPhone was born.  Today, a global leader can be built in a few years.  So can whole new industries.

To win in this new paradigm, boards and management teams need to embrace new ways of thinking about strategy.  They need to harness decision-making frameworks that can deal with inflexion points in a quantitative and robust manner.  They need to cast of the shackles of the status quo and realise that doing things the same is no longer a safer option than doing things differently.  The devil you know is no longer your friend – he is the smiling assassin who will kill you and your company silently in the night.

Meanwhile, the individuals who have the courage to look up from the pavement, reach out into the future and grasp the opportunities that radical change and innovation offer will be the iconic leaders of tomorrow. These people must rise up and grapple with this challenge, both individually and collectively.  Because if the long term really does start tomorrow, we’d better start doing something about it today.

In relation to energy, most major countries are already well ahead.  Most of the top twenty five countries have opted for market-based mechanisms to tip the playing field just a little in favour of the future.  And even in the US and Canada, where national schemes are yet to be implemented, State-based schemes cover a significant part of the economy.  Contrary to many reports, Australia has not yet entirely abandoned its carbon-pricing scheme.  Rather the price has been set to zero, leaving the door open for a price to be reintroduced should the political climate change.

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Source: CIA Factbook, US Bureau of Economic Analysis, carbontax.org, World Bank data

Of all the world’s major countries, the barriers to riding the wave of innovation that the Energy Revolution will bring are greatest in Australia.  The sophistication of the debate on these issues has, frankly, been at best short-sighted, and at worst both ignorant and irresponsible.  It is now critical that leaders in both business and government leave their prejudices at the door, and address how their businesses and regions can maximise the economic and social benefits that will flow from the new economics of power.  Meanwhile, those that have campaigned to raise awareness of the issues over the last four decades, whether in academia or business, companies or government, should declare a one time amnesty in December 2014.  Those that accept this offer must pledge to make decisions that create transformational opportunities in the future, rather than which defend the status quo.

Ultimately, the Energy Revolution will create the most profound opportunities for outperformance and underperformance of any area of innovation over the decade globally.  This bold claim reflects the simple facts that more value is tied up in the energy value chain than in any other part of the world’s economy, and the economic forces now at work are creating an extraordinarily dynamic environment.  This makes it the single biggest opportunity to win or lose for the many, many businesses that operate somewhere along that value chain.

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33 Comments
  1. Christopher Calder 4 years ago

    This article is ignorant and wrong headed.

    1) Renewable energy other than hydroelectric is a destructive hoax, not a solution.
    2) The author totally ignores Low Energy Nuclear Reaction (LENR), a low cost, nontoxic solution that has HIGH ENERGY DENSITY and a small ecological footprint.
    3) “Climate Change” is a hoax. There is no legitimate evidence to suggest that atmospheric CO2 levels control Earth temperature. It never has!

    For scientific details Google *The Renewable Energy Disaster*, *The Fusion Revolution*, and *Moderating Climate Change Hysteria*.

    • Pedro 4 years ago

      No more so than you

      • Christopher Calder 4 years ago

        Pedro,

        You cannot defend your position, whatever that is, so you leave a meaningless insult. You are riding what is known as a “bandwagon.” Human animals often get swept up in the herd instinct because that is easier than thinking issues through for yourself. Now we have people standing in snow and record breaking cold temperatures protesting that the Earth is too warm. We have people who think windmills and solar panels can replace fossil fuels, which is impossible. Read *The Renewable Energy Disaster* and *Moderating Climate Change Hysteria*. You need to wake up and jump off the bandwagon. In 20 years all these renewable energy/global warming faddists will feel deep shame for all the pointless damage they have done to he world. Biofuels alone have killed far more worldwide than all wars and acts of terrorism combined over the same time period. Don’t make a false religion out of bad science and faulty math skills.

        • Pedro 4 years ago

          Thanks Chris. Can’t be bothered arguing with you.

    • Billy 4 years ago

      You are totally missing the point of the article, take your rant to a denier website please. The author is, in depth, detailing the direction investment in future energy is headed – regardless of whether climate change is a “hoax” or not. Stick your fingers in your ears and keep your coal shares if you want.

