15 Jul 2019
Investing Through The Unfolding Energy Disruption
Although a life long mathematician and technologist, recently much of my focus has been on being a savvy investor, in many asset classes from private seed/angel investing to public markets and alternative investments. While Canadian investors have traditionally thrived on conservative, cash generating value investing and fixed income plays, the future is rendering such risk averse models obsolete, making it critical to adopt a forward lens, looking out, perhaps a decade into the future.
I have lived through many market disruptions in which “software is eating the world.” Such disruptions include the “Kodak Moment” of digital photography rendering mining of silver oxide to supply the ecosystem around film irrelevant in a digital photography age. Another exemplar is the upending the entire value chain for newspapers and other ad-funded media by the likes of Google (Adwords) EBay (classified ads).
Energy has driven world economies for time immemorial and may even have led to the fall of the Roman Empire. As modern societies have become wealthier, energy consumption has seen stratospheric growth. The simple reason is that Energy underpins the creature comforts of modern society, including food, shelter, transportation and consumer consumption. There is widespread concern that this nonstop growth model that underpins our economy is ultimately unsustainable, particularly as rich country ways spread to the rest of the soon to be 10 billion people on planet earth. The younger generation, who will ultimately see the limits of such consumption in their lifetimes, has embraced a more pessimistic view of their future and adopted a focus on lifestyle changes, including low carbon (vegan or vegetarian) diets, not owning a car, and trying to eschew rampant consumerism.
Essentially, there are two paths open to a more sustainable way of living:
- conservation, in which individuals strive to lower their environmental (primarily carbon) footprint, and
- a technology revolution in which traditional energy is replaced, for example by renewables, and even more radical, technologies that remove carbon from the atmosphere.
Thus, futurists have long predicted the same fate for energy driven by new technologies that include renewables, storage (battery and other), Digital Electricity, subjecting the global energy market to its own “Kodak Moment” of digital disruption. The future has arrived, and today in 2019, this energy disruption is already in full force, potentially rendering oil, gas and coal essentially obsolete over a time as short as the next decade.
What does this mean for the Canadian investor, including business, government and insurance companies who all will see their future results impacted by how this unfolds?
I have been researching a formal presentation around energy disruption for investors, but this recent CBC article spurred me to publish this post and perhaps have readers send me their thoughts and research.
Fighting climate change may be cheaper and more beneficial than we think | CBC News
Governments aren't calculating the true cost of fighting climate change when they fail to take into account side effects such as fewer deaths from air pollution - co-benefits that make the net cost of climate action as low as zero, growing evidence shows.
The above article is instructive inasmuch as it paints a picture of a better world achieved by strategically and aggressively re-allocating resources in our economy. The suggestion is that to do so, far from being foolishly spendthrift, is our most rational and positive outcome. What it doesn’t say is that to delay doing this, by allowing others to capture leadership in the “new”, post fossil fuel, growth industries, render Canada a much poorer (aka “third world”) country in the future.
The fossil fuel (coal, oil and gas) industry is facing many headwinds, which has moved economists from a previous narrative of concern about “Peak Oil” (ie. the world is running out of oil) to the new narrative of “Peak Demand” (ie. demand will drop as energy consumption is disrupted by new technologies). Here are some of the head winds and their implications:
- Over the last decade, coal power, one of our greatest carbon producers, has already been rendered uneconomic, with declines in coal mining and production starting from around 2010.
- Solar and Wind electricity production costs continue to drop and since 2016 are cheaper at scale than oil, and now gas (including Gas Peaker Plants).
- The electrification of transportation, from cars, buses, trucking and more, is continuing to grow rapidly year over year. Current estimates call for Peak Petroleum Vehicle (ie. those “ICE” or Internal Combustion Engine powered) sales to occur by 2023.
- New technologies, particularly in the areas of energy storage, are quickly coming on stream. Year over year more than doubling in such storage capacity further indicates exponential disruption at work.
- Carbon pricing, in whatever form whether carbon tax or cap and trade, is needed for the market economy to work and will certainly become pervasive as the climate crisis escalates. It will require the majority of people to demand government policy and action. Current government policies seem to be held hostage to the oil and gas lobby instead of the wishes of the general public, although some parties try to disguise oil and gas wishes as “for the people”.
