investment viewpoints

    What does a world with almost free power look like?

    What does a world with almost free power look like?

     

    Renewable energy is getting cheaper. What impact is this likely to have on other sectors that are experiencing cost declines, and what does this mean for the wider economy?

    Need to know:

    • Renewable energy costs are in decline and this trend looks set to continue
    • Taken in the context of other falling cost curves, this development presents a number of growth opportunities
    • This could accelerate the transition to new food systems, which represent a USD 1.5 trillion annual profit pool by 2030

     

    Renewable power

    The costs associated with renewable energy generation have been in a sustained decline for a number of years. Wind and solar costs have dropped by 60% and 80% respectively over the past 10 years, owing to larger, more efficient wind turbines and the automation of solar product manufacturing. Renewables are also getting cheaper relative to fossil fuels. Under its Net Zero scenario, the International Energy Agency (IEA) predicts that in the next 10 to 30 years, the cost of electricity from gas is set to rise across geographies, while costs for solar and offshore wind are set to drop the most. 

    Lombard Odier’s recent Net Zero Transition Forum, delivered in partnership with the University of Oxford, saw SYSTEMIQ Partner Mattia Romani explain how a continuation of this trend presents the possibility of power at close to zero cost as up-front capex investments are amortized. This development stands to underpin a number of transformations.

    The challenge for investors then is to anticipate the resulting economic disruptions, particularly in the context of other sectors and solutions which are also on a cost-reduction trajectory. Romani suggests two areas of relevant interest are Artificial Intelligence (AI) and genomics as they are also experiencing declines in costs.

     

    Driverless cars

    The overall costs associated with AI are falling in line with the falling costs of computation. When considered in the context of cheap power, this has enormous potential. Romani suggest these two factors taken together would have the effect of bringing down the costs associated with automated vehicles, for example. In the event that there is a proliferation of automated vehicles, this not only presents growth opportunities in terms of manufacturers, but also solutions providers who support the infrastructure needed to accommodate these vehicles. Falling cost curves, considered in tandem, can help identify adjacent potential areas of growth. 

     

    Alternative proteins

    Equally, the falling costs associated with genomics have the potential for far-reaching consequences when taken in the context of cheap power availability. Together, this presents a potential scenario where alternative proteins can be manufactured at scale and at a very low cost. This not only points to an exciting area of growth, but reflects an essential driver of the necessary transition to new food systems.

    New food systems are required in order for humanity to address transgressions of the planetary boundaries, in a way that can accommodate the dietary needs of a growing global population. Central to our new food system strategy is the notion that 1 billion hectares of land needs to be returned to nature by 2030 to meet global climate and nature policy commitments, and this can be achieved through reducing agricultural land by 20%. Dietary shifts from animal-based to plant-based proteins will play a critical role in the transition to new food systems.

    Overall, the alternative protein industry is nascent at only around 2% of the conventional animal protein market in 2021 but is set to grow rapidly in the coming years – it is estimated that every 10th portion of meat, eggs and dairy eaten in 2035 will be from alternative sources.

    We estimate that new food systems will represent a USD 1.5 trillion annual profit pool by 2030 (from USD 600 billion in 2021). Cheap, clean energy will provide a huge boost to this transition and underpin a number of investment opportunities.

     

    The CLIC® economy

    The global economy is undergoing a major sustainability transition towards a Circular, Lean, Inclusive and Clean model (the CLIC® economy). This will not be a transition that happens at a uniform pace. Developments such the abundance of clean and cheap energy should have far-reaching implications for the wider economy and accelerate the transition within other sectors.

    The falling cost curve of renewable energy has a vital role to play in our climate transition strategy, which targets companies that will benefit from new growth avenues and enhanced profitability due to a carbon-constrained world. Our new food systems strategy should potentially benefit from factors which facilitate the growth of the alternative proteins market, which is essential to enabling major land restoration.

    important information.

    For professional investor use only

    This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
    Lombard Odier Investment Managers (“LOIM”) is a trade name.
    This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
    Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
    Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
    Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
    Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
    No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited  which is authorized and regulated by the FCA. ©2022 Lombard Odier IM. All rights reserved.