A 3-step process towards zero emissions
How misinformation around the causes of the recent disastrous blackouts in Texas spread so quickly was a key theme of our recent story, which also discussed how a widespread misunderstanding of renewable energy's role may present an opportunity for investors. In the follow-up article below, we summarise our high-level framework for thinking about the opportunity set and where we apply our analytical resources.
Don’t get lost in the enormity of the challenge
Annual greenhouse gas emissions today are about 50 GIGA tonnes of CO2-equivalent, which needs to get to zero by 2050 to stay within 2C of warming. It’s easy to look at the scale and complexity of getting the world to zero emissions and lose hope, and while we do not downplay how hard this is going to be, it can broadly be broken into three pieces, each with a different set of risks, opportunities and timeframes. A big chunk of today’s emissions can be eliminated with mature, cheap solutions that only held back by collective willpower.
1. Decarbonisation of electricity, the electrification of everything ... and a focus on energy efficiency
Put very simply, electricity production is our largest single source of carbon emissions, but low-emission substitutes for fossil fuels are mature and cheap, and while wind and solar are intermittent by nature, we can get to 90% renewables cheaply and quickly while long-term storage solutions mature. At the same time, other fossil-fuel energy uses that can be electrified will be. Electric vehicles are the most well-known innovation on this front, but there are lots of other areas where there are mature, cost-effective pathways today for things such as home and building heating, which in many parts of the world still use gas and oil. While solar and wind will provide lots of cheap and abundant energy, we also need to constantly chip away at the energy efficiency of everything we do too – the profligate ways of the past are incompatible with a zero-emission future.
2. The decarbonisation of industry
While we are accelerating the decarbonisation of the grid, work needs to continue on some hairier challenges, such as finding zero or low-carbon substitutes for fossil fuels used in industrial processes - think coal in steel and cement manufacture, natural gas and oil in plastic, fertiliser and other industrial processes. We believe that these applications are the most promising opportunities for the nascent green hydrogen industry, but unlike wind and solar electricity, significant cost progression needs to be made and the technologies need to mature further.
3. And, well, everything else
About a quarter to one-third of our emissions come from agriculture, deforestation and other land-use changes and waste. Many of these are complex issues, that require cooperation and coordination across many different groups and cannot be solved by technology alone (though NONE of this can be solved with technological solutions alone, we would stress.) Many of these may take longer to solve but are just as important as the lower-hanging fruit mentioned above.
As investors, we must not only try to get these paths right, but also the timing (neither too early, nor too late) while also identifying the parts of the value chain where more of the value accrues.
A simple example of how you can be both right (on the trend) and wrong (on the timing and the value chain) would be investing in Western solar cell and panel makers in the early 2000s. Not only was it too early in that capital intensity was high and cell costs uncompetitive, ultimately it was all about cost and volume and it became a commoditised race to the bottom.
As investors in listed equities, we are somewhat constrained in our options, but some of the areas where we think the proverbial ducks are lining up are in wind generation, especially offshore, where demand is poised to explode thanks to falling costs, the great wind resource and the relative ease of getting approvals; companies providing energy-efficient solutions to transition households away from gas and oil heating and cooking, such as heat pumps; electric vehicles and the supply chain, especially their components, thanks to strong policies promoting adoption in many regions, combined cost competitiveness; and, while probably more of interest to those with higher risk tolerances, the green hydrogen supply chain is showing signs of maturation too. There are quality businesses that straddle many of these themes at once.
Again, we spend a lot of time looking at the industry structure, trying to identify where the pressure points are and who has the technological leadership and the deepest moats. We are especially cautious of the potential dislocations that these disruptive changes can have too. As an analogy, in the PC era, all the value accrued to Microsoft and Intel, but in the transition to smartphones, those value stacks were rebundled such that most of the spoils went to Apple, Google and TSMC. We are trying to find the Apples and TSMCs of the zero-carbon revolution.
Avenir Capital is a value-based investment manager that brings a long-term, owner-oriented approach to global public equity markets. To stay up to date with our latest insights click the follow button below.
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Curtis Cifuentes is an Investment Director at Avenir Capital and is responsible for the portfolio management of the Avenir Global Fund. Prior to joining Avenir, Curtis worked at Platinum Asset Management, where he spent 15 years as an investment...
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