Electrifying the economy

Discover more on the electrification of our economies and the investor opportunity with our Head of Sustainability Research, Thomas Hohne-Sparborth, here:

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20% to 70% electrification

Access to energy has long been at the heart of human development. For more than two centuries the bulk of this energy has come from burning fossil fuels. As economies have grown, so have emissions – since 1920, fossil fuel consumption has increased 12-fold¹, and 73% of all global greenhouse gas emissions (GHGs) now arise from burning coal, oil and natural gas².

The largest portion of these emissions comes from power stations, as they generate electricity for commercial and domestic use. Despite this, just 20% of today’s end-user energy consumption is based on electricity, with the large majority still coming from burning fossil fuels directly³.

Advances in renewable electricity generation, batteries and heating technologies are changing this story.

Between now and 2050 we will move from 20% economy-wide electrification to 70%, as entire sectors transition from fossil fuels to renewably-generated electricity. In transport, road vehicles will switch to battery power and shipping will turn to a mix of low- and zero-carbon fuels that include ammonia produced with electricity. In heavy industries, direct electrification and zero-emissions hydrogen produced via electrolysis will take the place of oil and coal. And in buildings, electric heat pumps will replace gas boilers.

making history.

The rise of our WILD economy has been driven by a fundamental market failure – the price of emissions and other pollution has been missing from the cost of goods and services. The final bill for the environmental and social damage has been left to future generations or, often, populations in developing nations. That is – until now.

Since the Paris Agreement, governments have attempted to right this wrong with regulations and subsidies. But while public policy acted as a catalyst for early growth in the renewables sector, the market has now taken over. Over the last decade, as technology has advanced, the installed prices for wind and solar generation have plunged more than 80% – solar is now the cheapest form of electricity generation in history⁴. In 2022, 83% of all new electricity generation capacity came from renewables alone⁵. And, for the first time, more capital is now being pumped into renewables than into upstream oil and gas⁶. Renewables are on the rise, not because of ideology, but because of economics.

In many ways it’s a story we’ve seen before.

From one ground-breaking innovation to the next – the lightbulb, the motor car, the home computer – as innovations match or beat incumbent technologies on price, bring improved performance, and become widely accessible, they pass socio-economic tipping points, swiftly moving from niche to mass adoption. As adoption grows, capex is deployed and economies of scale are reached. Costs plummet and performance improves further – what was once niche is suddenly the norm.

Now history is in the making – again. With the rapid rollout of clean, renewable energy, and major efficiency gains in technologies like electric vehicles and heat pumps, electrification has reached its tipping point.

tipping points.

In 2022, several key clean technologies passed economic tipping points:

Plug-in electric vehicles

13% of all new cars sold

Wind and solar

12% of all electricity generation

Heat pumps

10% of all global heating needs

disruptor.

In national grids, the merit order model determines which power stations and which forms of electricity generation are “on” at any one time, with the cheapest at the head of the queue. Already, renewables have pushed conventional power stations to the back of this queue – when power is needed, we now turn to renewables first.

At the same time, demand for electricity is growing, driven by recent technological improvements in end user applications, with many electric solutions now significantly more efficient than their fossil-fuel predecessors. As the cost of burning fossil fuels is undercut, energy-intensive industries will experience an operational expenditure (Opex) revolution. Across the wider economy, the disruption will be disinflationary.

The cost of EV battery production has fallen dramatically – down 90% since 2010⁷. In turn, this is driving the mass adoption of batteries in the power grid. Increasing numbers of homes and businesses are now pairing small-scale battery storage with rooftop solar installations, in effect becoming mini-power stations. This decentralisation of electricity generation is creating an entirely new phenomenon – the ‘prosumer’.

Prosumers – consumers who also produce electricity, both for their own needs and for sale to others – are upending more than 100 years of power grid orthodoxy. We are moving from large-scale centralised production to a mix of large, medium and small-scale distributed generation and storage, increasing grid resilience in the process, and creating new opportunities for governments to achieve energy independence. Networks of prosumers will form “Virtual Power Plants” (VPPs), ready to be called on in times of energy stress. In the US it is estimated that, by 2030, VPPs could reduce peak-time demand by 60 gigawatts, the average power consumed by 50 million homes⁸.

While today’s prosumers sell their excess electricity back to the central grid, future iterations of our energy system may see peer to peer trading, with neighbours selling home-generated electricity across local micro-grids. This deep disruption will put oil and gas distributors at risk. As businesses and homes lower their costs by self-generating the electricity needed for heating and charging EVs, or by “buying local”, established suppliers of transport and heating fuels could be cut out altogether from household energy needs.

The disruption will extend beyond economics, too. The transition from fossil fuels will redesign the geopolitical chessboard, as those nations reliant on income from fossil fuels find their exports less and less in demand. Meanwhile, miners of the metals needed for electrification will be selling into a growing market, and innovations in recycling batteries and other electrification materials will flourish, creating entire new supply chains and services.

opportunities.

USD 1trn

global low-carbon energy investment in 2022

USD 24.5trn

electrification cumulative capex investment mobilised for deployment 2022-2030

USD 12trn

potential global annual savings from the switch to renewables⁹

infrastructure.

Electrification is creating massive investment capex. Between now and 2030, with the business case for generating and consuming low-cost, zero-carbon electricity becoming ever clearer, companies are gearing up to deploy USD 24.5 trillion in order to participate in the electric economy¹⁰.

