21st Jan '23 by Edmund Shing

18 comments 2562 reads

Market Musings 200123:
Energy at the centre of the modern economy

Do not underestimate the relentless growth in global energy demand.

Weekly Podcast - Gold Glitters Again

In today’s podcast, Edmund Shing discusses the virtues of precious metals.

· What are precious metals and how are they used?

· Why do people tend to overlook gold in their investment portfolio?

· How has gold performed in recent years and what is the outlook for 2023?

· How can people invest in precious metals?

Summary

Continued global energy demand growth forecast for at least 10 more years
We have become more efficient with our use of energy, but much more is now needed
Peak global fossil fuel demand not seen until 2025; Indian demand growth a key driver
The US Inflation Reduction Act should spur heavy renewable energy investment, we should see similar in Europe
Cleantech and energy transition funds should benefit
As should oil & gas infrastructure and producers

Renewable energy alone will not satisfy global energy demand

Today we are going to talk about energy. Energy, both fossil fuel energy, renewable energy, energy in all its forms. There are some interesting points to make.

Continued global energy demand growth

The first point, which underlies everything else that we think about in the energy space, is the following:

Global energy demand grows and will continue to grow for a number of years, even as we make more efforts to economise on our use of energy.

Global energy consumption to rise for another 10 years

Source: McKinsey

So the story has been that since the 1970s, the first oil shock, when, if you remember, in 1973, the price of oil tripled from $3.50 a barrel to $11 a barrel almost overnight, thanks to the formation of the OPEC oil cartel group of nations.

1970s oil shock: $3.50/barrel to $11, second oil shock in 1980s

TV3LUYqY78w7I1YrNhtsQIA2NNg8mF-8f2aICKdX90rCrYF0opi8x_gWpTVCK_RAmCmJIaKPjgslIBkq8hiDMLPTdN8g437gaNyDwLJ-Ve0IkiA6yR-ffWYl1ERD31rcs_1Ljr1APPf4ljk9NBWmpgdgilh18f5w7ODFqGMuzj7zWxEvGoeVers2KwRRPg

Source: Thomson Reuters

Since that point, we have made increasing efforts to become more efficient with our use of energy, obviously oil, gas and more recently renewables and electricity. In all these forms, we have become more efficient, using less…

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Caduceus

21st Jan '23

Enlightening and thought provoking as always Edmund, many thanks

Albertos

Interesting article as always Edmund.

As chance would have it I decided to go back into the renewable sector last week. My reasoning was along the lines of your article but without the data you present. I also felt that the shocks of the "windfall" tax introduction are beginning to wane and I've seen a few company announcements which suggest that there will be little impact on the NAV's of green energy generators.

So I took starter positions in Greencoat UK Wind (LON:UKW) , NextEnergy Solar Fund (LON:NESF) , Gore Street Energy Storage Fund (LON:GSF) and Ashtead Technology Holdings (LON:AT.) - always like to have a "picks and shovels" company attached if possible and the recent placement gave an opportunity. We'll see how these work out. There's quite a lot of choice out there.

Personally think the oil majors may well be a good medium/long-term bet - we're still a few years out from peak oil and a few more from peak gas and there continues to be low investment. But on the side-lines at the moment apart from Diversified Energy (LON:DEC) for its hedged income and yield.

Also there is a link here to transition metals so I also currently have holdings in Blackrock World Mining Trust (LON:BRWM) and BHP (LON:BHP) .

Time will tell and we live in uncertain times.

Thanks again

Phil

Rusty2

The problem with energy is it switching from fossil fuels such as oil and gas to electric, cars and heating. How are we going to produce enough? Renewals are growing but some days they produce hardly anything, on cloudy still days, it is down to about 5% of our use. Around about 40% of our electric comes from gas.

Other countries such as India, USA and Germany still use a lot if coal. I think India and the US could switch to solar quite easily. But they have a lot of coal.

The problem in the UK, is the Govt. has imposed windfall tax on renewables, which does not make sense to me.

