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What can history teach us about energy transition?

By Tom Nelson - Head of Natural Resources 

Key points

  • Sustainability can be addressed through the transition to renewables and reduction of fossil fuels especially for electricity generation. By electrifying major components of the energy system such as transport - electrification and decarbonisation can then go hand-in-hand establishing a virtuous circle. Can such a transition be achieved?
  • There is a historical precedent – our energy system has seen a constant stream of innovation and scientific discovery which has led us through significant changes in our primary energy sources over time. What can we learn from previous transitions from wood to coal and coal to oil and gas?
  • Burning the midnight oil reviews three important lessons for asset owners from previous transitions including:
    • Lesson 1: Speed
    • Lesson 2: Key Drivers
    • Lesson 3: Overlapping energy sources
  • These historical precedents form an important benchmark for understanding investment implications for the third energy transition.

The history of energy consumption is a history of the modern world. Exploitation of the planet’s non-renewable sources of energy has fuelled human progress.

Market forces and consumer economics have driven the energy system relentlessly towards the most potent and readily available supply sources, with no real consideration of environmental and social consequences: with human progress superseding concerns about emissions, deforestation, burning coal, unsustainable fishing or frontier oil exploration, to mention just a few.

But such unsustainability can be addressed. If we look in more detail at the composition of the current energy system, we see that there are two main areas where direct change can be achieved. First, we can reduce the proportion of fossil fuels especially coal in the overall mix of fuels for electricity generation.

Second, we can electrify major components of the energy system, such as transportation. Of course, the two are complementary: if more industries can be run on electricity, and more of that electricity can be generated from renewable sources, a virtuous circle can be established. Electrification and decarbonisation go hand in hand and both processes dominate much of the impact for investors linked to the energy transition.

There is historical precedent. The evolution of our energy system has seen a constant stream of innovation and scientific discovery which in turn has led us through significant changes in our primary energy sources over time.

They can be categorised into three major energy transitions:

Source: Investec Asset Management, November 2018

But how long have these transitions typically taken? What were their causes, and effects? Most importantly, what are the lessons for asset owners at the infancy of the third energy transition?

What can we learn from the previous energy transitions?

Over time, different societies transitioned at different stages, but we believe there are three important lessons for investors and asset owners, all of which have implications for the current transition.

Lesson 1: Speed

History shows that a new primary source of energy takes around 50 years to achieve dominance over other sources.

The coal-fuelled industrial revolution began in the UK in the eighteenth century before many other parts of the world had moved on from burning wood. However, from a broader perspective the transition from wood to coal on a global basis started in the mid-nineteenth century and was a key driver of the dramatic increase in global economic output. By 1880, coal’s share of primary energy supply had grown from 5% to 30%, and by the end of the nineteenth century the share was approximately 50% globally.

Coal’s share peaked around 1915, when Britain’s Royal Navy switched from coal to fuel oil). By then oil had claimed 5% of the overall market and, just as coal took around 50 years to reach 50% of the overall market, oil by the 1970s had arrived at a similar share. If we include natural gas, it was even higher.

The 50-year journey from new entrant to 5% (critical mass) then to around 50% adoption is a helpful benchmark. "The Rise of Renewables" provides more detail of the market share of renewable energy relative to these two case studies.

The three energy transitions

Source: Investec Asset Management & Energy Production and Changing Energy Source by Hannah Richie and Max Roser, www.ourworldindata.org, August 2018.


Lesson 2: Drivers of transition

Each transition is marked by clearly discernible drivers. While they tend to differ across each transition, they are caused by known trends in the way humans use technology to create economic growth, improve living standards and, increasingly, create efficiencies in transportation.

Coal displaced wood because of superior energy density but also critically because it unlocked a vast new demand source: steam power. Coal had originally been used as a heating fuel, but the engineering and scientific breakthroughs by Newcomen, Watt and Stephenson between 1710 and 1840 in the UK, pioneered coal’s usage as a transportation fuel. By the end of the eighteenth century, the epoch-making inventions of Bessemer and Edison had created two huge new areas of demand for coal: steel and electric lighting. Coal effectively enabled the world to industrialize, thereby causing an enormous uplift in global energy demand.

Renewable energy can do something similar in many parts of the world today, where 1.1 billion people still have no access to electricity.

If the transition to coal was driven by industrialization in a broad sense (steam, steel, electricity), the transition to oil was driven by transportation. At first, oil was used to displace whale oil as a lighting fuel, but by the late nineteenth century the early pioneers of gasoline and diesel engines were making huge advances. The first commercial discovery of oil in the US by Colonel Edwin Drake in 1859 paved the way for the provision of abundant local supply, and by 1908 the Ford Model T was under mass production. Interestingly, and by way of context for electric vehicles, which we will focus on at length, the Model T cost $850 (on its way to $300 by 1925), while a horse, which 20% of Americans had in 1908, cost $50-$150.

The horse to car transition in itself was quite rapid in urban areas, changing the fundamentals of how societies operated – not least in infrastructure and city spaces. The decreasing need for horses severed ties between urban and rural areas where the transition to automobiles was far more protracted. The barriers to car adoption were significant when compared to a move from combustion engines to electric vehicles where adoption rates will rapidly increase as explored in the future of transportation.

From horses to horsepower. The rapid 1900s horse-to-car transition 

Source: BNEF New Energy Outlook, 2018

Global energy demand was growing at 3% per year by the outbreak of World War I, fuelled by oil, only to accelerate to around 4% per annum from 1945 as vehicle ownership increased and highway infrastructure was built out on a large scale. Oil was without rival as a transportation fuel, and the growing world population craved the freedom and increased productivity which a car provided.

