A concise look at energy transition

Well-known: The basic mechanism of all free markets is suppy demand equilibrium.

The pricing in free markets works on this simple mechanism. The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. Once the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied that shall result in increased price, push to the equilibrium price. The same happens in the opposite way.

Another well-known: Energy is not a free market.

(i) The supply of oil is (somehow) managed by a cartel called OPEC. (ii) Sources of energy are concentrated in certain parts of the earth and this pawes the way for geopolitics to play an effective role in the supply dynamics. (iii) As exploration and production is quite capital and technology- intensive, dominance of a number of large companies is the fact. (iv) Enourmous amount of financial instruments defined over the price of the energy is traded every day which disrupts the pricing mechanism. Hedging and manipulation goes together.

The fact: Drive towards net zero is expensive. Huge investment is needed, cost of ‘clean’ energy is relatively high, ROE is lower compared to hydrocarbons.

My take (2020) : Two exits from here. (i) Price of hydrocarbons (somehow) gets to the higher level which makes ‘clean’ energy investment and usage more feasible. (ii) The efficiency is increased in generation by new technologies bringing ROE of ‘clean’ to a higher level.

Where we are: No news from efficiency increase in generation yet. Good progress in the first exit (on the back of lower capex for last 5 years, political tension with Russia, carbon tax).

Good for: States that exporting hydrocarbons, investors of energy companies, companies providing services and equipments for hydrocarbon exploration and production (exploring software and hardware, well services, off-shore services etc.), transporters of hydrocarbons, petrochemicals (in short term), electric vehicle producers, battery producers (companies offering energy transition services, electrification industry ($SIEG, $LEGD, $ENR1), cable industry ($NEX), grid management services.

Bad for: All consumers, energy importing states, petrochemicals (in long term), energy-intensive industries (steel, cement, glass, sanitaryware, building materials, electricity generators, datacenters, suppliers of ICE powertrain).

Short and medium term risk for the first exit: High inflation and expected slowing of growth in the economies caused by normalisation of monetary policy shall lower the disposable income. Increasing energy bill is certainly not helpful. If economies gets into stagflation, net zero will be too painful to realize.

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