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Some empirical cause for optimism on the energy transition

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I am not, by nature, an optimistic person. However, I am more optimistic than most on the energy transition.  At a personal level, this optimism springs from my experience with my hybrid car and the integrated solar and battery energy system that I installed at home about a year ago. Both have exceeded my expectations in terms of reducing my reliance on fossil fuels, although both need to be more ubiquitous to have a meaningful effect.

It’s not only at a personal level. My optimism is also the result of the rapid improvements in the efficiency of wind and solar power over the past 10 years or so. About a decade ago, the conventional thinking was that neither would ever be economic without subsidies. That is now a long way from being the case, as highlighted by a 2022 article by four Oxford University academics titled Empirically grounded technology forecasts and the energy transition.

The article, which focuses on the changing cost projections of technology (and how this relates to the transition), makes several fascinating points:

  • Rapidly decarbonising the global energy system is critical to address climate change, but concerns about costs have been a barrier to implementation.
  • Prices of fossil fuels are volatile, but after adjusting for inflation, prices are similar to 140 years ago.
  • By contrast, the costs of solar photovoltaics, wind and batteries have dropped rapidly – nearly 10 per cent a year.
  • ­­Historically, most energy-economy models have underestimated deployment rates for renewable energy technologies and overestimated their costs, with the reason being that the modelling typically imposes ad hoc constraints, such as deployment rate limits and floor costs, and these have been too stringent.


Using these probabilistic cost forecasts for individual technologies, the article then models three transition scenarios: a “Fast Transition” away from fossil fuels by around 2050, a “Slow Transition” away from fossil fuels by around 2070, and a “No Transition” scenario where fossil fuels continue to dominate the energy system.

The authors forecast annual system costs in 2050 and the net present cost of each scenario and present a distribution of the potential outcomes for these costs.

Interestingly, the forecasts suggest that both the annual system costs in 2050 and net present costs for the “Fast Transition” scenario are significantly below the “No Transition” and, importantly, the “Slow Transition” scenarios. The reason for this is that under the “No Transition” scenario and “Slow Transition” scenarios, spending on fossil fuels continues for decades in an environment where it is incrementally more difficult, and hence costly, to extract the fuels.

The study also constructed an additional scenario in which nuclear plays a dominant role in replacing fossil fuels. This is much more expensive than all the other scenarios, given the capital required and the need to buy the fuel in an environment where it is incrementally more difficult and costly to obtain the fuel.

While these forecasts are just that, and, like all forecasts, are likely to be wrong, it does provide more detailed thinking around the reason for my optimism.

So, how do these conclusions impact on our investment thinking at Perennial Better Future?

It means we invest in companies such as Calix that are developing technology to assist in the transition.  Among the many other things that Calix is working on are:

  • The company’s joint venture with Pilbara Minerals, in which the Calix technology is being developed to increase the amount of lithium that is produced from a given amount of ore.
  • The advanced battery project the company is working on to develop lithium batteries that produce equivalent power to existing batteries from lower quality lithium.


We are mindful that it is not always easy to predict the “winning” technologies in times of rapid technological change. A famous Warren Buffett quote from 1999 comes to mind. “Sometimes, incidentally, it’s much easier in these transforming events to figure out the losers.  You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money.  But there was one obvious decision you could have made back then – it’s better sometimes to turn these things upside down – and that was to short horses.”

Now, we don’t short-sell, as, to quote John Maynard Keynes, another famous investor, “Markets can stay irrational longer than you can stay solvent.”

However, we do exclude from our portfolios companies that derive any revenue from producing fossil fuels. Although there may be times when this approach brings return headwinds – for example, following the Russian invasion of Ukraine, when oil and gas prices spiked – we remain comfortable with our view that this is unlikely to result in headwinds over the medium term, given the likely improvements in technology that will drive the energy transition at a faster speed than consensus thinking suggests.


By Damian Cottier, Portfolio Manager, Perennial Better Future

Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial. This article does not take into account your investment objectives, particular needs or financial situation. Perennial Investment Management Limited is the responsible entity for the funds mentioned in this article. Potential investors should consider the product disclosure statement and target market determination of the fund mentioned in this article before deciding whether to invest, or continue to invest, in the fund. The product disclosure statement and more can be found on Our Trusts page.