An Early 21st Century Narrative: The Age of Renewables

Brazil recently auctioned off the rights to its giant Libra oil field, and practically no-one attended the party. Any American under the age of 25 cannot imagine a world where half of the population lived under the follies of central planning; and any American under the age of 20 cannot imagine a world without the internet or instantaneous global communications.

Similarly, any American born in the year 2013 would not be able to imagine a world where there is even a debate on the viability of renewable fuels vs. fossil fuels. To them, it is a foregone conclusion that renewable fuels will be the main lifeblood of 21st economic growth and prosperity. We assert that much of the early 21st century narrative–particularly the years 2014-2020–will be driven by the “coming of age” of renewable energy sources, particularly solar, wind, battery storage technologies, and eventually, bio-fuels.

We have kept track of the energy industry since the end of the dot.com boom, when I worked as a natural gas & oil analyst in Houston, Texas. In an August 29, 2004 commentary (when WTI traded at $45 a barrel), I argued that WTI could be trading at $80 to $100 a barrel, while U.S. gasoline prices could top $4.00 a gallon over the next five to six years. The study of renewable fuels is an extension of this–the study of the evolving energy regime is important as energy forms the lifeblood of any modern economy, and to this day, still dictates much of global geopolitics. But more important, we believe renewable fuels will drive much of the growth in U.S. and European energy production from now until 2020. Power grids will become more decentralized while households will be subject to less power interruptions. U.S. energy independence at the national level is a foregone conclusion–what we are trying to achieve is energy independence down to the community or neighborhood level. This may be a more difficult feat given the entrenched interests of U.S. utilities, unions, and the amount of capital costs required to construct microgrids across the country. We also believe that this boom in renewable fuels production/infrastructure growth will coincide with the next secular bull market in venture capital and public equities.

Energy historians (e.g. Daniel Yergin–his Pulitzer-prize winning book “The Prize” is a must-read ) in 2020 will look back at the disappointing auction of Brazil’s Libra oil field as a watershed event in the global energy regime. The failure of the Libra field in generating much excitement heralds the beginning of the end of the “Age of Oil,” and not coincidentally, the shift of economic power from the “BRICS” and OPEC countries back to the United States as the latter, especially the state of California, invest substantial amounts in renewable fuels technology and infrastructure. Sure, the commercialization of the Libra oil field has been beset by political and ownership disputes, as well as overshadowed by the commercialization of U.S. shale. But the collective yawn by energy analysts and the U.S. population would have surprised me just a few years ago, when Petrobras’ stock price was still riding high.

Today, we are no longer as surprised. A recent (which I would label as conservative) study by Citi Research projects that $9.7 trillion of infrastructure investments will be made in the global power industry from now till 2030. Over 60% of this new power generation will come from renewables, including wind, solar PV, biomass, and hydro. As shown in the following charts, the majority of renewable investments would be in Developed Markets (U.S., Germany, the UK, etc.). In fact, Citi Research expects 40% of all incremental Developed Markets’ energy consumption during 2015-20 to originate from renewables (excluding hydro).

Citichart1

There is already plenty of evidence suggesting this projection may be conservative–the U.S. shale boom notwithstanding. Within the U.S., there is still an ongoing chorus to drill for more shale, including the Monterey Shale in California (if all of the Monterey Shale is commercialized, California’s oil production will surpass that of Texas). But this chorus is being gradually displaced by a broader movement to commercialize alternative energy sources across the world–e.g. the broader support for Tesla and its planned build-out of super-charger stations across the country, rooftop solar panels on new homes in California, and–as Citi Research points out (see below chart)–the displacement of peak generation by solar in Germany.

CItichart2

The penetration of wind and solar in Germany is expected to double in three years. This means in three years (and some of this may occur by summer 2014), wind and solar will “eat up” the vast majority of Germany’s baseload power generation during the middle of a sunny Saturday or Sunday afternoon. Installing battery storage technologies (Arizona is beginning to do this) will eventually allow German households to consume solar-generated power in the evenings as well.

We have come to a turning point in how our world (especially in Developed Countries) view, produce, and consume energy. We have detached ourselves from nature in every aspect since the beginning of the First Industrial Revolution in the late 1700s. Individuals no longer witnessed how we produced our energy on a daily basis. Points of production and power grids became centralized–dominated by giant corporations and sovereign entities. This too, shall pass. The Age of Renewables will usher in a new age of harmonization–driven by a secular bull market in cleantech and technology venture capital.

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