Eye on the Market
14th Annual Energy Paper
Electravision
The complicated journey to an electrified future
Michael Cembalest
Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management
Electravision. The predominant vision for the future involves the electrification of everything, powered by solar, wind, transmission and distributed energy storage. This vision primarily relies upon the greater efficiency of electric motors and heat pumps vs their fossil fuel counterparts. While the grid is getting greener, electrification is advancing at a much slower pace for reasons related to chemistry, physics, cost, politics and human behavior. Our 14th annual energy paper takes a closer look, and also includes sections on nuclear power, China, hydrogen, “net zero oil” and Gaza’s energy future.
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1Executive SummaryElectravision: the contours of an electrified future
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2The latest from Vaclav SmilA link to Vaclav’s latest essay on the transition
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3All Eyes on ChinaThe world’s largest energy user is building a lot of everything
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4Tracking the energy transitionOur annual compilation of essential energy transition charts
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5Investment returnsOil & gas, renewable energy and nuclear-exposed shares
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6Nuclear powerElusive measures of true cost, German decommissioning/deindustrialization and NY State
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7Lazard’s epiphany does not go far enoughThe inadequacies of levelized cost, Part 2
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8Advanced electrification topicsTiming, temperature, transmission and turbines
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9Why-drogen EpilogA tough year for the green hydrogen industry: unfavorable energy math and project cancellations
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10“Ignore the PUNIs”The distraction of small countries with unique natural energy resources
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11On “Net Zero” OilWorth trying if it can be done close to very ambitious pro-forma projections
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12A proper burialCan sequestration of bio-oil gain more traction than CCS?
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13What if?A thought experiment on the reconstruction of Gaza and the role of distributed solar power
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Good morning, everyone, and thank you for being with us. We're here today with Michael Cembalest, J.P. Morgan's chair of Market and Investment Strategy, to talk about his current market energy paper, "Electravision." It's an extraordinary opportunity to be with one of the great researchers and holders of the lamp of truth in our industry.
My name is Ash Williams. I'm vice chair of J.P. Morgan Asset Management. Thank you, Michael, for being with us.
You're welcome. Sorry for the late start. I had one of those New York mornings with a subway derailment and all sorts of other things. For everybody out there that doesn't live in New York, you should be thankful.
Understood.
So this is the 14th annual energy market paper. For those in our audience who may not know the paper and be familiar with the body of work, could you just introduce the idea of how you came upon doing it, what its history has been, and what's involved in putting it together?
Sure. Let's see. I started writing it, as you mentioned 14, 15 years ago. And I just noticed that a lot of our clients were either under-informed or unaware of the energy ecosystem. And I would go to places where very sophisticated and smart people in their own industries would say things like, well, let's just shut off all the coal plants tomorrow and market forces, like they do in the tech sector, will come up with some other solution.
And there was there was a lot of projections about the energy transition that I felt were really not founded in reality, but I didn't understand the reality, either. I just knew enough to know that that what they were saying probably didn't make any sense.
So I decided to educate myself, and I developed a relationship with Vaclav Smil, who's one of the world's preeminent energy scientists, authors, speakers, whatever. And for 12 years or so, he was our technical advisor on this paper. He's retired now. He's 80 years old.
But I made annual pilgrimages to Manitoba, where he and I would walk through the various things I was working on. And it's one of those things where he forced me to learn how to fish instead of giving me the fish. And so for the last few years, I've basically done the bulk of the work on my own.
And it takes about three or four months worth of research to kind of cobble the whole thing together, because things are constantly changing. There's new regulations. There's new incentives. There's new inventions. There's new technology. And so every year, I spend about three, four months aggregating the topics and the discussions. And then, of course, each of the various sections is farmed out to different technical experts in the industry just to make sure I've got all my facts right.
And so certainly, there are substantive and technical changes over time, but there are also constants over time, human behavior being a huge one, political realities being another, physical realities being a third. And as you said, there are an awful lot of well-meaning people in the world who want to see an outcome that's meritorious, but they don't understand the complexity, the reality of the barriers to accomplishment of that change.
And I think there's some old bromide about, for every complex and really challenging, knotty problem, there's a simple, elegant, and completely wrong solution that's embraced by many. And I think this is a good example of an area where that's true.
What are some of the things that have changed over the years that you've been working on the paper?
That's a good question, because sometimes it pays to step back and say, well, what were we thinking, and how have things evolved versus what we thought? Some parts of the transition have accelerated more quickly than we thought, others much more slowly and some of them, kind of slowly, as we expected. So an example of each one of those.
The collapse in polysilicon prices due to Chinese production and subsidies has caused the installation cost of solar power to collapse much more quickly than any learning curve would have anticipated, and global installations are rising much more quickly than all the forecasts. So on the positive side, you have a really rapid deployment cycle of solar power.
Now. The average capacity factor of solar panels is somewhere between 20% and 22%, even in sunny places. So there's a difference between capacity and generation, and solar is a good example of that. But solar has generally outstripped most projections in terms of the speed. And going forward, in most countries, except for maybe Northern Europe, solar installations are expected to substantially outpace wind. So that's happened much more quickly.
What hasn't budged at all, despite all of the projections that it would, is electrification of industrial energy use. So if you put energy use into four simple buckets, households, office buildings, transportation, and industrial production, the last one, industrial markets use much more energy than the other ones. And that's rubber, cement, plastics, ammonia, fertilizer, steel, glass. That's where the bulk of the energy is used in almost all modern societies.
And the share of total industrial sector energy that comes from electrification has been stuck at around 12% for the last 30 years. It hasn't budged. And if you can't electrify it, it's very hard to decarbonize it. If you can electrify it, that means that if you add more wind and solar to the grid, you're essentially decarbonizing something. But if you can't make steel with electricity and you have to use a blast furnace, it's much, much harder to decarbonize.
So the name of the paper, "Electravision," reflects that reality.
Those two realities. So on the one hand, the grid we have is getting greener at a quicker pace, but we're not using the grid for more things than we used to. The grid is still mostly being used for air conditioning and all the stuff in this studio, lighting, air conditioning, computers, that kind of stuff. Electricity is not really used in any meaningful way in transportation yet, in industrial production at all, and is used modestly in home heating.
So given the weight of industrial production consumption and energy, that seems a key point of focus, I would think, of two issues there. First of all, if you're an operating business and you have a lot of capital plant dedicated to conventional energy sources for the process heating and other things you're doing, replacing that with electric alternatives is a capital expenditure issue, where you're going to change the way you depreciate your existing equipment. And you're going to spend more capital in a big way, potentially sooner than you otherwise would have. So there are financial and margin implications on the one side of it.
The other would be that-- I wonder if the intensity of the heat required, as such, that electrifying it makes it more challenging. Is that a factor as well?
Well, let's see. Let's separate those two questions. The first issue is electrification and existing capital and investments.
