Since the Industrial Revolution, economic growth has been tied to rising carbon emissions (1). Much of this is thanks to our seemingly endless appetite for fossil fuels. Now a deep transformation of our energy systems is underway. Plummeting costs and huge efficiency gains are creating economic tipping points as clean, renewable energy technologies come to the fore.

Greening supply

Energy production is the biggest driver of climate change, with nearly three quarters of all man-made greenhouse gas emissions (GHGs) coming from fossil fuels. Most of these are burnt directly for transport, heating or to power heavy industry. Today, just 20% of our final energy supply is met by electricity. Yet if we are to achieve the goals of the Paris Agreement, and limit global warming to 1.5°C, we must reach 70% economy-wide electrification by 2050, with the large majority of our electricity produced by zero-emissions renewables (2).

Over the last decade, the price for electricity generated by wind and solar has plunged – solar is now the cheapest form of electricity in history (3), and in most places both wind and solar generation beat fossil fuels on price. Renewables are, increasingly, becoming first choice for electricity producers on economics alone.

Demand creates a ‘virtuous circle’

The dramatic transformation of our energy systems is being spurred on by growing electricity demand, with electric and battery-powered technologies reaching mass-market tipping points of their own. Most noticeably this is seen on our roads, where electric vehicles now make up 13% of all new car sales (4); and in our homes, where electric heat pumps already meet 10% of global heating needs (5). This virtuous circle – with cheap renewables driving electricity demand and rising demand driving the rollout of renewables – is expanding. In heavy industries such as steelmaking, ‘green’ hydrogen – produced via electrolysis using renewable electricity – is set to become an alternative to fossil fuels. In shipping, similar ‘green’ ammonia will offer a zero-carbon alternative to heavy fuel oil. And our railways will continue to shift from diesel to electric power.

Unexpected profit pools

After more than a century of dominance, conventional power stations are losing their place as we are turning first to renewables. Power is being democratised with the growth of home solar panels putting the means of production into the hands of consumers. This has given rise to a new phenomenon – the ‘prosumer’, who both consumes and produces electricity, selling the excess back to the grid. Investors can be part of this opportunity.

The electrification of our economy will require infrastructure build-out on a vast scale. We estimate that $25 trillion of capital investment will be deployed this decade alone creating an unparalleled opportunity – in often unexpected places. The buildings renovation sector will more than triple in value as millions of homes and offices are retrofitted for efficiency upgrades. And while electric vehicles will continue to see strong growth – we anticipate pure battery vehicles will make up 60% of car sales by 2030 – it is in new revenue streams where the greatest growth will be seen. We estimate that charging-as-a-service and downloadable driver-assist digital updates could grow from near nascency to $240 billion each by 2030.

The search for ‘green alpha’

At Lombard Odier, we believe we must seek out ‘green alpha’ by identifying those firms best placed to both drive and benefit from this transformation. By carefully deploying capital, investors can contribute to the huge scale-up of electrification infrastructure while protecting portfolios against climate risk. Electrification will become the foundation of tomorrow’s economy and today’s investors have a once-in-a-lifetime opportunity to build it.

 

Guest contribution by Lombard Odier.

Learn more about this topic during Lombard Odier’s event at Building Bridges 2023.

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