Renewable energy and investing for the end of fossil fuels

Imagine its 2055, and we’re taking a tour round the oilfields that built the industrial world. Whether we go to the “nodding donkeys” of West Texas, the tar sands of Alberta, or to the North Sea, we may see the same, strange sight: a silent, abandoned wasteland. In just over a generation’s time we may be able to walk around the relics of a disused energy industry. Where once there were boomtowns like Calgary, we could soon see only ghost towns – lying as empty and derelict as the shuttered mills of the Industrial Revolution.

So what? Oilfields run out. That’s just how it is, right?

Wrong. What will be amazing about this future transition is that many oilfields may not actually be dry, but merely abandoned.

How could this be? Why would anyone walk away from a productive oilfield? The answer is simple: price. We’re on the cusp of a gigantic revolution in global energy. This won’t be driven by politics – no matter what scientists tell us about climate change. It will be driven by simple economics. Something really big is coming, which will make even the cheapest fossil fuels look unrealistically expensive.

What could be the driving force behind such a sudden and shocking transition in the global economy? It all comes down to one thing – something that could redraw the energy map of the world, reshaping the geopolitical dynamics of the next century, and making fortunes for well-placed investors.

That one thing?

Renewables.

Already, over half of new electricity generation capacity is from renewables. You can see this when you fly over huge North Sea wind farms, or the vast solar arrays of the Southwestern US. However, when it comes to heating and transport fuels, this change hasn’t even started. We’re now experiencing nothing more than the first foreshocks of the coming monstrous earthquake.

As in previous industrial transitions – like the rise of the motor car or of mobile phones – the momentum of change took a long time to build. This pattern is predictable. Firstly, there’s a lot of hype. Then, the buzz dies down – because as the transition starts to gather pace, it becomes ordinary. It has to feel ordinary, as even the timid must feel comfortable joining the revolution. Finally, within a decade or two, the old technology simply disappears from our lives.

For a good example of this transition, think of when you last used a film camera. Too long ago to remember, right? History is littered with the rusting hulks of firms who clung to these dying technologies for too long – with Kodak being a great example.

As an investor, you need to be aware of the risks if you don’t axe your familiar and faithful fossil investments. Your reliable, blue-chip energy firms may soon be going the way of the dinosaurs. Peabody Energy is an example of just one failed firm – indicating a terrifying future for all those who cling on too long.

This week, I’ll help you start to build an energy portfolio fit for the 21st century. A few well-placed investments today could place your capital in the equivalent of the next BP or Shell – companies that will dominate the energy world of the next century.

A decade from now, it’s probably going to be too late to take full advantage – or to protect yourself. But what can you do, when there are so many competing technologies to choose from? The complex landscape of future energy may seem like a confusing muddle, but it doesn’t need to be so hard. The logic of what’s hot, and what’s not, is actually pretty simple. One renewable technology is going to eat the world, and I’ll show you how you can profit from it. I’ll also pick out a few juicy alternatives, where niche alternatives may be very profitable.

Let’s start with a bit of physics. The end of the fossil fuel age is really the end of the heat age. Today, almost all power starts off as heat – in a power station, or an engine. Then, it’s converted into the energy you actually want – be that electricity, or movement. This conversion comes at a high cost, and around two-thirds of the energy is typically lost in the transformation. Renewables, by contrast, go straight to electricity. So for electrical or mechanical power, fossils are already fighting an uphill battle.

You might think this would mean that fossil fuels have a great future for heating, even if you may soon need to switch to an electric car. But there’s a clever physics trick that means renewables can still beat fossil fuels for low-temperature heating (think radiators, not industrial furnaces). This is based on the fact that it’s actually around three times more efficient to move low grade heat, than it is to generate that heat directly. So having a 3kW electric heat pump is (very roughly) equivalent to having a 10kW electric heater. Therefore, fossil fuels are on a losing streak – even for heating buildings (and that’s a huge consumer of energy).

Heat pumps are therefore one of the technology sectors we can expect to perform well. But more generally, we’ll see a future with a lot more electricity and a much higher proportion of renewables used to generate this electricity.

So, what does this electricity revolution look like, and what does it mean for your investments?

Let’s set off by slaying a few myths. These are often peddled by vested interests, selling versions of the future that look much like the past.

Firstly, let’s consider carbon capture and storage (CCS). This means capturing the “exhaust” from conventional power plants and injecting it into the ground. It’s the methadone of the fossil fuel industry – a dead end, half-solution to our fossil addiction. Even today, renewables are cost-competitive with fossil fuel electricity. Even if it were free, CCS would be on borrowed time – and it’s certainly not free. There are a handful of plants around the world trying to make CCS work, and it’s not going well. Projects in the UK, US and Australia are struggling, or failing. Even when CCS works, the end result is higher fuel costs (about 20%), and large, uncertain costs for the CCS infrastructure. Fossil fuel technology simply cannot bear all these extra costs, while remaining anything like competitive with ever-cheaper renewable energy.

Secondly, nuclear power is the vampire idea that won’t die. Even before cheap renewables came along, nuclear paid its way only because the costs of decommissioning and waste were swept under the carpet. These costs are passed on to taxpayers from the next generation – and beyond. Long-term geological storage for high-level waste is still a work in progress, even after 60 years of need.

Forthcoming nuclear reactor technologies, such as thorium and molten salt, are fundamentally superior to today’s plants – but these remain stuck in a constipated development process; you don’t find garage entrepreneurs playing around with nuclear fuel rods, for obvious reasons. This relative lack of entrepreneurship stifles innovation.

And what about fusion? As the old joke goes, it’s 40 years away (and probably always will be). That’s not to say there’s no chance that fusion will be the future – by some stroke of entrepreneurial luck/genius. But I personally wouldn’t bet the farm on it.

After discarding those dead-end approaches, the challenger for fossil fuels is clearly renewables. But how can you sift through all the different technologies, to find the winning ideas to invest in? That’s what we’re going to focus our investment research on later this week. Until then, you’ll just have to hold your breath.

Category: Energy

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