Too many of us are too tied in mentally to our iPhone cycles where we throw them out after a couple of years. They become obsolete. Apple and Google don't support the iOS and android older phones, and so we replace them.
In the rest of the fixed investment economy, things aren't discarded quite so quickly. Cars last for 12 to 15 years. The boilers and furnaces in homes and office buildings for heating can last 20 to 30 years, and steel plants can last 40 to 50 years. So I think sometimes people misunderstand the fact that even when there's economic incentives on the margin to change, you won't do it until you've exhausted the useful life of the existing equipment you're talking about, unless the government wants to pay you an exorbitant subsidy to change earlier.
And so when we think about somebody that bought a perfectly fine internal combustion engine car three or five years ago, they may intend to buy an electric vehicle for the next car, but that may not be until eight years from now. And if the government really wants to accelerate the pace of adoption of electrification, they're going to have to pay people to do that. And it gets very expensive when you start adding up all of the combustion engines, furnaces, steel plants, and everything else that would have to get replaced.
There's another important issue to keep in mind. Even after you replace it, electrification of heat is a good example. Electric heat pumps can be three times more efficient than the furnace you're replacing, but the furnace you're replacing used natural gas. This new electrified device uses electricity. What if electricity costs three much as gas?
So in other words, if your new device is three times more efficient but the cost of what it uses is three times more of what it used to use, those two things offset each other, and the economics may be less clear. And that's why I think a lot of companies are going very slow in terms of adopting electrification. And I think we're at the early stages of electricity costs going up.
Even over the last couple of years, the electricity prices have increased faster than core CPI and even faster than food prices, and we're only at the beginning of the electrification process. So that's one of the flies in the ointment here, which is, electric motors and electric heat pumps are very efficient, but the fuel they require is more expensive than the fossil fuels they used to use.
And there could be an issue, depending on where you are, that the electrical source you're using to feed that efficient motor, or heat pump, or whatever it may be-- depending on what fuel is being used to generate that electricity, you may be getting a more expensive source that, at the end of the day, isn't very clean itself because of how the electricity was made.
Right. Now, that's a good question. Early on, let's say, 10 years ago, when the first electric vehicles appeared on the scene, there was a lot of concern that people were essentially, in some parts of the country, driving coal-powered cars. Right? Because if the majority of electricity in the place you live is generated by coal and you have an electric vehicle, it's a coal-powered car. It actually has more emissions than a regular internal combustion engine car.
As of where we stand right now, in most parts of the country, that's not true anymore. So there's enough nuclear, hydro, and wind and solar on most, not all, but most of the grids around the United States so that there's an emissions benefit associated with driving an electric vehicle.
But it kind of feels like there was this wave of early adopters of EVs. And now, things are kind of plateauing a little bit, and everybody's waiting to see what the next wave is going to look like.
And think about it this way. The first wave of EV adopters were often people that were very eco-conscious to begin with, so they were replacing cars that already had good gas mileage. In the next phase of the EV cycle, we need a contractor working in Omaha, driving a Ford F-150 that gets 15 miles a gallon. That's the guy in the next phase that's going to have to switch to an EV in order for this to make sense. And that's where the jury's out.
Right.
Then you've also got people like me, who regrettably still live in an urban area. I can't buy a battery electric vehicle, because I have nowhere to charge it. I park my car in a garage in Brooklyn. There's 350 cars in the garage, and there's four charging slots. So at best, I can buy a plug-in electric vehicle, which only goes 20 miles on a full charge. So until you get more of a build out of charging infrastructure, you have a lot of urban populations that are not really going to be buying battery electric vehicles.
So that first adopter wave, I think, may have fooled people into thinking that that was going to be a permanent pace, and it may not have been. The next phase will be interesting to see.
Well, you and I are both old enough to remember the Arab oil embargo back in the early '70s. And there, the issue was, we didn't have any oil all of a sudden. We didn't have much oil, and everybody needed to conserve.
There were bold policy changes announced at the highest levels of our government. There were bold pronouncements about personal behavior change. We were going to turn down thermostats. The national speed limit was lowered from 70 to 55. President Nixon proclaimed that we were going to seek energy independence by 1980. A lot of stuff was very exciting and big change--
Like CAFE standards on cars.
Precisely. Yeah, that's where they came from. And guess what? We didn't achieve energy independence until many years later. In fact, oil imports continued going up until 2005. That was the peak.
And I think we're looking at a similar situation today, where the expectations for the speed and depth of change and the thoroughness and durability of it were far higher on the front end than the reality is proving to be the case.
And you touched on one point, which is the economics of, at the end of the day, if these changes don't make sense on the surface and they have to be powered by subsidy, then as soon as the subsidy stops, the behavior changes.
And we've certainly seen that on the EVs, where there's a standard if a manufacturer of EVs has sold a certain number of units, they're no longer eligible for the subsidy, or you have income caps. There are all kinds of reasons that policy plays out.
Yes. And now, the big debate, which was the battle between Schumer and Manchin on the energy bill has to do with-- at most, you can get a $7,500 tax credit for buying an EV. But the language in the energy bill is a little imprecise, but you only get that subsidy if the battery is assembled in the United States and if some of the components in the battery were sourced either from the US or some kind of free trade ally country. And the interpretation of that language is ongoing.
Right. So let's come back a minute to the point you made about renewable sources, solar, for example. Or wind is an even more stressed substitute. Not being one for wind replacements and the ramifications of that, riff on that for a little bit.
Yeah. I think there are some people that describe this issue as the death knell for renewables. That's wrong. There are some people that ignore the issue completely, and that's wrong. It's somewhere in the middle, and here's the way I think about it.
Let's just start out, and we have a metropolis of some kind that's getting 100% of its base load power from a nuclear power plant. It's reached the end of its life. It has to get decommissioned, and it was a 1 gigawatt plant. The metropolis then builds wind and solar power to replace it. But for the times when it's not windy or sunny enough, they have to have a backup thermal gas plant in order to supplement.
A lot of the estimates of renewables don't include-- which is a mistake-- don't include the cost of that backup thermal power plant, and so looking at the cost of wind and solar per megawatt hour on its own is very misleading, because you can never use it just on its own. It always has to be bolted on to some kind of backup thermal supply, unless you want to build a ton of extra wind and solar and battery storage, which is an even more expensive solution. So you have to include the cost of all these backup thermal plants, typically natural gas, peaker plants, or something like that.
Now, that said, the more wind and solar you build, you'll have to build and maintain these backup thermal plants. You won't be running them as much, so your exposure to what happens to natural gas prices goes down. The utilization rates of these plants are low, and they're just there to back up your base load power when you don't have enough wind, solar, and hydro to meet the gap.
