Extinction rebellion or energy revolution?

We have always taken the view that the shift towards renewable energy is inevitable because of technological change and economics whatever climate change deniers may say. As the cost of energy sources such as solar and wind continues to fall, and new storage technologies come on stream, it becomes inevitable that suppliers will switch to the cheapest form of energy and this will drive the change, irrespective of any government intervention to accelerate it.

Cost of Solar Power

                                                                                                                                      Source: Bloomberg New Energy Finance.

The chart above shows the levelized cost of energy for solar power in the US and Bloomberg’s forecast going forwards. Levelized cost of energy refers to the lifetime cost of an energy source, including both operating and capital costs. In comparison, the cheapest fossil fuel source is gas at between $38/MWh and $76/MWh. As such, solar is now crossing over from gas as the cheaper power source in the US. Onshore wind is already the cheapest power source overall in the US.

There are a number of other economic benefits of renewables. One is that they are less about very large long-life capital projects, such as gas fired power stations. They are often small, modular incremental investments which by their very nature are less risky. This attraction is often underplayed, as is the benefit of certainty. We know the sun will rise tomorrow but no-one can predict the price or availability of oil and gas sourced from often unstable countries.

We are big believers in this transition, which we see as still in its early stages. While the UK is now generating over 50% of its power from alternatives to fossil fuels, other countries are well behind. The US is still around 65% coal and gas, although this is shrinking. These percentages are only half the picture however. What is much more exciting is the prospect of widely available cheaper power.

On each occasion where the world has shifted to a new cheaper power source, this has led to accelerated development and greater prosperity. We see this as the early stages of such a transition. Investment in new energy research is continuing apace and barriers such as transmission and storage will soon be breached. As this occurs, we expect energy costs to fall further and supply to increase which will accelerate economic growth in the very long term.

This transition will also lead to changes in the structure of economies. Fossil fuels maintain an advantage as a transport fuel, as they have high energy density compared to batteries. This means that transportation will become, relatively, less attractive. This will further accelerate the move towards a more localised economy and greatly favour highly automated production.

We expect emphasis on the trends to only increase over time and maintain our significant exposure to our new energy theme, both through investments in fast growing utility suppliers as well as the manufacturers of the equipment for both solar and wind installations.

Risks:

The value of stock market investments will fluctuate and investors may not get back the original amount invested.

Forecasts are not reliable indicators of future performance.


Important Information

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Source for information: Miton as at 09/10/2019 unless otherwise stated.

The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice.

Miton has used all reasonable efforts to ensure the accuracy of the information contained in the communication, however some information and statistical data has been obtained from external sources. Whilst Miton believes these sources to be reliable, Miton cannot guarantee the reliability, completeness or accuracy of the content or provide a warrantee.

Issued by Miton, a trading name of Miton Asset Management Limited the Investment Manager of the Fund which is authorised and regulated by the Financial Conduct Authority and is registered in England No. 1949322 with its registered office at 6th Floor, Paternoster House, 65 St Paul’s Churchyard, London, EC4M 8AB.

MFP19/432.