Whitbourne

There's a lot of investment going into this right now, Rusty2. If you look at the projected increase in offshore wind alone (50GW by 2030, which is only just around the corner) then on windy days that is enough to power the whole country. You can see the live figures here. As I write, demand is 38GW of which wind is generating just 8GW, but last week it produced over 20GW on some days.

So we're going to have a lot of surplus power which we will need to store somehow. There are established technologies (pumped hydro is the most suitable) and new options using compressed or liquefied air, gravity storage, chemical reactions and hydrogen. These are typically at the early adoption stage, see for example this story about a 4GWh compressed air facility now being built. That's pretty big - for comparison the UK's largest grid battery is 200MWh or 5% of the capacity. Batteries alone won't do it, they are much too expensive for long-term storage.

Until then, we will just have to keep using gas when the wind isn't blowing. But we will be using less and less of it each year. I'm confident that the storage technologies will be developed, there is such a clear market for them and so many competing options. We'll see a process of cost and engineering optimisation until one technology comes to dominate, just as the Li-Ion battery has become the default option for electric cars, power tools and much else.

I agree with Phil's choices of how to play this, using energy storage funds. The two I hold are Gresham House Energy Storage Fund (LON:GRID) and NextEnergy Solar Fund (LON:NESF) which isn't yet a storage fund but is turning that way, and I hope for a re-rating when it does. The Gresham House fund is on a ~10% premium to NAV whereas NextEnergy Solar Fund (LON:NESF) is on a 10% discount and offers a higher yield. I haven't looked at Gore Street Energy Storage Fund (LON:GSF) so I'm off to do that now.

Thanks Edmund for another great article, and a good weekend to all.

Thanks, I know most of that and have used the NG site for some years. Do you know why we are exporting so much to Europe now? Seems unfair when gas prices are so high, in 2021 we imported nearly 10%. I agree storage is a major issue.

With cars switching to electric and houses switching from oil and gas to heatpumps, won't electric demand soar? Not convinced about switching from gas heating to electric.

I do hold some of those funds and looking to add 1 more.

Snowbum

Thanks for another interesting article Edmund. My largest holding just now is a picks and shovels play on the oil and gas industry, Hunting (LON:HTG) . They also have excellent alignment with energy transition projects. The order book is solid and imo, this is a company well set for steady growth.

Zipmanpeter

22nd Jan '23

I don't think there will be an issue with absolute electrical energy generation. The rate of switchover to electric cars, electric heating and (almost) electrical everything is going to be rapid but still take 15-20 years. Over that time period plenty of time to ramp up production (windfarms etc), storage (batteries etc) and improve inefficiency. the problems will be more local at the sub scale level unless the government gets serios quickly.

On the flip side, I think we underestimate how quickly coal will reduce, less on environmental grounds and more on cost grounds. Mining is expensive and standards of safety and emissions are rising even in places like like China. Oil and gas have better long term cost profiles in favoured locations.

I remain invested in Shell who are proactively taking action to divest low quality oil&gas assets and positioning themselves in trading and braded energy companies - whilst still planning to pump a lot of Oil and gas short term. This is the right strategy I believe.

The costs of climate change become more evident every year but the political reality is that change will be slow(er than we need!)

brads13

I believe the West has a distorted view of energy and I keep reminding myself of the Valeriepieris circle. The economies in that circle are leading the World's economic growth and therefore driving global energy consumption.

Quest

I am preparing a longer post on this but the essence is that fossil fuel use globally will not decline until there is massive nuclear capacity. A time scale of half a century?

XTR

I'm also unconvinced by the viability of electric heating, for instance, the cable that brings electricity into UK homes is good for around 100A max, which at 240V, provides 24kW total, even if this were used solely for heating it is still only 85% of the output of a typical boiler. A gas/hydrogen blend is more convincing and green hydrogen technology is currently in development [Shell (LON:SHEL) ] but relies on renewables, which rely on fossil fuels.

kuronagi

Edmund

This is an excellent article which I strongly recommend to all Stockopedia subscribers.