And so I would describe it as the frictional costs of this transition are going to be higher than what solar and wind look like on their own, but it doesn't completely blow the renewable transition out of the water. It simply means that everybody's going to have to be prepared for electricity prices that reflect this dynamic, and we're seeing that in Germany.
Germany has installed a ton of wind and solar power over the last decade. They haven't decommissioned a single coal or gas plant. They still need them for backup power when there's no wind. There's something called a dunkelflauta, which is the German word for what happens when the wind dies for two weeks or three weeks at a time.
And German electricity prices are now the highest in Europe, because you've got to pay the freight for building the wind, building the solar, and also paying to build and maintain those backup thermal plants. So you can build a lower carbon intensity system. You just have to be prepared to pay for it.
And for all the big nuclear fans out there, I have bad news for you, which is-- at least in the West, let's put Korea and India and Russia and China to the side, because what they can do in terms of cost and permitting and stuff like that-- I don't know that, necessarily, you'd want those plants built in the West.
The last few plants built in the West looked like they cost-- by the time they were completed, they ended up costing either two to three times more than what a wind, solar, and backup gas system would cost you.
And they didn't quite come in on time, did they?
No. I mean, we're talking-- the Vogtle plants in Georgia came in seven years late, $16 billion over budget. Same thing in Finland. Same thing in France. Same thing in the UK. And there's a big community of people out there that say, well, we just need to build more of them to bring their unit costs down.
That production logic works if you're building 1,000 of something, maybe even if you're building 200 of something. Does it apply if you build 10 of something instead of 4 of something? I really don't think so.
So here's a question on that. When I think about nuclear power-- I had lunch with a friend of mine who's a retired admiral recently, and he had had a lot of experience with aircraft carriers. And he made the point, you can have a 1,000-foot-plus-long aircraft carrier with a complement of crew that's over 5,000 people that will cruise at 30 knots for 50 years without being refueled with all the energy on the ship being powered by a nuclear reactor that's smaller than a washing machine.
Very compact. And their safety experience over them and nuclear submarines and other ships as well, over many, many years, has been extraordinarily good and the power of these compact plants, as such, that it would do a decent-sized town, or at least a small town. And a few of them, spread out, could do a bigger area. Behaviorally and politically, the walls that would have to be overcome to get there would be massive.
The military functions on its own. As we all know, there's no cost sensitivity in the military. Whatever something costs, it costs. So yes, these things have an impeccable safety record, at least what's public information. But we don't have any information on the effective cost per megawatt hour of power produced there, and I'd be surprised if it wasn't pretty high.
You also have the most well-trained nuclear technicians in the world working on those submarines and nuclear-powered aircraft carriers. That's kind of different than what happens at Vermont Yankee and other places around the country, where you're dealing with a different talent pool and the cost of errors is pretty high.
So look, I'm all for trying to resuscitate nuclear power in the United States, eliminating regulatory logjams, but there's something going on, because it's not just the US. All the other Western countries as well are finding that the redundancies required for community safety, once they're built into these nuclear plants, cost a lot of money.
And if you're going to ask me why the Chinese and Russian plants cost half as much, I would say, if I had to give you a cocktail napkin answer, they're half as safe.
Well, and it could fit with a lot of other processes. Western democracies, Western industrialized democracies tend to have built in policy premium over the years for worker safety, for all sorts of costs that simply don't exist in a lot of other nations.
Yeah, true. But there's also a $3 billion to $4 billion cost, maybe closer to $1 billion to $2 billion for the smaller plants. But at the end of the life of these nuclear plants, they have to be decommissioned. No other energy source requires a multi-billion dollar decommission at the end of its life.
So look, I'll look at anything. In other words, I'll keep an open mind on anything. I even have an open mind on direct air carbon capture, which I think is one of the stupidest ideas that's ever been birthed by the energy community.
We'll come back to that.
But we'll see.
A couple of years ago, some very smart people in the Department of Energy were very excited about small modular reactors, which was the "latest" theme of the day. It was the metaverse of nuclear power.
And I didn't understand, it because if the purpose-- why would you want to take an enormously capital-intensive investment and make it smaller, if an enormous part of the cost is fixed, irrespective of the size of the plant? So I never even understood the basics of this.
And of course, NuScale, which was done as a SPAC, which is another mark of Cain in the investment community, collapsed. And all of their estimates of what it was going to cost to build these small modular reactors at that Idaho site were eight times too low, and the whole project collapsed. So let's keep an open mind, but we have to look at the facts on the ground as well in terms of what happens with these nuclear projects once they get launched.
So even if we talk about forms of alternative power that are really clean-- and I'm thinking hydro is number one-- efforts to port hydro from Canada into the northern us have been dismal failures because of nimbyism, political issues, and just plain old resistance-- I don't want to bother with it-- with some negative outcomes. How can we--
Let's talk about--
--possibly overcome that--
Let's talk about hydro. Hydro is kind of interesting. I mean, some of the hydro plants in the world, in the United States, go back 100 years. So hydropower is a low tech, really effective solution. The problem is that in most developed countries, the hydro sites that have decent pitch-- because you need a certain elevation change in order to generate the kind of power you want.
Most of those waterways have already been dammed and connected to hydroelectric turbines, so there's not a lot of undammed sites left in the United States. There's a few, but maybe enough to add 1% or 2% of us electricity generation, at most. And there was a study from Oak Ridge National Labs a few years ago that came out with similar results to that.
So then the question is, are there nearby adjacent sources of hydropower that are underutilized? One of those is Canada. Canada has 25 million people and lots of hydropower. And Quebec has-- in particular, Hydro-Québec has spare hydro capacity. Massachusetts has been trying to get their hands on that, and at a cheap price of $0.05 a kilowatt hour for probably the last 20 years. But the last few times they tried to do it, both Maine and new Hampshire blocked the high voltage direct current lines that they would have needed to access that hydropower.
New York, which shares a border with Canada, is going ahead with the Champlain Express, so we don't have to deal with those other state objections. That power should come online, I think, in two or three years, which is great, because it'll be just in time to replace the power that was lost from shutting down Indian Point Nuclear Plant.
Very important.
But it's so interesting to me, because the Northeast is this progressive bastion of politics in the United States, and yet when it came time for Massachusetts to greenify its power through Canadian hydropower and reduce its reliance on natural gas, the neighboring states rejected it. There's no federal eminent domain policy that could have overruled it, and I didn't hear a peep out of any of the progressive senators or congressmen in the region about it.
You just touched on a very important point, and that is the policy and regulatory environment around utilities and power line siting. If you're siting a major thing like a natural gas line, you have the Federal Energy Regulatory Commission that has input to that and has a say in it. States have a say, also. The two intermingle. Utilities, however, are pretty much the domain of the states, I believe.
Yeah, but I would describe both pipelines-- I would describe natural gas pipelines and electricity transmission lines as the two hardest capital projects to build in the United States. Like, we could make a long list, and they'd be number one and two. And we could debate which one is number one. Probably power lines.