      • Christopher Calder 4 years ago

        If you bothered to read my web pages on the subject, you would not have said any of that. You have your mind made up and nothing can change that. You are on the same bandwagon as Pedro.

        • Lobes 4 years ago

          Nobody is going to bother to read your web pages. Billy is correct, this article is about trends in energy investment and their interplay with economic factors. Your shrill ranting about climate change is irrelevent. Its about money and right now fossil fuels are losing the money argument.

          • Christopher Calder 4 years ago

            Investment in renewable energy schemes that don’t work? And for what, …abnormal manmade climate change that does not even exist? You guys are not thinking. The Democratic Party lost the election to a significant degree because they cannot understand energy policy and mathematics. Renewable energy as a replacement for fossil fuels is mathematically impossible, not just improbable. We need to start facing facts. Fossil fuels and hydroelectric, which is the only good renewable energy source, and nuclear do all the work for us. Renewable schemes like wind and solar are just worthless high cost window dressing. The alternative to fossil fuels is nuclear, Low Energy Nuclear Reaction (LENR) and highly simplified hot fusion reactors as being developed by Lockheed Martin. We can get electricity at one cent or less per kilowatt hour that is reliable 24-7-365, not just operational when the Sun shines and the wind blows. The article ignores all those basic facts of life.

          • Lobes 4 years ago

            There are hard headed businesspeople right now making big money out of selling renewable energy to rational consumers. This is only going to increase. They are all right and you are wrong on this. Smart people don’t get rich by believing silly conspiracies like the ones you’re trying to peddle here. Imaginary nuclear reactors are not worth investing in when existing functioning renewable energy has already made them redundant. Money talks and smart people listen. You need to wake up to the real world.

          • Christopher Calder 4 years ago

            Lobes,

            Consumers are not purchasing windmill electricity and solar panels because they want to as a reasonable choice. These inherently inefficient and unreliable energy systems are mandated and subsidized by government. So a bankrupt US Government borrows even more money from China to pay consumers to put solar panels on their roof that are not worth a damn. Even the National Research Council says wind, solar, and biofuel subsidies are a failure at reducing greenhouse gas emissions and 48 billion in federal subsidies have had no significant positive effects on atmospheric CO2 levels. So what are we doing? Most Americans don’t want engine rusting ethanol in their cars but we are forced to use it. Without government subsidies and mandates there would be no solar and wind industry large enough to even talk about.

            Renewable energy & global warming have become an Orwellian government religion that people are brainwashed with. It is not science based any more than Christianity, Hinduism, or Islam.

          • Lobes 4 years ago

            Your argument falls apart at almost every level Mr Calder:

            Australians are using more solar than ever despite an incredibly hostile govt that is trying to kill the industry

            The National research council is an advocate of renewables (you just flat out Lied about their position)

            Renewables are responsible for reducing millions of tons CO2 already

            Ethanol doesnt rust engines it actually cleans them!

            Solar and wind are getting along just fine with or without govt support. Fossil fuels would be in dire trouble without subsidies

            Global warming is real, it is happening and the worlds scientists are unanimous agreement about it.

          • Christopher Calder 4 years ago

            Here is a link to the National research Council Study

            http://www8.nationalacademies.org/onpinews/newsitem.aspx?RecordID=18299&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+nationalacademies%2Fna+%28News+from+the+National+Academies

            Australia has solar mandates and subsidies just like the rest of the world. If you live off grid, then solar is fine even here, but if you live on the electricity grid there are no economic or energy efficiency benefits to using it. If you are rich and want back-up power for lights, then solar is a luxury item you can buy. Ordinary people cannot afford solar and without mandates and subsidies solar would be a very rare option. We should end all energy mandates and subsidies for biofuels, wind, solar, oil, natural gas, nuclear, everything.

