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Towards an electric future: investors at the heart of a new industrial revolution
Interview published on Letemps.fr, 3 July 2023
Over the next 30 years, the electrification rate of our economy is set to rise from 20% to 70%. For investors, this profound change represents a major financial opportunity.
The transformation of our energy systems constitutes a veritable revolution when we consider its monumental impact on our economy. Plummeting costs and huge efficiency gains are creating economic tipping points, as clean, renewable energy technologies contribute to the decline of fossil fuels. Underpinning it all is the electrification of society.
Today, electricity accounts for just 20% of our energy supply. 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 majority of our electricity produced by zero-emissions renewables. This means not only electrifying our energy supply, but also the demand.
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Moreover, since Russia's invasion of Ukraine, a host of governments have embarked on a race to invest in energy security through electrification in order to reduce their dependence on oil-producing countries.
Today, electrification is accelerating exponentially. Over the past ten years, the price of wind- and solar-generated electricity has plummeted, with solar power becoming the cheapest energy source in history. In 2022, global investment in low-carbon energy technologies exceeded USD 1 trillion and, for the first time, more capital was invested in renewable energies than in maintaining oil and gas infrastructures.
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The virtuous circle of demand
The development of new technologies generally follows an S-shaped curve. Change is almost imperceptible at first, but as companies start to invest, costs fall and adoption soars.
Clean, cheap supply is just one element in the wider electrification story. Electric and battery-powered technologies are approaching their own tipping points. Electric vehicles now account for 13% of all new car sales. In our homes, electric heat pumps already meet 10% of global heating needs.
This virtuous circle – with cheap renewables driving electricity demand, and this rising demand driving the rollout of renewables – is gaining strength. In heavy industry and maritime transport, for example, "green" hydrogen, produced by electrolysis using renewable electricity, is set to become an alternative to fossil fuels.
Unexpected profit pools
Electrifying our economy will require large-scale investment. We estimate that USD 25 trillion of capital investment will be deployed this decade, which will enable companies to position themselves in new markets and capture new sources of return.
This represents an unprecedented opportunity for investors: a transformation on the scale of the industrial revolution, unfolding at the speed of the digital revolution. Electric vehicles, for example, are expected to be a USD 1.7 trillion market by 2030, growing at almost 20% a year.
This increasing demand will encourage property owners to seize new sources of income that they can derive from solar installations combined with storage to sell charging services for electric vehicles.
The search for “green alpha”
At Lombard Odier, we are convinced that this transformation of our energy systems represents a major investment opportunity. Indeed, our research indicates that companies with significant exposure to the electrification of the global economy have a valuation similar to that of the equity market, yet offer capital efficiency and growth potential almost twice as high.
As the market awakens not only to the scale, but also to the speed of the transformation of our energy systems, we expect to see a re-rating of these companies. This should lead to relative market outperformance, which we call 'green alpha' - value creation that is directly attributable to one of the major components of the environmental transition.
Electrification will be a cornerstone of tomorrow's economy; today’s investors have a unique opportunity to be part of it.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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