But compared to interstate highways, interstate rail, fiber optic networks-- everybody loves those things or generally doesn't-- they don't exhaust their last breath trying to prevent them from happening.
Well, and they see benefit in having them, and maybe that's part of the issue here. Because I think of the interstate system-- a great example. Eisenhower, I think, wanted to build the interstate system largely for--
Military.
--military transport and materiel support. But there was such obvious benefit in terms of economic development of all the places along the way. Same with the rails back in the 19th century. And they came up with a with a scheme to give alternating parcels of land to people who would build--
You also didn't have as many lawyers then, right?
Well, there's that.
So we are now overlawyered. But that said-- yes, there-- but even more recently, most people did not object to the to the construction and eminent domain issues associated with bringing broadband to their communities, because everybody wants broadband.
Nobody wants power lines. Everybody hates power lines. It's the number one thing that Americans are united on. They hate China and they hate power lines. And so--
And Chinese power lines. Real bad.
Right. That would be the worst.
Yeah. Oh.
So to build a power line, you need to overcome local resistance, state resistance. You've got to get the feds on board. The best the best way to describe the issues is to look at an example.
So we have some clients in Wyoming that own some wind farms. And obviously, some of the best wind locations are where there's not a lot of people. So you've got a lot of potential energy being generated, but not a lot of consumption in those areas. The Dakotas and northern Oklahoma and Nebraska are similar.
Yeah, you can drive across there.
So what do you do if you have this great wind resource, but you don't have a lot of consumption in that area? You have to figure out if you can export it. So clients of ours have been trying to bring their wind from Wyoming to the Nevada/California border.
80% of the project is on public lands, where the feds told them it's a go from day one. It took them 17 years to put a shovel in the ground. So this is the first year-- it's year 17 or 18-- they're putting a shovel in the ground. And I think it's called the Northwest XPress Project. It's run by the Anschutz family and people like that. It's all public information.
And so if that's what it takes, if it takes 17 years to put a shovel in the ground, this electrification journey is going to be really slow, because it's going to take a long time to build out the electricity networks that are going to support the electrification of everything.
Which, at the end of the day, is a leadership issue. I mean, we need leaders to come forward, realize this, encapsulate the balance of risks and benefits in a positive way, and sell it to the American public and lead.
I also think you need some market solutions. Right?
Yeah.
I think communities need to be paid for power lines going through their community. I think that more work needs to be done to bury some of the, at least, local distribution power lines, so they're less disruptive. It costs a little bit more money, but this way, you don't have some of the site issues. And we can certainly piggyback more electricity transmission on existing rail networks, but it's really slow going.
And the Obama administration, many years ago, tried to do something at the cabinet level to accelerate this. It went to the Supreme Court, and the Supreme Court shot it down. So right now, it's a lot of blocking and tackling. And it can take 5 to 10 years for a small, in-state power line 15 to 20 years for one that crosses several states.
Right. So I want to say to our audience quickly, we've reserved time for Q&A, so please do think about your questions. And go ahead and submit them if you can. We're going to have time, and we're going to come to you on that.
So coming back to our discussion, we've established that we've got a real problem with the transmission to fulfill the "Electravision." The other thing we have a problem with is storage as a component of intermittency.
So when we think about batteries that are of large scale to store that kind of energy to help solve the intermittency problem, two things occur to me. Number one, it seems they're relatively early days in terms of technology that provides any kind of cost efficiency for the volume of storage we're talking about. And number two, sourcing the materials they're made out of is problematic because of where they come from and the nature of the materials themselves. What light can you shed on that area for us?
Yeah. I mean, the lithium-ion batteries right now are the go-to solution for utility scale and energy storage. There's lots of panic about lithium, but the more countries look for lithium, the more that tends to be found, so lithium prices have come back down a lot.
But it still costs money to build these batteries, and they're not scalable. In other words, for every kilowatt hour of energy you want to save, you want to store, you just have to build a linearly greater amount of storage. And so the costs-- you don't get, really, any economies of scale the more energy you want to store.
And as you mentioned, the economics are complicated. Suppose I have a wind and solar system and 3% or 5% of the energy is thrown away because it's generated at the time when there there's not enough load to consume that wind and solar power, so it's essentially discarded. If you have energy storage, you can save that energy and use it at another time.
But unless you're storing a lot of energy or a little bit of energy frequently, you're never going to reap enough capital benefits to pay you back for the capital cost of having built the storage in the first place.
I mean, think about an extreme example, where you build all this expensive storage and you only store energy once or twice a year that you shift in today. The economic value of that is de minimis compared to the cost of actually building the battery or buying the battery.
So there are some technologies that are designed to be cheaper. So far, the only ones that are cheaper have much worse efficiencies, like, as low as 50%, which means that half the energy that you put in, you never get out because it's lost in either heat or some other kind of chemical losses. So there's a lot of work that's got to be done on energy storage.
But there are jurisdictions that are avoiding future transmission and peaker plant investments by taking the money that they used to spend on those and paying people fixed amounts per year to have storage capacity available.
And so for example, I can say, well, I used to have this natural gas peaker plant. I think what I'm going to do is, I'm going to pay somebody to build a large utility scale battery storage facility, fill it with electricity, either powered by renewables or natural gas. And now, I don't need to build more transmission, and I can decommission my peaker plant.
So that's a policy option that a lot of communities are adopting. I just don't know that it's going to save them a hell of a lot of money, but it's one option that's out there.
And I guess there's some shadow costs as well. When you talk about lithium-ion batteries, we may be finding more lithium, but then the lithium has to be refined. And I gather the process of both mining it and refining it is not something most people would want to live next door to. Is that a fair assessment?
Like anything else, it can be done cleanly. But the more cleanly you want to do it, the more expensive it is. And so a lot of rare Earth minerals and other transition mineral processing gets done in emerging market countries for all the obvious reasons.
There's lithium in the United States. But I mean, what it would take to get approvals to build a lithium mining and refining operation in Nevada, I mean, that could easily-- you're looking at 10 to 15 years.
But battery storage is expanding. There are economic incentives. There are there are places in the country where it makes sense, but it's not radically altering the speed of the transmission. That's the thing to keep in mind. The mere the mere fact that energy can now be stored in a utility-scale form isn't necessarily accelerating the pace of the transmission, because that's not the biggest stumbling block.
So if we were going to prioritize where the biggest stumbling block is at the focus for leadership and capital allocation, is it the extension of the grid itself?
It's definitely going to be transmission. I think unlike-- I think you shouldn't decommission nuclear plants before you absolutely have to. You want to keep those things around as long as you can.
You're still going to have to build natural gas pipelines, because you still need natural gas as a bridge fuel as you go through this. But I would say--
And when you read the "Electravision" paper, the biggest issue is the one we started talking about upfront, which is, how are we going to pay, and who's going to pay, and how much will it cost to incentivize people to switch from their existing legacy energy machines and devices to the new electrified ones? and that's a very expensive and slow process.
