The Journal Vol 4. Chapter 2
The Journal Vol 4. Chapter 2
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The light at the end of the tunnel: the sun and renewable energy

Michael Power argues that we live in challenging times, eking out the last gains from the Third Industrial Revolution, an age that which was built upon computer energy. But there is good reason to be optimistic for we are on the cusp of the Fourth Industrial Revolution, that which will be built upon renewable energy, energy generated by the sun and wind. And, as we pass from one industrial era to another, so we pass from one historic age to another: the economic centre of gravity is shifting from West to East. Michael Power notes that it is thus fitting that it is the East, and not the West, that is in the vanguard of the renewable energy revolution.

The light at the end of the tunnel: the sun and renewable energy

The light at the end of the tunnel: the sun and renewable energy

Michael Power, Strategist, Investec Asset Management

Not only is the world changing rapidly, the axis upon which it revolves is changing too. This shift is happening both geographically – via the renaissance of the East and the relative decline of the West – and philosophically. The intellectual narrative of free trade and free-flowing capital – and to a lesser extent mobile labour that has governed global economics for almost two centuries – is starting to be questioned not just by the nations that have been traditionally peripheral to the global system but crucially those players that are at its core.

The technological follow-through of the third industrial revolution – that began by harnessing the human mind to the energy of the computer – is also producing a string of scientific and technical breakthroughs. These giant leaps are not only changing the world but, perhaps more fundamentally, changing and challenging humanity’s place in that world through robotics and artificial intelligence.

As if all this were not enough, we seem to be on the cusp of the fourth industrial revolution. After steam energised the first industrial revolution and electricity the second, collectively leveraging human muscle power, the computer energised the third and leveraged the human mind. All were an expression of the laws of thermodynamics, each enabling a greater degree of productivity and thus wealth to be generated from the application of energy. We now face the prospects of an industrial revolution built on solar – and to a lesser degree, wind – energy. Not only will such energy be infinitely renewable, once the capital costs of installation are borne, the marginal cost of operation will thereafter be so low as to effectively be ‘free’.

It will come as no surprise to students of economic history that in terms of both the knowhow and particularly the productive capacity, China is now the undisputed leader in the worlds of solar and wind energy.

Such optimism does not, however, allow us to escape – especially in the developed world – from the demands posed by both ageing demographics and higher life expectancies. Looking ahead, the state will simply not be able to afford the ballooning financial burden that will flow from these developments. Individuals will increasingly have to fund their own pensions and those that cannot will be obliged to work for longer.

As a result, the imperative to find sources for long-term capital growth has arguably never been greater. Yes, it might be argued that the cost of capital has never been cheaper, but at the same time demographics are deteriorating and productivity is falling, taking the wind out of the sails of the vessel that provides economic growth. Consequently, the sources of revenue increases have arguably never been harder to find. This situation is being exacerbated by the fact that many businesses that rely on annuity-based sources of profit are facing what has been called ‘Uberisation’, and the challenges of finding reliable sources of capital appreciation have become more complex. As a result private-sector capital investment has been steadily falling.

If there is an answer to this conundrum, it surely has to lie in investing in the late-stage digital technologies of the third industrial revolution, as well as those that characterise the looming fourth. Indeed, the real winners will probably be those hard-to-see-in-advance fields that will be liberated by the plentiful availability of nearly free energy. What progress could be made, for example, by the ready supply of water flowing from solar-powered desalination plants? One of the most encouraging consequences of the dawning of the ‘Age of Solar’ will be energy production that is less driven by carbon and more by environmentally friendly sources. Already in 2016, 60% of new energy capacity installed worldwide is renewable. By 2020, it will be over 100%!

At the risk of repeating the now well-established, the geographic axis on which the global economy is shifting decidedly East. The economic centre of gravity will have migrated from the Barents Sea off Norway in 2000 to the Chinese-Mongolian border by 2025. The implications of this shift in terms of where one invests are becoming apparent to all. What is less appreciated is the degree to which the East is embracing the implications of the coming fourth industrial revolution. Many of the corporate leaders in renewable energy are Asian. As indicated above, half of the top-10 suppliers of solar panels and wind turbines are Chinese. But India is also emerging as a heavyweight – Suzlon Energy, one of the world’s leading wind turbine suppliers is based in Pune.

As the nature of investment opportunities change, so too do the securities, products and strategies that we must use to harness them. These access points may not fall easily into existing asset allocation buckets, but they will have appropriate risk-and-return characteristics and provide true diversification across portfolios to provide resilience in times of shock. More and more investors are looking into the unknown and seeking out ‘special opportunities’, non-traditional asset classes and unconstrained strategies to harness these new sources of long-term outperformance.

It is one of our highest priorities at the Investec Institute to identify for our clients the new securities, products and strategies that will emerge to access not just these new opportunities but these New Worlds, be they geographic or technological.

Resilience in an age of uncertainty

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