            Governments have dramatically increased greenhouse gas release with their murderous global biofuel hoax, and yet the Earth has not warmed since 1998. A study of Antarctic ice cores has found 11,000 years of evidence that Earth temperatures do not track atmospheric CO2 levels and they never have. We have even had ice ages when atmospheric CO2 levels were 10 times higher than they are today. The Climate Change religion is bunk. Fundamentalist Christians mainly don’t believe it because they already have a religion to believe in. They don’t need another one. As an atheist, I don’t believe it because the junk science behind it is laughably dishonest. It is hysteria on wheels that politicians use as a club against their opposition.

          • Lobes 4 years ago

            Mr Calder I dont think you understand the science involved in forming the IPCC reports so like so many before you throughout the ages you write it off as ‘magic’.

            Climate change and carbon emissions did not start in 1998 either. They have been a factor since the beginning of the industrial era in the 18th C. Not that it matters. Its actually much hotter now then it was in 1998 anyway so you’re wrong there as well.

            The link you posted to the national academies report is laughable. Here is what it says: “The models indicate that the provisions subsidizing renewable electricity reduce greenhouse gas emissions”

            LoL do you even read your own evidence?? It flatly contradicts you!! Maybe its time to get some sleep Mr Calder because you are really making a fool of yourself with your unformed and self-contradicting arguments

          • Christopher Calder 4 years ago

            The bottom line of the study was that biofuel production increases greenhouse gas release and that wind and solar schemes reduce CO2 release to such a small extent that they are not worth subsidising. The Earth is no warmer than 1998 and it is not unusually warm at all. The Earth is always fluctuating in temperature, and that fluctuation is largely determined by solar output, not by changes in level of a very weak greenhouse gas, CO2. The laws of physics have not changed since the Earth experienced a major ice age when atmospheric CO2 levels were 10 times higher than they are today. See “Global Warming: Doomsday Called Off” at

            The IPCC is a joke. IPCC chief Rajendra Pachauri admitted that the 2014 report was tailored to meet the political goals of governments: “We are an intergovernmental body and we do what the governments of the world want us to do. If the governments decide we should do things differently and come up with a vastly different set of products we would be at their beck and call.” That is junk science. Real science uses the scientific method which does not allow any predetermined conclusions. Whores pretending to be scientists will say anything for money and make it sound scientific. Real scientists in the field do not believe man made global warming is a proven threat. Water vapor is the main greenhouse gas, not CO2, and we cannot ban water. Our own bodies are largely made of water and CO2. You are greenhouse gas with legs. Better ban yourself.

          • Lobes 4 years ago

            “wind and solar schemes reduce greenhouse release”

            Damned by your own words Mr Calder!!

            Seriously dude you are just embarrassing now.

            IPCC is a scientific organisation made up of global scientific consensus. Do you think NASA is going to have its findings dictated by China or the Royal Society will massage data to suit the Australians? It does not work like that.

            World is warming constantly, 2012, 2013 and 2014 were all hottest years on record. Let go of your obsession with 1998. It was not a particularly significant year, and you can not prove it was.

            Water Vapor has an atmospheric presence of days while CO2 lasts centuries. Of course due to this CO2 is a big problem whilst water vapor has, at worst, a transitory influence.

            You clearly do not understand physics and your grasp of politics is similarly weak.

          • Christopher Calder 4 years ago

            Why do you make such childish, dishonest arguments? I and the study said that “wind and solar schemes reduce CO2 release to such a small extent that they are not worth subsidising.” Taking a few words out of context is not a winning debate tactic. The damage done to the environment by mandating industrial wind power is extensive, and the costs to our economy are great. Wasting billions of dollars killing jobs with foolish energy mandates without any real-world benefit is bad policy. It would be better to save 90% of the money wasted on these programs and spend just 10% on research into the safe, non-radioactive forms of nuclear energy which can actually replace fossil fuels. Wind and solar do not have the reliability and energy density needed to do the job.

            See “Windmills Kill Birds”

            https://www.youtube.com/watch?v=7OQMBdcbMTc

          • Lobes 4 years ago

            What universe do you live in where “nuclear research” is better than “wind and solar schemes [that] reduce greenhouse release”.

            Damned again by your own words. This is getting surreal!

