Electrifying the economy

Discover more on the electrification of our economies and the investor opportunity with our Head of Sustainability Research, Thomas Hohne-Sparborth, here:

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20% to 70% electrification.

Access to energy has long been at the heart of human development. For more than two centuries the bulk of this energy has come from burning fossil fuels. As economies have grown, so have emissions – since 1920, fossil fuel consumption has increased 12-fold¹, and 73% of all global greenhouse gas emissions (GHGs) now arise from burning coal, oil and natural gas².

The largest portion of these emissions comes from power stations, as they generate electricity for commercial and domestic use. Despite this, just 20% of today’s end-user energy consumption is based on electricity, with the large majority still coming from burning fossil fuels directly.

Between now and 2050 we believe we will move from 20% economy-wide electrification to 70%, as industries transition from fossil fuels to renewably-generated electricity

Advances in renewable electricity generation, batteries and heating technologies are changing this story.

Between now and 2050 we believe we will move from 20% economy-wide electrification to 70%, as industries transition from fossil fuels to renewably-generated electricity. In transport, road vehicles are switching to battery power and shipping may soon turn to a mix of low- and zero-carbon fuels that include ammonia produced with electricity. In heavy industries, direct electrification and zero-emissions hydrogen produced via electrolysis could take the place of oil and coal. And in buildings, electric heat pumps are already replacing gas boilers.

making history.

The rise of today’s wasteful, high-emissions economy has been driven by a fundamental market failure – the price of emissions and other pollution has been missing from the cost of goods and services. The final bill for the environmental and social damage has been left to future generations or, often, populations in developing nations.

Since the Paris Agreement, governments have attempted to right this wrong with regulations and subsidies. But while public policy acted as a catalyst for early growth in the renewables sector, the market has since provided added momentum. Over the last decade, as technology has advanced, the installed prices for wind and solar generation have plunged more than 80% – solar is now the cheapest form of electricity generation in history. In 2022, 83% of all new electricity generation capacity came from renewables alone.

And, for the first time, more capital is now being pumped into renewables than into upstream oil and gas. In many ways it’s a story we’ve seen before.

From one ground-breaking innovation to the next – the lightbulb, the motor car, the home computer – as innovations match or beat incumbent technologies on price, bring improved performance, and become widely accessible, they pass socio-economic tipping points, swiftly moving from niche to mass adoption. As adoption grows, capital expenditure is deployed and economies of scale are reached. Costs fall and performance improves further – what was once niche becomes the norm.

We are convinced history is in the making – again. With the rollout of clean, renewable energy, and efficiency gains in technologies like electric vehicles and heat pumps, we believe electrification has reached a tipping point.

disruptor.

In national grids, the merit order model determines which power stations and which forms of electricity generation are “on” at any one time, with the cheapest at the head of the queue. Renewables have pushed conventional power stations to the back of this queue – when power is needed, we now turn to renewables first.

At the same time, demand for electricity is growing, driven by recent technological improvements in end user applications, with many electric solutions now more efficient than their fossil-fuel alternatives. Across the economy, it is possible that this disruption will have a disinflationary effect.

The cost of EV battery production has fallen 90% since 2010. In turn, this is driving the adoption of batteries in the power grid. Increasing numbers of homes and businesses are now pairing small-scale battery storage with rooftop solar installations, in effect becoming mini-power stations. This decentralisation of electricity generation is creating a new phenomenon – the ‘prosumer’.

Prosumers – consumers who also produce electricity, both for their own needs and for sale to others – are rewriting more than 100 years of power grid orthodoxy. We are moving from large-scale centralised production to a mix of large, medium and small-scale distributed generation and storage,

increasing grid resilience in the process, and creating new opportunities for governments to achieve energy independence. Industry experts anticipate that networks of prosumers will form “Virtual Power Plants” (VPPs), ready to be called on in times of energy stress. In the US it is estimated that, by 2030, VPPs could reduce peak-time demand by 60 gigawatts, the average power consumed by 50 million homes.

While today’s prosumers sell their excess electricity back to the central grid, future iterations of our energy system may see peer-to-peer trading, with neighbours selling home-generated electricity across local micro-grids. As businesses and homes lower their costs by self-generating the electricity needed for heating and charging EVs, or by “buying local”, established suppliers of transport and heating fuels could see reduced demand.

The disruption is likely to extend beyond economics, too. The transition towards renewables could redesign the geopolitical chessboard, as those nations reliant on income from fossil fuels find their exports less and less in demand. Meanwhile, miners and recyclers of the metals needed for electrification will be selling into a growing market.

infrastructure.

The business case for generating and consuming low-cost, zero-carbon electricity is becoming ever clearer. Infrastructure upgrades will be key. The rise of decentralised production demands that network connections designed to flow in one direction must also now take energy back to the grid. In some parts of the world, the take-up of home solar has expanded so quickly that ageing grid infrastructure is struggling to cope with the extra energy produced. Extra cabling, batteries and transformers will be needed as the grid is made ready for a new way of working.

unexpected opportunities.

As the energy transition unfolds, we believe that new profit pools will surface, often in unexpected places.

In shipping, for instance, green ammonia – produced via electrolysis using renewable electricity – looks set to join the low- and zero-carbon fuel mix as the industry aims to cut emissions. For fertiliser manufacturers, many of whom produce ammonia for use in mineral fertiliser, this could provide a potential new profit pool.

Electrification could also impact the real estate sector, with low value property becoming a potential home for new solar installations. Meanwhile, the buildings renovation sector is likely to grow as buildings are retrofitted with heat pumps, insulation, and an array of physical and digital energy efficiency solutions.

In the automotive industry, while car sales will continue to rise as demand grows from an increasingly wealthy global population, those firms that embrace the electrification opportunity could benefit from new revenue streams, such as charging-as-a-service and over-the-air driver-assist digital updates.

profit pools.

As the economy electrifies, oil and gas assets could be at risk of becoming stranded. Impacts are likely to be felt across all sectors.

Technological advances and the falling costs of renewables and batteries are key to the transition, but unprecedented policy support will continue to play a crucial role.

In the US, the Inflation Reduction Act will spend USD 391 billion on climate change measures – as part of a wide range of measures the Act will extend to 2035 a significant tax rebate for home solar installation. Meanwhile, the EU’s Green Deal will frontload the rollout of renewable energy installations, both to reduce the bloc’s emissions and to increase energy independence following Russia’s invasion of Ukraine. For investors, understanding and navigating the complex policy network is essential, with each new announcement having the potential to create game-changing opportunities for early movers.

our strategy.

Our Future Electrification Strategy aims to capture the many opportunities emerging through the energy transition. We favour industrials, information technology, materials and consumer discretionary companies. Our strategy focusses on the electrification and management of supply and demand, and the multiple enablers, both physical and digital, that are materialising these technologies.

The shift is happening more quickly and deeply than many imagine, as electrification brings both new risks and investment opportunities.

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¹ Fossil Fuels - Our World in Data
² Lombard Odier Data

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20% to 70% electrification.

making history.

disruptor.

infrastructure.

unexpected opportunities.

profit pools.

our strategy.

where we are.

get in touch.

let's talk.

electrifying the economy.

let's talk.

electrification insights.

sign up to our newsletter.

20% to 70% electrification.

making history.

disruptor.

infrastructure.

unexpected opportunities.

profit pools.

our strategy.

our expertise.

where we are.

get in touch.

let's talk.

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