Without a shadow of a doubt, the ability to create affordable power is the linchpin of the modern world. But the energy crisis in Europe and the woeful planning and rhetoric around policy has laid bare how the public and politicians have learned to take cheap, plentiful energy for granted.
Europe is headed for another decade of meager growth because of poor energy planning and policy.
Despite the early missteps, it's clear that we're in the era of the energy transition. The world will decarbonize and serious people are trying to find novel solution with efficiency and technology. The space, the opportunity and the challenge are all enormous.
Shortages of energy, higher prices, war and a deep dive into what will be required to lower global carbon emissions has laid bare just how difficult it will all be -- not just the energy but securing the metals for green technology. There's a portion of the world that badly wants to believe that we can build electric cars and windmills then all will be solved.
One illustration of the challenge of decarbonization argument has stuck with me. It came from British Columbia, which is the greenest province in Canada and surely one of the greenest in the world. Blessed with abundant rivers, it can create enough hydroelectricity to power itself cleanly with one exception: Natural gas is widely used for heating.
Some want to end that.
If so, the amount of electricity capacity needed to heat the provinces homes and maintain the grid on the coldest days of the year would need to be triple current capacity. So 90% of the time that capacity would be idle but you would need batteries or other capacity during peaks. The economics of leaving most of your capacity idle for 90% of the time are unworkable.
So there will need to be other solutions. Maybe that's new ways of storing energy that haven't yet been proven, maybe it's carbon capture (I believe it's promising) or maybe it's something else. That's one opportunity.
What's increasingly clear is that there's a nearly-irreconcilable between green all-weather capacity and peak demand. We also can't just go without power when the wind isn't blowing or the sun isn't shining. Nuclear can fill in gaps, but is there a political appetite to build it?
I don't know but what voters won't tolerate are higher energy costs and/or routine power outages. There will be a cost to the energy transition and it will be inflationary but managing it is the great political challenge of our time. It's also the great investment opportunity of this decade.
The problems this year have exposed a chasm between rhetoric and reality. Within that gap is an incredible amount of alpha. There was easy money to be made last year betting on the misunderstanding of the importance of oil and likelihood of rising demand and falling investment in supply. I expect many similar opportunities this decade, right down to the currency market where the countries that can provide cheap, clean energy will thrive while those who mismanage it will suffer.
I read a wonderful thread from former Goldman Sachs oil analyst Arjun Murti on the weekend where he wrote this:
Post-Ukraine, we are seeing some recognition that if we don’t solve for ALL aspects of energy — availability, affordability, reliability, and security — we won’t solve our climate/environmental challenges. They all go together.
I believe that philosophy will win out in the years ahead as the energy zealots on both sides give way to people who want practical, economically-feasible solutions.
Murti is hopeful that the lessons of the Ukraine war will lead to a healthier energy transition, I hope he's right because a future with abundant, cheap and reliable energy is a bright one.