There's a lot of industrial heat that takes place at less than 200 degrees centigrade, drying processes and the terminal processes for dehydrating things. You could certainly use electric heat pumps for that kind of thing. You don't need to have a blast furnace to do hydration, dehydration. But like you said, all of these things cost money, and some of these existing facilities have 20, 30, 40 years left on their useful lives.
Well, it seems that of all the different elements that we can commit capital to and commit policy focus on, the one that's immutable, that's usable for all of the decarbonization modalities, is the grid. If you look at the sources that go into the grid, it's sort of like, where's the electricity generated? Is it wind? Is it solar? Is it-- whatever.
So think about something like wind. Wind has had some major setbacks very recently, where a number of large project projects have just had the plug pulled on them because there were input price changes.
Right. And people bid. People bid. They won the auctions and then said, oh, my god. I can't make a profit. And then they withdrew their bids. They sacrificed some kind of down payment they put in. And then a lot of times, they'll participate in the next auction anyway after resetting their price points higher.
There was a lot of inflation in the wind supply chain in 2021, 2022 that hurt a lot of companies. And right now, the whole cost structure of wind is being reset to higher levels.
Right. Which I think just goes to the idea that we need to be, from a leadership and public messaging standpoint, honest with consumers. Because if what we're trying to do-- at the end of the day, if what our nation needs to do is earn the trust of the energy consumer to get them to buy into a policy and follow it for the common good, you don't do that by misrepresenting what's going to happen and disappointing people.
Right. You also need to stop disappointing people by having the Electrify America charging network have 20% or 30% of the charging stations offline. It's kind of amazing, in this day and age, where everything is digital, that that company, unlike Tesla, can't ensure a higher reliability rate of their charging stations on the network. I mean, that's going to contribute to EV aversion more than anything else.
People are worried enough about their range anxiety. There are stories of people going from charging station to charging station, and the lines are long. They're broken, or they don't charge at their advertised capacity. I mean, that should be easy pickings.
There also needs to be subsidies, as I mentioned, for the garage I park at in Brooklyn to put in charging stations in each parking spot. Otherwise, some of us will never buy a battery electric vehicle.
And one of the key uses is over the road trucks and heavy, heavy transportation, which electrification has not penetrated. One of the most anticipated--
It should.
Right.
It should.
So one of the most anticipated launches in recent years was Ford's F-150 Lightning. People stood in line for those things. They paid a six-figure price, etc.
They did, except there was-- my understanding is, for marketing purposes, Ford wanted to show an enormous order book. And the initial price that they offered the Ford F-150 at entailed a substantial negative margin for Ford. So that was not a sustainable price point. Now that the Ford F-150 price point is more reflective of what Ford needs to make money on that vehicle, the order book has gone down.
So you can entice a lot of people to do things if you charge less for them than they cost to make. So again, we don't really know what the what the true equilibrium pace of demand is for the Ford F-150 electric vehicle until we're another year or two into it.
What we do know is at the end of last year, the dealer lots were full of EVs, and days of inventory doubled versus the prior year. And the auto inventory-- I mean, the auto dealers collectively wrote a letter to the Biden administration, asking them to slow down some of the incentives, because they were having trouble selling the cars they had.
Right. Anything else?
Thank you. No, I think we're good.
OK. As a follow-up, in addition to the paper itself, there's a webcast that we did that covered some of these related topics that you can watch. It's on the website. And if anybody has any important follow-up questions that we didn't get a chance to discuss and you'd like to discuss them, please reach out to your J.P. Morgan coverage team, and we can try and get on that.
Thank you. You always enlighten us and bring truth to the conversation. We appreciate it. And I'd like to thank our audience for being with us today.
And I'm sorry I was late again. [LAUGHS] All right. Thanks everyone.
Thank you.
Thank you for joining us. Prior to making financial or investment decisions, you should speak with a qualified professional in your J.P. Morgan team. This concludes today's webcast. You may now disconnect.
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Good morning, everyone, and thank you for being with us. We're here today with Michael Cembalest, J.P. Morgan's chair of Market and Investment Strategy, to talk about his current market energy paper, "Electravision." It's an extraordinary opportunity to be with one of the great researchers and holders of the lamp of truth in our industry.
My name is Ash Williams. I'm vice chair of J.P. Morgan Asset Management. Thank you, Michael, for being with us.
You're welcome.
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Sorry for the late start. I had one of those New York mornings with a subway derailment and all sorts of other things. For everybody out there that doesn't live in New York, you should be thankful.
Understood.
So this is the 14th annual energy market paper. For those in our audience who may not know the paper and be familiar with the body of work, could you just introduce the idea of how you came upon doing it, what its history has been, and what's involved in putting it together?
Sure. Let's see. I started writing it, as you mentioned 14, 15 years ago. And I just noticed that a lot of our clients were either under-informed or unaware of the energy ecosystem. And I would go to places where very sophisticated and smart people in their own industries would say things like, well, let's just shut off all the coal plants tomorrow and market forces, like they do in the tech sector, will come up with some other solution.
And there was there was a lot of projections about the energy transition that I felt were really not founded in reality, but I didn't understand the reality, either. I just knew enough to know that that what they were saying probably didn't make any sense.
So I decided to educate myself, and I developed a relationship with Vaclav Smil, who's one of the world's preeminent energy scientists, authors, speakers, whatever. And for 12 years or so, he was our technical advisor on this paper. He's retired now. He's 80 years old.
But I made annual pilgrimages to Manitoba, where he and I would walk through the various things I was working on. And it's one of those things where he forced me to learn how to fish instead of giving me the fish. And so for the last few years, I've basically done the bulk of the work on my own.
And it takes about three or four months worth of research to kind of cobble the whole thing together, because things are constantly changing. There's new regulations. There's new incentives. There's new inventions. There's new technology. And so every year, I spend about three, four months aggregating the topics and the discussions. And then, of course, each of the various sections is farmed out to different technical experts in the industry just to make sure I've got all my facts right.
And so certainly, there are substantive and technical changes over time, but there are also constants over time, human behavior being a huge one, political realities being another, physical realities being a third. And as you said, there are an awful lot of well-meaning people in the world who want to see an outcome that's meritorious, but they don't understand the complexity, the reality of the barriers to accomplishment of that change.
And I think there's some old bromide about, for every complex and really challenging, knotty problem, there's a simple, elegant, and completely wrong solution that's embraced by many. And I think this is a good example of an area where that's true.
What are some of the things that have changed over the years that you've been working on the paper?
That's a good question, because sometimes it pays to step back and say, well, what were we thinking, and how have things evolved versus what we thought? Some parts of the transition have accelerated more quickly than we thought, others much more slowly and some of them, kind of slowly, as we expected. So an example of each one of those.
