The energy industry is being reshaped. There has been a dramatic drop in the cost of generating electricity from renewables, while the cost of generating electricity from conventional sources has remained much more constant. The levelized cost of energy (LCOE) is essentially a proxy for the average price that an electric generating asset has to receive in order to break even over its lifetime.
- Lazard does an annual analysis of the LCOE from various sources in the United States
- The LCOE of solar has dropped from $359/MWh in 2009 to about $43/MWh today, a drop of about 90%
- Wind has dropped from $135/MWh to $42/MWh
- The current LCOE for natural gas is about $58/MWh, down from $83/MWh
- And coal has stayed very consistent at just over $100/MWh
These economics are driving change. Bloomberg New Energy Finance projects that there will be a shift from generating two thirds of electricity from fossil fuels today, to about two thirds of electricity coming from renewables by 2050.
The other mega trend that is impacting oil and gas is the shift in the transportation system from fossil fuels to electric. Electric vehicles represent 0.3% of the cars on the road today and only 1.5% of new car sales. Although these numbers seem inconsequential and irrelevant, a closer look at the metrics suggest exponential growth in his sector:
- It took 20 years to sell the first million EVs, 18 months to sell the second million, 8 months to sell the third million and 5 months to sell the fourth million
- This trend is likely to accelerate based on regulatory change. At least 14 countries have announced a ban on sales of new internal combustible engines by 2040 (France, UK, Germany, Austria, Netherlands, Norway, Denmark, Ireland, China and Taiwan are some examples), and many more are considering similar bans.
p>But what does this trend mean? Electric vehicle adoption is likely to remain low over the next few years but Bloomberg predicts that by 2030 28% of all new vehicle sales will be electric and by 2040 it will be 55%. EVs will have cost parity with internal combustion engines prior to 2030.
What Does This All Mean?
It is clear that there are a lot of forces working on shifting our traditional energy industries – disruption is going to happen. In disruption, though, is opportunity. Wise investors will seek out these opportunities, because the potential is significant, if we are willing to embrace them.
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