- Fossil fuel subsidies in Canada, including taxes and direct subsidies, are estimated to be between $30 and $50 Billion annually. I continue to work at sourcing more definitive subsidy data, but it is clear that simply better allocating these subsidies to a cleaner future must happen.
- Because the oil industry has known about our current Climate Crisis for many years (40 or more) and actively spread misinformation and hugely lobbied governments to ignore the long term effects, litigation for the damages caused by climate change will only escalate. This is analogous to the class action suits against tobacco companies for spreading misinformation about smoking in the 1960s and 1970s that have made these industries Wall Street pariahs today. In essence, this misinformation and deflection is an attempt to delay the inevitable, at the cost of real future damage to our world and the people inhabiting it.
- Fake News Has a Cost: various industries have spent billions of dollars bombarding us with a continuous stream misinformation in order to distract and deflect us from proper policy. While the Kohl Brothers who make money from coal are legendary, examples of other myths include:
- apparently the power unions and nuclear industry heavily fund anti-wind energy misinformation, such as Wind Turbine Syndrome
- the auto industry funds significant misinformation about EVs, and this isn’t just in Buzzfeed, but in fact finds itself in otherwise reputable news media like The Globe and Mail: See The Trouble with Electric Vehicles – Winter and Out in the Cold with a Hyundai Kona Electric.
- consider both the cost to all of us when this misinformation helps form government policy and also the notion that those promulgating this misinformation may attract future liability for harm stemming from real harm their actions inflict on society.
- For those not familiar with Exponential Innovation, it can be deceptive because humans tend to see growth as linear and get caught off guard as what look like small numbers rapidly balloon into much larger ones. The perceptual problem that people have with Exponential Technology Adoption curves is explained here: The Problem With Exponential Innovation : People
The above just skims the surface of the major disconnect between reality and lobbying and misinformation. Those who want to drill deeper into this fascinating world of energy disruption may wish to check out this video by futurist and technologist Ramez Naam from Singularity University.
Ramez Naam - Future of Energy
All of this leads to predictions that, by around 2030, both the price of oil and the public market stock prices of public oil majors crater. In the process, some economists predict that globally US$100 Trillion (yes that’s right) of fossil fuel assets will be kept in the ground, and hence written down. Such a staggering number means a huge economic dislocation for countries, companies [and investors].
Here are some closing thoughts:
- Short Coal, Oil and Gas: and their ecosystem. Although no one can be sure about the timing, the fact that the coming energy disruption will have a hugely detrimental effect on these industries is irrefutable. Don’t get caught in the massive price (commodity and stock) swings that this market disruption will unleash. You heard it here first!
- See Beyond Partisan Politics: because parties, and elected representatives, seem more beholden to the 100 largest global fossil fuel companies than their own voters, the time is long overdue to return politics to a grassroots level of democracy where the views of citizen voters actually count. In the US, there is a movement to pressure local representative to refuse fossil fuel industry funding. It will be interesting to watch this unfold here in Canada. No doubt our coming economic transition will be a gargantuan effort — I liken our upcoming transition to the effort to win World War II – everyone united, regardless of party line, for a common cause. It would be good to emulate the spirit of such a war effort. In spite of past failures of partisan politics, the net/net is that citizens can mobilize and collectively push our elected officials toward policies that actually help citizens and our planet.
- Insurance: The current climate crisis may up-end the property insurance business and make insurance coverage unaffordable for many homeowners. To date, the insurance industry has led in research and advocacy around resilience and adaptation to Climate Change. The day is fast arriving when that will have to change. Increased weather volatility may make the climate so hard to model that realistic pricing of risk, which determines policy premiums, close to impossible. Lastly, as litigation starts to segment companies by liability for knowingly contributing to climate change, the insurance industry will undoubtedly be forced to respond both in their own investment portfolios and in the core insurance business.
As an investor, citizen, and voter I know that we need a significant reset in how we respond to the inevitable decarbonization of our economy. No one suggests it will be easy. Conversely, further inaction and delay will result in hugely greater pain, and suffering.