The collapse in polysilicon prices due to Chinese production and subsidies has caused the installation cost of solar power to collapse much more quickly than any learning curve would have anticipated, and global installations are rising much more quickly than all the forecasts. So on the positive side, you have a really rapid deployment cycle of solar power.
Now. The average capacity factor of solar panels is somewhere between 20% and 22%, even in sunny places. So there's a difference between capacity and generation, and solar is a good example of that. But solar has generally outstripped most projections in terms of the speed. And going forward, in most countries, except for maybe Northern Europe, solar installations are expected to substantially outpace wind. So that's happened much more quickly.
What hasn't budged at all, despite all of the projections that it would, is electrification of industrial energy use. So if you put energy use into four simple buckets, households, office buildings, transportation, and industrial production, the last one, industrial markets use much more energy than the other ones. And that's rubber, cement, plastics, ammonia, fertilizer, steel, glass. That's where the bulk of the energy is used in almost all modern societies.
And the share of total industrial sector energy that comes from electrification has been stuck at around 12% for the last 30 years. It hasn't budged. And if you can't electrify it, it's very hard to decarbonize it. If you can electrify it, that means that if you add more wind and solar to the grid, you're essentially decarbonizing something. But if you can't make steel with electricity and you have to use a blast furnace, it's much, much harder to decarbonize.
So the name of the paper, "Electravision," reflects that reality.
Those two realities. So on the one hand, the grid we have is getting greener at a quicker pace, but we're not using the grid for more things than we used to. The grid is still mostly being used for air conditioning and all the stuff in this studio, lighting, air conditioning, computers, that kind of stuff. Electricity is not really used in any meaningful way in transportation yet, in industrial production at all, and is used modestly in home heating.
So given the weight of industrial production consumption and energy, that seems a key point of focus, I would think, of two issues there. First of all, if you're an operating business and you have a lot of capital plant dedicated to conventional energy sources for the process heating and other things you're doing, replacing that with electric alternatives is a capital expenditure issue, where you're going to change the way you depreciate your existing equipment. And you're going to spend more capital in a big way, potentially sooner than you otherwise would have. So there are financial and margin implications on the one side of it.
The other would be that-- I wonder if the intensity of the heat required, as such, that electrifying it makes it more challenging. Is that a factor as well?
Well, let's see. Let's separate those two questions. The first issue is electrification and existing capital and investments.
Too many of us are too tied in mentally to our iPhone cycles where we throw them out after a couple of years. They become obsolete. Apple and Google don't support the iOS and android older phones, and so we replace them.
In the rest of the fixed investment economy, things aren't discarded quite so quickly. Cars last for 12 to 15 years. The boilers and furnaces in homes and office buildings for heating can last 20 to 30 years, and steel plants can last 40 to 50 years. So I think sometimes people misunderstand the fact that even when there's economic incentives on the margin to change, you won't do it until you've exhausted the useful life of the existing equipment you're talking about, unless the government wants to pay you an exorbitant subsidy to change earlier.
And so when we think about somebody that bought a perfectly fine internal combustion engine car three or five years ago, they may intend to buy an electric vehicle for the next car, but that may not be until eight years from now. And if the government really wants to accelerate the pace of adoption of electrification, they're going to have to pay people to do that. And it gets very expensive when you start adding up all of the combustion engines, furnaces, steel plants, and everything else that would have to get replaced.
There's another important issue to keep in mind. Even after you replace it, electrification of heat is a good example. Electric heat pumps can be three times more efficient than the furnace you're replacing, but the furnace you're replacing used natural gas. This new electrified device uses electricity. What if electricity costs three much as gas?
So in other words, if your new device is three times more efficient but the cost of what it uses is three times more of what it used to use, those two things offset each other, and the economics may be less clear. And that's why I think a lot of companies are going very slow in terms of adopting electrification. And I think we're at the early stages of electricity costs going up.
Even over the last couple of years, the electricity prices have increased faster than core CPI and even faster than food prices, and we're only at the beginning of the electrification process. So that's one of the flies in the ointment here, which is, electric motors and electric heat pumps are very efficient, but the fuel they require is more expensive than the fossil fuels they used to use.
And there could be an issue, depending on where you are, that the electrical source you're using to feed that efficient motor, or heat pump, or whatever it may be-- depending on what fuel is being used to generate that electricity, you may be getting a more expensive source that, at the end of the day, isn't very clean itself because of how the electricity was made.
Right. Now, that's a good question. Early on, let's say, 10 years ago, when the first electric vehicles appeared on the scene, there was a lot of concern that people were essentially, in some parts of the country, driving coal-powered cars. Right? Because if the majority of electricity in the place you live is generated by coal and you have an electric vehicle, it's a coal-powered car. It actually has more emissions than a regular internal combustion engine car.
As of where we stand right now, in most parts of the country, that's not true anymore. So there's enough nuclear, hydro, and wind and solar on most, not all, but most of the grids around the United States so that there's an emissions benefit associated with driving an electric vehicle.
But it kind of feels like there was this wave of early adopters of EVs. And now, things are kind of plateauing a little bit, and everybody's waiting to see what the next wave is going to look like.
And think about it this way. The first wave of EV adopters were often people that were very eco-conscious to begin with, so they were replacing cars that already had good gas mileage. In the next phase of the EV cycle, we need a contractor working in Omaha, driving a Ford F-150 that gets 15 miles a gallon. That's the guy in the next phase that's going to have to switch to an EV in order for this to make sense. And that's where the jury's out.
Right.
Then you've also got people like me, who regrettably still live in an urban area. I can't buy a battery electric vehicle, because I have nowhere to charge it. I park my car in a garage in Brooklyn. There's 350 cars in the garage, and there's four charging slots. So at best, I can buy a plug-in electric vehicle, which only goes 20 miles on a full charge. So until you get more of a build out of charging infrastructure, you have a lot of urban populations that are not really going to be buying battery electric vehicles.
So that first adopter wave, I think, may have fooled people into thinking that that was going to be a permanent pace, and it may not have been. The next phase will be interesting to see.
Well, you and I are both old enough to remember the Arab oil embargo back in the early '70s. And there, the issue was, we didn't have any oil all of a sudden. We didn't have much oil, and everybody needed to conserve.
There were bold policy changes announced at the highest levels of our government. There were bold pronouncements about personal behavior change. We were going to turn down thermostats. The national speed limit was lowered from 70 to 55. President Nixon proclaimed that we were going to seek energy independence by 1980. A lot of stuff was very exciting and big change--
Like CAFE standards on cars.
Precisely. Yeah, that's where they came from. And guess what? We didn't achieve energy independence until many years later. In fact, oil imports continued going up until 2005. That was the peak.
