Season 5, Post 41: Finance follows physics
In the world of energy, the voice of Michael Liebreich is one worth listening to. For those unfamiliar with Michael’s background, not only does he have a Masters Degree in Engineering from Cambridge University, but he was also the founder of New Energy Finance in 2004. The business was sold to Bloomberg in 2009 (and now operates as Bloomberg New Energy Finance). Michael currently undertakes a range of speaking and consulting roles as well as serving on numerous industry boards. Your author was lucky to hear Michael’s thoughts on energy transition over coffee and exceptionally good Portuguese nata. The key takeaways were as follows:
“There are better ways of doing things”, Michael said passionately when asked about the current state of affairs. Sure, the United Nations’ Paris Agreement (a legally binding international treaty on climate change) was “ground breaking” but the reality is that the world remains highly dependent on fossil fuels. This is a function of their deeply embedded nature in almost everything we do – from fuel to transportation – and also the “heavy resistance” to change. Michael described this as a function of regulatory and political capture as well as the vested interests of incumbents, views to which we are sympathetic.
Nonetheless, there are major causes for optimism. Most importantly, this is simply because “finance follows physics.” Put another way, understand how the science of energy works and how these learnings can be applied practically, and then the investments should follow. Electric vehicles are over three times as energy-efficient as those with internal combustion engines. Logically, we should see increasing deployments of EVs. The “fast and dramatic” rise of wind and solar energy – to c15% of the global electricity mix versus zero a generation ago – is another case in point.
Against this background, Michael is confident that “we will get to net zero.” Even if current targets may be “aspirational”, there is a clear need to plan towards them currently. The ‘S-curve’ is a well understood concept in business: slow and steady progress, then exponential growth before eventual flattening. If 2050 is the goal for net zero in the developed world, then a lot needs to happen: invest now and remove barriers before 2030, to make sure the real change (the steep part of the S) occurs in the following decade. Better policy and fewer regulatory hurdles will help. Technological change can be an enabler (a favourite theme of ours). However, it will also be “necessary to put money on the table.” If we want clean steel or green aviation fuel, then we may just have to pay up for it.
2 November 2023
The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.
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Alex Gunz, Fund Manager
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