It’s your choice – where will you place your investment?
24 Sep 2021
A Personal Carbon Reduction Plan
Today is a Global Climate Strike in cities and towns all over the world. In late 2019, was a crescendo of activity including the first Global Climate Strike and UN Climate Summit. It feels almost like time, and action, has been paused by the COVID-19 pandemic. Now in late 2021 marks a return to that pivotal time. With a summer of extreme weather events including the most wildfires ever globally, we are entering a cycle including COP26 in Glasgow. And, for those of us who are boomers, the fact that these climate strikes are led by our youth and children, should add poignancy to the state of the world we have bequeathed the next generation.
As a society and as thoughtful citizens, how can we respond? Thinking beyond surviving the worst pandemic the rich world has experienced in our lifetimes, this is the perfect time to set priorities and make life plans and we must include addressing the greatest existential crisis challenging humanity and the world we live in.
Everywhere the sense of urgency has increased. Scientific models show that the amount of carbon we can pump into the atmosphere must be limited if we are to keep to an increase of between 1.5°C to 2.0°C, which already will be a much changed earth. This remaining capacity to emit carbon, also known as our Carbon Budget, is shrinking rapidly. Hence, each year that passes, such as between 2019 and now, means that living within this carbon budget requires more drastic action and at a much faster pace.
I strongly encourage everyone to take their own personal actions. They are so important to signal to others that the Climate Crisis is serious and to help mobilize action.
Systems Change
Personal actions will never be sufficient. We also need local, regional, country-wide and global systems change to accompany our personal actions. This might be described as re-jigging our long held systems of regulation, taxation and even the incentives in our market economy. In effect, we may be re-writing the rules of capitalism itself. Examples of this include:
We must keep up the pressure on our elected officials of all political stripes. While we are doing this, here are my thoughts on personal actions we can take. Its a complex topic, but by breaking into down into more digestible chunks, a seemingly intractable problem moves closer to solution. Here are the major categories I use, and note that I will provide further commentary on each in following posts:
Residential
While we can, and should, reduce our energy and electrical load through active management of our device choices and lifestyle, the biggest gains come from making our homes inherently more efficient.
I am currently designing and building such a sustainable, carbon zero (or negative) home in part to show a direction for the coming years. I hope that this will lead to real insights to help future homes be more sustainable, even the average house.
Of course, most homes aren’t new but have been around for 20, 30, 50 or even over 100 years. Retrofits of those homes are an important part of the mix. Audits against the Energuide for Houses standard help determine both your home’s energy rating, but to help define a path forward. Combing this with systems change, through financing or even property tax abatement to encourage this trend, is clearly the way forward. Systems change that encourages individual action is key. Even the august Conference Board of Canada has published a policy recommendation Green Homes: Sustainable Finance for Residential Retrofits. We can only hope that the appropriate levels of government are spurred into action.
Transportation
Personal transportation may represent over 30% of our personal carbon footprint. Note that I am, somewhat arbitrarily assigning logistics and freight to produce and deliver goods to us into the personal Consumption category below. While we can work to reduce our footprints by living in compact cities with lots of walking and bicycling, this does not work for all. The largest component is the electrification of transportation represented by the acceleration of the move from legacy ICE (Internal Combustion Engine) vehicles to EVs (Electric Vehicles). We are also starting to see this trend in small trucks and eventually event transport trucks. Beyond cars, I make several suggestions:
Consumption
Another aspect to consumption is excess packaging, much of which is made from plastics. Plastics pose enormous problems to our biosphere and in particular the oceans and so reducing or eliminating single use plastics is an urgent need. Further, most plastics are made from oil and hence are another form of fossil fuel consumption. I will soon write a ‘top 10’ list for ways to reduce your personal plastic and packaging footprint – which directly reduces your carbon footprint.
I hope that this provides a high level roadmap to both personal action, but also where public policy needs to go. Of course, it over simplifies a fiendishly complicated topic. At the same time, by dissecting de-carbonization I can only hope that it inspires action, at both a personal and government level.