            One (renewables) is a real thing that provides energy and reduces CO2 the other (nuclear) is just research that does nothing for nobody and might never have an outcome besides draining away taxpayer money.

            Yet you keep on king-hitting yourself by bringing up “non-radioactive forms of nuclear energy” Haha , can we have “non-wet water” or wait, how about “room-temperature coal plants”. Wot a joke m8

            PS I am writing these posts on a laptop powered by solar energy. Its giving enough energy to communicate with you AND absolutely destroy your arguments. Seems like proof of a good thing.

            Tell me more about how windmills kill penguins

          • Christopher Calder 4 years ago

            You clearly are very uninformed. You keep making silly arguments that are not worth responding to, and your “facts” are all wrong. Just Google *The Renewable Energy Disaster*. It has all the mathematical and ecological details about why renewable energy is a destructive waste of time (except for hydroelectric) and a broad overview of recent developments in Low Energy Nuclear Reaction (LENR) and simplified hot fusion. The only thing that is really going to kill the destructive renewable energy fad-religion is LENR, and that is coming to the marketplace relatively soon. It will be cheap, reliable, carbon free, safe, non-toxic, non-radioactive. It uses ordinary hydrogen in extremely small quantities as fuel, not plutonium or uranium. Some big names are working on LENR, such as Toyota, Mitsubishi, NASA, various semi-secret government agencies, and now Bill Gates is interested.

            Have a nice day.

          • Lobes 4 years ago

            Its really encouraging to see people like Christopher Calder now being marginalised like the fools they are. The science on climate change has been unequivocal for some time now and with climate records matching or (shudder) surpassing what the models have predicted we are seeing the doubt and denial being swamped by evidence. The billions of dollars investment pouring into green energy is proof of that. “Follow the money” as they say. I’m optimistic that the energy sector will see concrete changes by the end of the decade and I hope it happens quick enough to avert the worst of climate change. We must not let the ignorant and foolish continue their obstructionist lies though. Calder seems to really believe his own delusions, maybe he’s mentally ill but more likely just an unhappy lonely crank who has been brainwashed. Whatever the motivation the Calders need to shoved out of the way and ignored so the rational amongst us can continue fixing the damage.

    • Rob G 4 years ago

      TROLL ALERT!

      • Harry Verberne 4 years ago

        It is evidence of the impact and regard in which this site is held that the fossil fuel funded denialists have become more active. A number of this site’s featured articles have been published on well regarded sites such as The Conversation.

        I don’t think it is worth dignifying most of these people with a reply to their posts.

        • Rob G 4 years ago

          I always have a good laugh when a troll turns up. Maybe they think its fun to tango with an educated audience but in the end they leave bruised and battered by facts, never to return.

    • nakedChimp 4 years ago

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  2. A.c. Quinn 4 years ago

    #FreeEnergy @ Power station level “Engineer validated” released without Patent for all mankind.

    • nakedChimp 4 years ago

      Hm.. do they have internet at the psychiatry yet?

      PS: learn to properly form sentences so a sane person is able to follow your ‘thoughts’.. this there is just useless. Oh, and a drawing tells more than a thousand words.

      • A.c. Quinn 4 years ago

        lol, physics people and engineers have reweeted this around the world, you have just insulted the smartest person who ever lived, are you retarded because you didn’t learn to fly a plane? I left school when i was 13, so a didn’t learn grammar, but I have a 160 IQ without even knowing most of the answers that are not puzzle related, have a nice day insulting others who didn’t go to school or who havent learned to drive yet.

        • nakedChimp 4 years ago

          Hm.. it wasn’t on Sci-Tech Daily, must have missed it then?

          More serious though.. I went to school in Germany, finished class 12 and studied physics which I finished, thus you’re talking with someone here that knows a bit or two about this stuff, but I don’t know my IQ.. funny 😀

          Now onto that jpg up there.
          I tried Google with ‘archurian physics’ and nothing related came up. I’m not trying ‘Free Energy’ though.

