In the 1930s American engineer Theodore Wright observed that in plane manufacturing, each time plane production doubled in volume, the cost of producing each plane fell by a fixed percentage. The same trend was found all over the manufacturing sector, from the production of semiconductors to the Ford Model T.
This principle is applicable to many technologies at the core of the energy transition, from electric vehicles (EVs) and solar panels to wind turbines and batteries. The numbers are even more striking than those seen in the manufacture of planes or Model Ts. The cost of solar energy has dropped by some 36% with each doubling of cumulative installed capacity.
But looking at the energy transition numerically still misses the point about ‘virtuous circles’. Cheaper products make customers more likely to adopt a given technology, adoption stimulates greater demand, greater demand leads to higher production volumes, higher production volumes lead to lower unit prices, lower unit prices lead to higher demand.
Digital transformation has the same story and we could see the decarbonisation trend following a similar trajectory.
Green is getting cheaper
The first generation of green energy technologies, such as EVs, solar panels and wind turbines, are now cheaper – or similar in cost – to the fossil fuel counterparts. With plummeting costs and a growing profit incentive from the private market, we should expect an inflection in their deployment.
The proliferation of digital devices has exploded since 1980, but the growth of green technologies is likely to happen faster because for one, climate change is seen as an existential risk and two, trillion-dollar government budgets have been set aside for this explicit purpose. There is much more of an imperative in a bid to save the planet.
For investors, the message is that decarbonising electricity production, transport and even food creates enormous markets for companies providing solutions.
Much of the political rhetoric is unhelpful for investors. Terms like ‘net zero’ and references to ‘pre-industrial levels’ do not mean much from a portfolio perspective. There are two things that matter.
The first is a continuous deflationary trend as the cost of energy eventually falls, making all goods more accessible to consumers by reducing the costs embedded in their manufacture, distribution, use, and disposal.
The second is that this fall in the cost of energy will result in new businesses, ideas, and cultural habits that are unimaginable, just as the idea of meeting your significant other online would have been half a century ago.
Evolving trends
Just as PCs were replaced by laptops, tablets and smartphones, we expect EVs, solar panels and onshore windfarms to be replaced in turn by newer, cheaper and better technologies.
Onshore wind demand will slowly be cannibalised by demand for less obstructive and more efficient floating windfarms. Small offshore turbines will be replaced with bigger ones.
EVs that take all night to charge may be superseded by ones that can be charged faster and travel further.
Solar panels will likely be phased out by 3D-printed solar film, which can be put anywhere and everywhere.
Today new renewable energy projects are cheaper than the cheapest fossil fuels. Major economies are phasing out subsidy programmes because they’re simply no longer needed. The cost of solar electricity has fallen by 90% since 2009, and now represents one of the cheapest forms of energy ever produced.
But of course there will be obstacles. For one, our grids need substantial investment after almost half a century of underinvestment. Two, supply chains have become creaky since the pandemic. And three, storage is a challenge.
Thematic investing
Wind and solar energy are on a clear trajectory towards being radically better than any other form of energy generation available. We are moving to a place where we can absorb a fraction of the sun’s energy and use it for energy needs.
The next step will be understanding how we can decarbonise huge parts of the economy with very little additional technology. And this isn’t about trying to pick the Microsoft at the start of the tech revolution – thematic investing helps investors capture a basket of companies that are changing how we produce and consume our energy.
There will still be some emissions in 2050. Industries such as concrete manufacture and farming are hard to decarbonise. That said, green energy means that they will still be less polluting than they are today, and carbon capture technology could mitigate some of the adverse effects.
The politics of climate is controversial. The economics is much more settled. Thematic investing in the companies that are helping the world decarbonise is a way to think beyond the noise and invest in profound change that will help the world achieve its sustainability targets. And along the way, maybe Theodore Wright will get a little more credit for his ideas.