Infrastructure will be key. Not only will vast amounts of cabling and batteries be needed, but the grid of tomorrow will need to be ready for a new way of working. The rise of decentralised production demands that network connections designed to flow in one direction must also now take energy back to the grid. In some parts of the world, the take-up of home solar has expanded so quickly that ageing grid infrastructure is struggling to cope with the extra energy produced – physical and digital upgrades are needed fast.

Decentralised storage will smooth the transition. At-home and vehicle-to-grid (V2G) EV batteries will store excess energy at times when renewable production is high, and feed back to the grid when production is low or at moments of peak electricity demand, with smart-grid software controlling the process. For consumers, V2G systems provide passive income, gained merely by leaving EVs plugged in when not in use. For governments, decentralised storage will increase the viability of renewable installations and minimise the need for public spending on large-scale centralised storage. It is estimated that at the present rate of EV adoption, V2G batteries could provide the world’s entire short-term grid storage needs by 2030¹¹.

unexpected opportunities.

As the economy is rewired, vast new profit pools will surface, often in unexpected places.

In shipping, green ammonia – produced via electrolysis using renewable electricity – will join the low- and zero-carbon fuel mix as the industry looks to cut emissions. For fertiliser manufacturers, many of whom produce ammonia for use in mineral fertiliser, this will provide an entirely new profit pool that will feed into a market worth USD 22 billion.

Electrification could change the world of real estate, with low value property becoming a potential home for new solar installations, creating large-scale urban generation and revitalising run-down areas. Meanwhile, the buildings renovation sector will grow from USD 960 billion to USD 3.3 trillion¹² as millions of buildings are retrofitted with heat pumps, vast volumes of insulation, and a wide array of physical and digital energy efficiency solutions. Here, sheep farmers could discover an unexpected new market, as sheep’s wool sees demand for use in 100% renewable insulation.

In the automotive industry, while car sales will continue to rise as demand grows from an expanding and increasingly wealthy global population, those firms that are quick to embrace the electrification opportunity will benefit from entirely new revenue streams, such as charging-as-a-service and over-the-air driver-assist digital updates, which we anticipate could grow from near nascency to each be worth USD 240 billion between now and 2030¹³.

profit pools.

As the economy electrifies, 95% of our investment universe will be disrupted. More than USD 1 trillion of oil and gas assets are at risk of becoming stranded. Cascading impacts will be felt across all sectors.
Technological advances and the plunging costs of renewables and batteries are driving this transformation, but unprecedented policy support will continue to play a crucial role.

In the US, the Inflation Reduction Act will spend USD 391 billion¹⁴ on climate change measures – as part of a wide range of measures the Act will extend to 2035 a significant tax rebate for home solar installation. Meanwhile, the EU’s Green Deal will frontload the rollout of renewable energy installations, both to reduce the bloc’s emissions and to increase energy independence following Russia’s invasion of Ukraine. For investors, understanding and navigating the complex policy network is essential, with each new announcement having the potential to create game-changing opportunities for early movers.

our strategy.

At Lombard Odier, we believe the transition to an electrified energy system effectively constitutes a new industrial revolution. This is, however, unfolding at the speed of the digital revolution. Already it is radically altering how businesses do business and consumers consume.

Working in partnership with systems change firm Systemiq and the University of Oxford we take a science-based systems approach. While markets largely still perceive the energy transition in a linear fashion, our conviction is that it will occur at yet unpriced exponential growth. In building our Future Electrification portfolio we favour industrials, information technology, materials and consumer discretionary, and target mid- and large-capitalisation firms, rather than mega-caps. Our strategy focusses on the electrification and management of supply and demand, and the multiple enablers, both physical and digital, that are materialising these transformative technologies.

Already the shift is happening far quicker and more deeply than many imagine, as the electrification revolution brings both new risks and once-in-a-generation opportunities.

where we are.

Our heritage is Swiss, yet our outlook and mind set are resolutely international. With over 25 offices globally, we are able to serve our clients all over the world.

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¹ Fossil Fuels - Our World in Data
² Lombard Odier Data
³ https://www.iea.org/reports/key-world-energy-statistics-2021/final-consumption
⁴ Solar is now ‘cheapest electricity in history’, confirms IEA (carbonbrief.org)
⁵ Record Growth in Renewables Achieved Despite Energy Crisis (irena.org)
⁶ Renewable projects payback time drops to under a year in some places – capital investments shoot up (rystadenergy.com)
⁷Race to Net Zero: The Pressures of the Battery Boom in Five Charts | BloombergNEF (bnef.com)
⁸Explainer: What is a virtual power plant? | Reuters
⁹Switching to renewable energy could save trillions - study - BBC News
¹⁰Lombard Odier projection
¹¹Electric vehicle batteries alone could satisfy short-term grid storage demand by as early as 2030 | Nature Communications
¹²Lombard Odier projection
¹³Idem
¹⁴Wikipedia

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20% to 70% electrification

making history.

tipping points.

disruptor.

infrastructure.

unexpected opportunities.

profit pools.

our strategy.

where we are.

get in touch.

let's talk.

electrifying the economy.

let's talk.

electrification insights.

sign up to our newsletter.

20% to 70% electrification

making history.

tipping points.

disruptor.

infrastructure.

unexpected opportunities.

profit pools.

our strategy.

our expertise.

where we are.

get in touch.

let's talk.

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