I’m glad you raised this topic @predictor!
I believe this is by far the big topic of our generation and expect it to be ever-present over lifetimes to come. Allow me to focus on the problem here.
Taking a step back from the increasing demand for electricity that could govern the greatest part of the 21st century due to emerging economies in Asia Pacific, Africa and Latin America, it all boils down to two central issues, namely the repercussions of global warming on life on Earth as we know it, and the efficiency of energy seen as an input into the global economy.
The Effect of Environmental Disaster on the Global Socioeconomic Order
Disruptive population displacement in Africa, rising sea levels reclaiming land in Jakarta and New York (among others), and extreme weather conditions jeopardising crop yield as well as destroying animal habitats are just a few examples of the (in)direct social and economic costs associated with the ongoing climate crisis.
As convenient as it may be to single out high polluting companies, the fight against global warming requires a coordinated effort from companies, governments and consumers alike. Once a coordinated effort is achieved, it will all come down to blitzscaling unprecedented environmental solutions that combine academic research breakthroughs and state-of-the-art technology.
Did someone mention the trial and error process that follows thereafter? Right…
For starters, our consumption patterns are broken and need changing. When do we need it? Now. On average, each person in the UK produces around 410kg of waste each year. Being more mindful about our consumption patterns by reducing food waste and avoiding products wrapped in plastic, among others, can substantially reduce the waste we generate.
Putting a scientist’s coat on, waste is bad for the environment because we cannot sustainable recycle it at our current capabilities. The waste ends up in oceans, landfills or end up being offshored to emerging economies such as Malaysia. Why is this bad? Because animals are displaced, ecosystems such as corals reefs die off and methane is released into the atmosphere, respectively. Why do we care about coral reefs? Well, although they cover 0.0025% of the oceanic floor, they generate half of Earth’s oxygen and absorb nearly one-third of carbon dioxide generated from burning fossil fuels.
The breadth and depth of the issue at hand requires an unprecedented level of coordination. Uh oh, did I mention this is unprecedented?
Energy: The Input at the Heart of the Global Economy
In economic terms, energy is a variable factor of production. In layman terms, that means that energy is necessary to create goods and services and the costs associated with the use of energy depend on the number of ‘units’ produced.
Bear with me.
To put it into perspective, if Elon were to rent out a Gigafactory production line to Team Pynk to bring a limited-edition electric vehicle, Model Pynk, to market (flashy prospect, huh? ), they would have a look at the costs of operating that production line. If Pynk produces 100 Model Pynk electric vehicles, an energy cost will be associated with the production of each vehicle. The more EVs Pynk produces, the higher the total electricity bill. For reference, Tesla manufactured about 96,000 EVs in 2019. Meanwhile, Volkswagen manufactured 10.8 million vehicles. That’s a lot of electricity.
To get a holistic view of the importance of the energy debate think about the following hypothetical situation and the analysis that follows thereafter.
Imagine that Model Pynk is so successful that the existing production line cannot handle market demand. Hence, papa Elon decides to open a new Gigafactory exclusively for producing Model Pynk. Where should it be built? Assuming that energy costs are the defining criteria for choosing a construction site, Elon will seek to build it in a region with the lowest energy costs - or create the infrastructure for it to be self-sufficient (that’s a thing).
As of 2020, according to the Energy Information Administration, energy sources such as onshore wind energy, solar energy, geothermal energy and hydroelectric energy are the cheapest options in the US. Hence, Elon would build the Gigafactory somewhere with access to such energy source.
Wait, so renewable energy is cheaper than fossil fuels in the US? Aye.
So…why isn’t everybody using it?
Well, as @ZackofPynk mentioned, the supply of renewable energy is nowhere close to covering demand. Furthermore, converting to a renewable energy source is not as straightforward for incumbent companies as doing a cost-benefit analysis.
Tesla, being a relatively new market entrant, has the luxury of building its factories using state-of-the-art tech. This includes (energy) infrastructure, industrial robots, etc. The same does not apply for incumbents.
But if there’s not enough supply of renewable energy and the penetration of electric vehicles increases, energy demand as a whole also increases, right? Well, yes.
Where does that extra energy come from?
You guessed it, that would come from fossil fuels…
A Dream of Spring
By now you may think that I’m the pessimist on the block, but there’s something that Albert (Einstein) would have had to say about this.
“If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”
Looking beyond the grotesque, single-minded pursuit of profits most investment managers embrace, the investment management industry is not compromised, at least not yet. There is a group of investment managers that stand out of the crowd, namely stewards. Stewards are those who deploy capital not only for the sole purpose of generating profits. Stewards bring change by investing in companies with disruptive ideas backed by ambitious management teams. For the record, Pynk has the features to become one of them. They identify the trends of tomorrow and support companies that turn vision into reality.
Going back to the main debate, although it’s hard to pinpoint what the energy source of tomorrow will be, we know that it must be cost-efficient and not further contribute to global warming. In this sense, recent advances in the cost efficiency of renewable energy are encouraging but there’s still a lot to be done for it to meet the technical efficiency and scale we require.
Electric vehicles, energy storage and clean energy may be obvious areas for stewards to identify and support visionaries to further the fight against global warming but there’s more to it. Improvements in less flashy areas such as infrastructure, freight and logistics, mining as well as waste management, among others, can bring about the change we want to see in the world.
Imagine Dragons puts it very well:
“We don’t wanna change, we just wanna change everything.”
Change starts with you and me; our consumption behaviour needs changing, so let’s get cracking!