The energy evolution story and the current investment opportunity

Energy 9/23/2020
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What is the future of energy demand?

The two primary drivers of energy demand are population and GDP growth. As of last year, energy demand growth has increased 35 of the past 36 years, with the 2008/2009 recession being the only dip. With GDP temporarily declining across the world, we are expecting a short term reduction in global energy demand. However, with continued population growth globally along with the electrification of the developing world and the continued development of technologies that require more energy input, it’s very likely that energy demand will continue to intensify and accelerate into the future.

To meet that increasing demand, as we stand today, we have a global energy supply that’s made up of:

Source: BP Statistical Review of World Energy: June 2019 and Tortoise estimates as of 12/31/2019

What are the environmental concerns with current global energy generation?

The biggest concern is the growth of CO2 emissions. Power generation is the single largest driver with more than a third of all CO2 emissions. The fundamental challenge for the global energy sector is this: generating more energy to meet demand, but doing so with less CO2 emissions.

With energy demand increasing year over year, and power generation increasing to keep up with this demand, how can CO2 emissions decline?

The single quickest way to do this through the reduction, and eventual elimination, of coal globally with a shift to natural gas and renewables, specifically wind and solar.

Natural gas has about half the CO2 emissions of coal. Until wind and solar energy generation are scalable across communities and countries, natural gas is the quickest and most efficient way to effectively reduce CO2 emissions today.

How does the U.S. factor into the growth of CO2 emissions?

While energy demand in the U.S. continues to grow each year, and the U.S. has been producing more oil and gas over the past couple of years than at any other time in history to meet this demand, overall CO2 emissions have decreased substantially.

10-Year Change in CO2 Emissions by Top 10 Emitters

Source: BP Statistical Review

The reason for this decline is mainly the displacement of coal with natural gas. Over the past 10 years, coal’s market share within the U.S. has decreased from close to 50% to about 20%.

Rapid change in U.S. power generation

Source: EIA 2019

If the U.S. is decreasing its CO2 output, what is responsible for the global increase of CO2 emissions?

Other countries around the world, like China and India, which have historically relied more heavily on coal, have not followed the same roadmap as the U.S. About 67% of the domestic energy supply in China comes from coal, while that number is around 75% for India. These countries have increased global CO2 emissions in aggregate because of the substantial increase in energy demand and energy consumption these countries have seen, and the significant amount of coal each of these countries uses to meet that demand.

As of 6/30/2019. Source: BP Statistical Review of World Energy 2019

These countries are in transition to cleaner sources, they’re just taking a lot longer to get there than the U.S. has. There’s a clear path to reduce CO2 emissions by displacing coal with natural gas and renewables. As countries around the world adopt a similar playbook to that of the U.S., we will see significant improvements in reduction in global CO2 emissions globally.

Why are some countries turning to natural gas instead of focusing on building out their renewable energy infrastructure?

Wind and solar energy generation have been gaining traction because of the decline in costs of the components and the materials used to generate those projects. As of today, there is no way to store excess wind and solar energy that’s generated in order to use it when the sun’s not shining or the wind’s not blowing, which has hindered the broad adoption of wind and solar. Progress is happening, and there are a lot of resources being deployed to improve energy storage, but it is still in the early phases of development.

If countries or communities are committed to decreasing their CO2 emissions, do they have to choose one alternative power source to do so, or can energy sources be used in conjunction with one another?

Many communities are starting to utilize wind and solar assets to generate a significant amount of electricity during periods when the sun is shining and the wind is blowing, and then in the intermittent periods, when that’s not the case, supplementing that electricity generation with natural gas. By combining a natural gas facility with a wind or solar farm, or a combination of all three, enough energy can be generated to satisfy and meet the demand of a particular area in an environmentally friendly way.

How else can the U.S. be part of the broader global CO2 emissions solution?

The U.S. has become a major exporter of low-cost energy to the rest of the world over the past 5 years. As energy demand continues to increase across the world, namely in developing countries, U.S. natural gas exports will be critical to replacing coal across the globe.

How else are U.S. exports helping communities across the world?

U.S. natural gas exports to emerging countries, will be crucial to helping decrease the global poverty rate. Reducing poverty requires access to energy. The UN states that more than 80% of the world’s population lives in countries that consume less energy than deemed necessary for proper human development and well-being. Economic poverty and energy poverty go hand in hand.

To address global poverty, emerging countries will require increasing energy for electricity and other uses. More than 100 million people gained access to electricity over the three-year period ending in 2015. More than half of that number utilized coal as a primary fuel source. More than 3 billion people worldwide rely on polluting energy sources such as wood, dung and charcoal for cooking. Almost 1 billion rely on kerosene lamps and other polluting devices to light their homes. U.S. exports of LPG, such as LPG canisters containing propane or butane, offer a lower emission solution that is dramatically safer for those citizens and the environment.

As emerging countries evolve and seek to provide a better quality of life for their citizens with improved access to electricity and transportation, U.S. energy exports will be critical to help accomplish this in a low carbon footprint way.

Is there an opportunity for investors to have positive impact on society through these themes, while benefiting from attractive returns?

Tortoise is focused on exactly this and takes into account not only lowering global CO2 emissions, but also aims to reduce poverty through affordable clean energy, utilizing industry and infrastructure.

To capture this macro opportunity, Tortoise believes the investible opportunity is in the companies that are focused on utilities in transition and the growth of renewables, as well as those companies focused on U.S. exports of low cost and low carbon fossil fuels globally.

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