          As for ‘engineer validated’ and in the text I read ‘Looks good’ as a means of validation.. sorry.
          Also.. in my 35 years living under naked chimps I never came to the conclusion that I could outsmart everyone else currently living or having lived in the past 100 years. I’ve been on the edge of written/recorded accessible knowledge a couple of times, so I know how it feels to realm spaces like those, but I never was the first nor the only one there. Now you might understand why I’m more than careful if someone claims stuff like: ‘”I” am the master of physics’ or ‘TMQ beats 10 million physicists over 200 years, 200m (*) engineers’.

          *) is that 200 meters, ‘Milli’ = 1/1000 or ‘Million’?

          Conclusion:
          A guy who chest-beats himself with a text that is not to understand, spitting on established engineers and at the same time needs their validation is pretty pathetic.

          Have a nice day.

          • Nigel Lake 4 years ago

            Fascinating to watch the arguments above. Mine are purely economic. You can think what you like about climate change, but you can’t change the inevitability of further reductions in the cost of solar PV energy generation and battery storage – two technologies that are still much earlier in their refinement than coal fired power stations (which operate close to physical limits). Oh, and there are other developments coming too, such as thorium cycle nuclear power.
            Enjoy the debate, just remember that some people will make billions and some will lose billions (even tens of billions) over the next decade.

          • Pedro 4 years ago

            Thanks for the article Nigel. I like the economically rational lens you used for your argument.

        • nakedChimp 4 years ago

          PS: If I understand you right you propose to let a floating weight raise itself (for free) in a tank of water to some height above ground and let it drop back to ground driving some energy converter to harvest the potential energy it gained during it’s raise in the tank.

          On that ground and if the water in the tank doesn’t refill from above the tank for ‘free’ as well (mountain feed, rain, etc.) you didn’t look at the full picture.
          You missed that you have to push the floating weight into the bottom of the tank against the pressure of the water there.. essentially lifting the water body by the amount of potential energy the weight gained when it dropped down.

          And if the water in the tank refills for free than this ‘free’ energy is already being harvested all the planet over, it’s called hydro-electricity or hydro-power.
          Welcome to the group of naked chimps that found out about this a couple of thousand years back..

  3. Nigel Lake 4 years ago

    Thank you for these comments – they illustrate very neatly the issues that we all have to address. My fundamental point is – even if you are coming from a perspective where you believe absolutely that climate change is – what shall we call it – “CRAP?”, it is important to look at what some of the most powerful businesses and governments in the world are doing with their own money. This isn’t about talk or beliefs, its about investments of tens of billions of dollars. The world’s largest resources companies (with massive vested interest in preserving the energy status quo) and China (with massive vested interest in making sure energy is as cheap as possible) are all making decisions that reflect a belief that there will be cheaper forms of energy than conventional energy sources. There’s actually lots of good academic background to this if you can be bothered (just Google “Hubbert Curve”.

    The other thing that won’t be apparent from an American perspective is that – here in Australia – grid electricity is so expensive, and sunshine is so strong and reliable, that solar + batteries is simply a cheaper solution that traditional fossil fuels already anywhere other than in the big cities. And that’s where you already have pre-existing power stations and pre-existing grid connections. The moment you need to build a new power station – or a connection to the grid – the economics jumps further away from traditional power sources. All if this is without any form of Government subsidy.

    If you want something better to get wound up about – think about how China now owns future power generation, through its leading position in solar and wind generation…

    • nakedChimp 4 years ago

      Nigel the article is very good and paints the current situation remarkably well. If it wasn’t for the economics of renewables we wouldn’t be on any meaningful way to a sustainable future..

  4. john 4 years ago

    The real learning from the article is this.

    Tesla Motors has made its entire patent portfolio accessible by its competitors for no charge, so long as the companies concerned are genuinely committed to building electric vehicles.

    Here is a company releasing all their patents.
    Why?
    Because they want competition?
    No, because they actually care people get over it already.
    Perhaps there is a middle course that says ” We have to move on and accept that we wish to leave to our descendants a decent future and not be so self centred ”
    Is this to high a hurdle for YOU to grasp I ask?

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