And I think we're looking at a similar situation today, where the expectations for the speed and depth of change and the thoroughness and durability of it were far higher on the front end than the reality is proving to be the case.
And you touched on one point, which is the economics of, at the end of the day, if these changes don't make sense on the surface and they have to be powered by subsidy, then as soon as the subsidy stops, the behavior changes.
And we've certainly seen that on the EVs, where there's a standard if a manufacturer of EVs has sold a certain number of units, they're no longer eligible for the subsidy, or you have income caps. There are all kinds of reasons that policy plays out.
Yes. And now, the big debate, which was the battle between Schumer and Manchin on the energy bill has to do with-- at most, you can get a $7,500 tax credit for buying an EV. But the language in the energy bill is a little imprecise, but you only get that subsidy if the battery is assembled in the United States and if some of the components in the battery were sourced either from the US or some kind of free trade ally country. And the interpretation of that language is ongoing.
Right. So let's come back a minute to the point you made about renewable sources, solar, for example. Or wind is an even more stressed substitute. Not being one for wind replacements and the ramifications of that, riff on that for a little bit.
Yeah. I think there are some people that describe this issue as the death knell for renewables. That's wrong. There are some people that ignore the issue completely, and that's wrong. It's somewhere in the middle, and here's the way I think about it.
Let's just start out, and we have a metropolis of some kind that's getting 100% of its base load power from a nuclear power plant. It's reached the end of its life. It has to get decommissioned, and it was a 1 gigawatt plant. The metropolis then builds wind and solar power to replace it. But for the times when it's not windy or sunny enough, they have to have a backup thermal gas plant in order to supplement.
A lot of the estimates of renewables don't include-- which is a mistake-- don't include the cost of that backup thermal power plant, and so looking at the cost of wind and solar per megawatt hour on its own is very misleading, because you can never use it just on its own. It always has to be bolted on to some kind of backup thermal supply, unless you want to build a ton of extra wind and solar and battery storage, which is an even more expensive solution. So you have to include the cost of all these backup thermal plants, typically natural gas, peaker plants, or something like that.
Now, that said, the more wind and solar you build, you'll have to build and maintain these backup thermal plants. You won't be running them as much, so your exposure to what happens to natural gas prices goes down. The utilization rates of these plants are low, and they're just there to back up your base load power when you don't have enough wind, solar, and hydro to meet the gap.
And so I would describe it as the frictional costs of this transition are going to be higher than what solar and wind look like on their own, but it doesn't completely blow the renewable transition out of the water. It simply means that everybody's going to have to be prepared for electricity prices that reflect this dynamic, and we're seeing that in Germany.
Germany has installed a ton of wind and solar power over the last decade. They haven't decommissioned a single coal or gas plant. They still need them for backup power when there's no wind. There's something called a dunkelflauta, which is the German word for what happens when the wind dies for two weeks or three weeks at a time.
And German electricity prices are now the highest in Europe, because you've got to pay the freight for building the wind, building the solar, and also paying to build and maintain those backup thermal plants. So you can build a lower carbon intensity system. You just have to be prepared to pay for it.
And for all the big nuclear fans out there, I have bad news for you, which is-- at least in the West, let's put Korea and India and Russia and China to the side, because what they can do in terms of cost and permitting and stuff like that-- I don't know that, necessarily, you'd want those plants built in the West.
The last few plants built in the West looked like they cost-- by the time they were completed, they ended up costing either two to three times more than what a wind, solar, and backup gas system would cost you.
And they didn't quite come in on time, did they?
No. I mean, we're talking-- the Vogtle plants in Georgia came in seven years late, $16 billion over budget. Same thing in Finland. Same thing in France. Same thing in the UK. And there's a big community of people out there that say, well, we just need to build more of them to bring their unit costs down.
That production logic works if you're building 1,000 of something, maybe even if you're building 200 of something. Does it apply if you build 10 of something instead of 4 of something? I really don't think so.
So here's a question on that. When I think about nuclear power-- I had lunch with a friend of mine who's a retired admiral recently, and he had had a lot of experience with aircraft carriers. And he made the point, you can have a 1,000-foot-plus-long aircraft carrier with a complement of crew that's over 5,000 people that will cruise at 30 knots for 50 years without being refueled with all the energy on the ship being powered by a nuclear reactor that's smaller than a washing machine.
Very compact. And their safety experience over them and nuclear submarines and other ships as well, over many, many years, has been extraordinarily good and the power of these compact plants, as such, that it would do a decent-sized town, or at least a small town. And a few of them, spread out, could do a bigger area. Behaviorally and politically, the walls that would have to be overcome to get there would be massive.
The military functions on its own. As we all know, there's no cost sensitivity in the military. Whatever something costs, it costs. So yes, these things have an impeccable safety record, at least what's public information. But we don't have any information on the effective cost per megawatt hour of power produced there, and I'd be surprised if it wasn't pretty high.
You also have the most well-trained nuclear technicians in the world working on those submarines and nuclear-powered aircraft carriers. That's kind of different than what happens at Vermont Yankee and other places around the country, where you're dealing with a different talent pool and the cost of errors is pretty high.
So look, I'm all for trying to resuscitate nuclear power in the United States, eliminating regulatory logjams, but there's something going on, because it's not just the US. All the other Western countries as well are finding that the redundancies required for community safety, once they're built into these nuclear plants, cost a lot of money.
And if you're going to ask me why the Chinese and Russian plants cost half as much, I would say, if I had to give you a cocktail napkin answer, they're half as safe.
Well, and it could fit with a lot of other processes. Western democracies, Western industrialized democracies tend to have built in policy premium over the years for worker safety, for all sorts of costs that simply don't exist in a lot of other nations.
Yeah, true. But there's also a $3 billion to $4 billion cost, maybe closer to $1 billion to $2 billion for the smaller plants. But at the end of the life of these nuclear plants, they have to be decommissioned. No other energy source requires a multi-billion dollar decommission at the end of its life.
So look, I'll look at anything. In other words, I'll keep an open mind on anything. I even have an open mind on direct air carbon capture, which I think is one of the stupidest ideas that's ever been birthed by the energy community.
We'll come back to that.
But we'll see.
A couple of years ago, some very smart people in the Department of Energy were very excited about small modular reactors, which was the "latest" theme of the day. It was the metaverse of nuclear power.
And I didn't understand, it because if the purpose-- why would you want to take an enormously capital-intensive investment and make it smaller, if an enormous part of the cost is fixed, irrespective of the size of the plant? So I never even understood the basics of this.
And of course, NuScale, which was done as a SPAC, which is another mark of Cain in the investment community, collapsed. And all of their estimates of what it was going to cost to build these small modular reactors at that Idaho site were eight times too low, and the whole project collapsed. So let's keep an open mind, but we have to look at the facts on the ground as well in terms of what happens with these nuclear projects once they get launched.