If I can just highlight two paragraphs in the middle of your report

So the bottom line is: expect heavy investment in renewable energy and renewable energy infrastructure.

But strong demand will continue for oil and natural gas, as an intermediate solution while we try to decarbonize the economy, and while we try to become even more efficient with our use of energy.

I have a simple way to gain exposure to these trends. Buy big oil (Shell, BP, Exon etc) and big mining (Rio, BHP, Glencore etc). They are the clear winners and safer investments than renewable energy plays. By "safer", I include stock market valuations and dividend yields.

Kuronagi

Logical David

Ed, that's an interesting chart showing the world's projected energy consumption for the next decade and until 2050. The graph shows mankind still using copious amounts of fossil fuel by 2050. I say this because last year I read an article which stated that by 2056 mankind will have consumed all the oil in the ground, by 2060 all the natural gas will have been used up by humans and the world's coal reserves will only last until 2090. All this suggests the fossil fuel element of your graph will plummet during the 2050s and by then mankind will have no option but to be much more reliant on renewables and hopefully fusion will finally be a reality. Without oil, how will the petrochemical industries manage to produce enough plastics for the world's ever growing demand because there is only so much land to grow the crops??

David.

Also I read gas power stations are only around 58% efficient, and most new gas boilers are over 90%. So replacing gas boilers with electric heat pumps, at the moment, does not seem to make much sense. If renewables do get up to around 50% then maybe.

The future of plastics is not oil based…. Bio plastic technology is improving all the time, some very interesting compounds now being used such as FDCA (furan di-carboxylic acids).

Indeed, I have recently established a small ‘punt’ position in Biome Technologies (LON:BIOM) as they have recently received a grant to manufacture at scale, one of their developed plastics. The company is loss making just now but could be on the cusp of profitability from their existing product range - biodegradable coffee pods / filters and biodegradable tree protectors.
If the scale trial goes to plan, or even another of their patented compounds takes off, it could be a multi bagger or takeover candidate at the current ridiculous mcap of £3mil.

Hi Rusty2, your figures are correct - gas power stations are only around 58% efficient, and most new gas boilers are over 90%. What this omits is that if you use the electricity generated at 58% efficiency to run a heat pump, for every 1 kWh of electricity used the pump will produce anything from 2.8 kWh to 4 kWh depending on design and flow temperature. The difference is ambient energy drawn from the environment (air or ground). Once you account for this, burning gas to generate electricity makes sense. However if the electricity is used to run a traditional radiant heater, or an immersion heater, then you would have been better off with gas-fired heating as you say.

Hi, yes we are exporting so much to Europe because the French nuclear fleet is performing poorly and many reactors are shut down. The 'past year' figures show that this has made us a net exporter as you say. In previous years we have imported cheap French electricity.

This is the past year - imports more than offset by exports to France

This is the past week, with modest wind speeds and hence more reliance on imports, including from France

"With cars switching to electric and houses switching from oil and gas to heat pumps, won't electric demand soar?" Yes - it is projected to increase by 50% by 2035.

24th Jan '23

Did this post garner some interest for Biome Technologies (LON:BIOM) ?

Up almost 20% today :-)

Caper4

24th Aug '23

Belated thanks Edmund for your very interesting piece. Did you see the article in the Sunday Times business section this week, in which Greencoat U.K. Wind was strongly recommended? Apparently, the wives of the Fund managers, recently invested a total of £600,000 in UKW shares . Quite an endorsement.

Market Musings 200123: Energy at the centre of the modern economy

Market Musings 200123:
Energy at the centre of the modern economy

Weekly Podcast - Gold Glitters Again

Summary

Renewable energy alone will not satisfy global energy demand

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

18 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 200123: Energy at the centre of the modern economy

Market Musings 200123:Energy at the centre of the modern economy

Weekly Podcast - Gold Glitters Again

Summary

Renewable energy alone will not satisfy global energy demand

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

18 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 200123:
Energy at the centre of the modern economy