Both the first and second energy transitions were catalysed by major scientific and engineering innovation, by the emergence of a new supply source, and by very strong demand. The urgency derived from the clear improvements in economic output, personal mobility and quality of life that both transitions afforded, with of course no consideration given to the environmental side-effects.

Lesson 3: Energy sources always overlap

There is a tendency to think that once a dominant energy source has been supplanted by the next and is losing overall market share that it becomes irrelevant and can be discounted.

In fact, historically the opposite is true – and asset owners should not be surprised to see renewables surpass coal and oil, rather than replace them.

Population growth and the huge increases in energy intensity over the last two centuries, has meant a declining share of a much larger market equates to a much higher absolute number. So, while the nineteenth century is typically characterised as the ‘century of coal’, the reality is that wood in fact provided around 85% of the century’s energy requirements.

The twentieth century might be known as the ‘century of oil’ but it saw coal provide around 40% of the overall energy. While coal’s share of the global energy mix peaked around one hundred years ago, the global production of coal increased by a factor of six between 1900 and 2000. This demonstrates that many sources of energy will be required for centuries to come; we can see unequivocally the need to reduce usage of coal for electricity production and oil for transportation, but it is unrealistic to expect these energy sources to be driven completely from the system. An energy transition is also in some ways an energy diversification. As humans address the carbon and climate challenges, they must meet the needs of growing global energy demand in an environmentally acceptable, secure and economic manner.

What might be different: can the third energy transition be faster?

In many respects, the catalysts for the third energy transition are similar to those driving the first two energy transitions:

  • Scientific progress in solar and wind technology has ensured these forms of renewable energy could reach critical mass as a share of global electricity generation.
  • Security of supply and the need to diversify energy supply has been an important factor as we saw with OPEC oil embargo of 1974 underlying the vulnerability of the US to supply interruptions. China’s need to diversify its energy sources has been another crucial driver.
  • Improving economics has naturally played its part, as was the case with coal and oil.

However, it is in consumer behaviour and the diversity of renewables where differences begin to appear this time around.

Source: Investec Asset Management, November 2018

While previous changes in consumer behaviour were driven by economics and a desire to improve living standards and mobility, we now have the added dimension – and arguably the dominant dimension – of preventing runaway climate change.

This could dramatically increase the speed of adoption of new technologies. With policy direction accelerating the installation and adoption of renewable energy technologies, it seems reasonable to suggest that the gathering momentum to act to prevent global warming could make this transition quicker than the previous two.

An energy transition is also in some ways an energy diversification. As humans address the carbon and climate challenges, they must meet the needs of growing global energy demand in an environmentally acceptable, secure and economic manner.

Consumers certainly have the ability to act much more quickly. It took 62 years to reach 50 million car owners while it took 16 days for the Pokemon Go game to attain 50 million users. Technology adoption curves are accelerating and EV forecasts look conservative.

But it is in consumer behaviour and the diversity of renewables where differences begin to appear this time around.

Gotta Catch 'Em All
The number of years it took to reach 50m users across various products and technologies

Forecasts are inherently limited and should not be relied upon as an indicator of the future

Source: Visual Capitalist, BoAML Global Research (October 2018). Reference year for Electric cars is 2012, the year the Tesla Model X was launched.


Tipping point for investors: Renewable energy from solar and wind reach critical mass

We have seen a phenomenal rate of change in solar and wind technology. Any industry which can cut module costs by over 80% in less than 10 years, which solar has achieved, is doing something extraordinary. Forecasts from Bloomberg New Energy Finance (BNEF), an energy analysis firm, outlines that the share of global electricity generation from solar and wind installations will rise from 7% today to 48% by 2050. This resonates as an entirely plausible and possibly conservative roadmap.

In 2018 there has been further cost deflation in both wind and solar. All predictive models of installed capacity have been exceeded, and costs continue to come down. Increased scale, lower cost of raw materials, higher efficiency and technological improvement are enabling wind and solar in particular to displace traditional sources of power generation on a global basis without subsidies.

New research conducted by Investec indicates that global installation of wind and solar will grow at 5-8% per annum for the next two decades: this may well prove to be conservative, if further cost cuts are achieved which looks highly likely.

Moreover, while solar and wind appear to be the significant areas of growth between now and 2050, the overall energy market will be extremely diversified by mid-century.

This means that many sources of renewable and non-renewable energy will have a part to play in meeting the needs of growing global energy demand in an environmentally acceptable, secure and economic manner. The financing required for this diverse and growing market is likely to be considerable – forming an important basis for building a decision-making investment framework that ensures portfolios adapt efficiently to the energy transition.

It is important to acknowledge that there are still major challenges around system integration and the intermittent, unpredictable nature of energy generated from renewable sources. However, the enormous investment by the automotive manufacturers in battery capacity will be very helpful in bringing down the costs of short-term storage, but this also links to the likelihood of energy diversification. The generation system of the future will require more sophisticated demand response, complementary renewable output (wind at night and solar by day), much smarter and more robust grids, and also likely gas back-up.

The third energy transition is underway. Its precise speed is difficult to determine, but it is accelerating significantly and could easily be quicker than the previous two thereby having a major impact on investors’ decision making. Technology cycles are quicker, consumer trends more flexible, and the environmental imperative is enormous.

In this series, we detail the requirement for a decision-making framework for capital allocation – supporting asset owners as they interpret materiality on asset valuations, assess opportunities and manage risk.

It is our contention that such a framework can help asset owners reach acceptable environmental and financial goals in tandem.



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