So even if we talk about forms of alternative power that are really clean-- and I'm thinking hydro is number one-- efforts to port hydro from Canada into the northern us have been dismal failures because of nimbyism, political issues, and just plain old resistance-- I don't want to bother with it-- with some negative outcomes. How can we--
Let's talk about--
--possibly overcome that--
Let's talk about hydro. Hydro is kind of interesting. I mean, some of the hydro plants in the world, in the United States, go back 100 years. So hydropower is a low tech, really effective solution. The problem is that in most developed countries, the hydro sites that have decent pitch-- because you need a certain elevation change in order to generate the kind of power you want.
Most of those waterways have already been dammed and connected to hydroelectric turbines, so there's not a lot of undammed sites left in the United States. There's a few, but maybe enough to add 1% or 2% of us electricity generation, at most. And there was a study from Oak Ridge National Labs a few years ago that came out with similar results to that.
So then the question is, are there nearby adjacent sources of hydropower that are underutilized? One of those is Canada. Canada has 25 million people and lots of hydropower. And Quebec has-- in particular, Hydro-Québec has spare hydro capacity. Massachusetts has been trying to get their hands on that, and at a cheap price of $0.05 a kilowatt hour for probably the last 20 years. But the last few times they tried to do it, both Maine and new Hampshire blocked the high voltage direct current lines that they would have needed to access that hydropower.
New York, which shares a border with Canada, is going ahead with the Champlain Express, so we don't have to deal with those other state objections. That power should come online, I think, in two or three years, which is great, because it'll be just in time to replace the power that was lost from shutting down Indian Point Nuclear Plant.
Very important.
But it's so interesting to me, because the Northeast is this progressive bastion of politics in the United States, and yet when it came time for Massachusetts to greenify its power through Canadian hydropower and reduce its reliance on natural gas, the neighboring states rejected it. There's no federal eminent domain policy that could have overruled it, and I didn't hear a peep out of any of the progressive senators or congressmen in the region about it.
You just touched on a very important point, and that is the policy and regulatory environment around utilities and power line siting. If you're siting a major thing like a natural gas line, you have the Federal Energy Regulatory Commission that has input to that and has a say in it. States have a say, also. The two intermingle. Utilities, however, are pretty much the domain of the states, I believe.
Yeah, but I would describe both pipelines-- I would describe natural gas pipelines and electricity transmission lines as the two hardest capital projects to build in the United States. Like, we could make a long list, and they'd be number one and two. And we could debate which one is number one. Probably power lines.
But compared to interstate highways, interstate rail, fiber optic networks-- everybody loves those things or generally doesn't-- they don't exhaust their last breath trying to prevent them from happening.
Well, and they see benefit in having them, and maybe that's part of the issue here. Because I think of the interstate system-- a great example. Eisenhower, I think, wanted to build the interstate system largely for--
Military.
--military transport and materiel support. But there was such obvious benefit in terms of economic development of all the places along the way. Same with the rails back in the 19th century. And they came up with a with a scheme to give alternating parcels of land to people who would build--
You also didn't have as many lawyers then, right?
Well, there's that.
So we are now overlawyered. But that said-- yes, there-- but even more recently, most people did not object to the to the construction and eminent domain issues associated with bringing broadband to their communities, because everybody wants broadband.
Nobody wants power lines. Everybody hates power lines. It's the number one thing that Americans are united on. They hate China and they hate power lines. And so--
And Chinese power lines. Real bad.
Right. That would be the worst.
Yeah. Oh.
So to build a power line, you need to overcome local resistance, state resistance. You've got to get the feds on board. The best the best way to describe the issues is to look at an example.
So we have some clients in Wyoming that own some wind farms. And obviously, some of the best wind locations are where there's not a lot of people. So you've got a lot of potential energy being generated, but not a lot of consumption in those areas. The Dakotas and northern Oklahoma and Nebraska are similar.
Yeah, you can drive across there.
So what do you do if you have this great wind resource, but you don't have a lot of consumption in that area? You have to figure out if you can export it. So clients of ours have been trying to bring their wind from Wyoming to the Nevada/California border.
80% of the project is on public lands, where the feds told them it's a go from day one. It took them 17 years to put a shovel in the ground. So this is the first year-- it's year 17 or 18-- they're putting a shovel in the ground. And I think it's called the Northwest XPress Project. It's run by the Anschutz family and people like that. It's all public information.
And so if that's what it takes, if it takes 17 years to put a shovel in the ground, this electrification journey is going to be really slow, because it's going to take a long time to build out the electricity networks that are going to support the electrification of everything.
Which, at the end of the day, is a leadership issue. I mean, we need leaders to come forward, realize this, encapsulate the balance of risks and benefits in a positive way, and sell it to the American public and lead.
I also think you need some market solutions. Right?
Yeah.
I think communities need to be paid for power lines going through their community. I think that more work needs to be done to bury some of the, at least, local distribution power lines, so they're less disruptive. It costs a little bit more money, but this way, you don't have some of the site issues. And we can certainly piggyback more electricity transmission on existing rail networks, but it's really slow going.
And the Obama administration, many years ago, tried to do something at the cabinet level to accelerate this. It went to the Supreme Court, and the Supreme Court shot it down. So right now, it's a lot of blocking and tackling. And it can take 5 to 10 years for a small, in-state power line 15 to 20 years for one that crosses several states.
Right. So I want to say to our audience quickly, we've reserved time for Q&A, so please do think about your questions. And go ahead and submit them if you can. We're going to have time, and we're going to come to you on that.
So coming back to our discussion, we've established that we've got a real problem with the transmission to fulfill the "Electravision." The other thing we have a problem with is storage as a component of intermittency.
So when we think about batteries that are of large scale to store that kind of energy to help solve the intermittency problem, two things occur to me. Number one, it seems they're relatively early days in terms of technology that provides any kind of cost efficiency for the volume of storage we're talking about. And number two, sourcing the materials they're made out of is problematic because of where they come from and the nature of the materials themselves. What light can you shed on that area for us?
Yeah. I mean, the lithium-ion batteries right now are the go-to solution for utility scale and energy storage. There's lots of panic about lithium, but the more countries look for lithium, the more that tends to be found, so lithium prices have come back down a lot.
But it still costs money to build these batteries, and they're not scalable. In other words, for every kilowatt hour of energy you want to save, you want to store, you just have to build a linearly greater amount of storage. And so the costs-- you don't get, really, any economies of scale the more energy you want to store.
And as you mentioned, the economics are complicated. Suppose I have a wind and solar system and 3% or 5% of the energy is thrown away because it's generated at the time when there there's not enough load to consume that wind and solar power, so it's essentially discarded. If you have energy storage, you can save that energy and use it at another time.
But unless you're storing a lot of energy or a little bit of energy frequently, you're never going to reap enough capital benefits to pay you back for the capital cost of having built the storage in the first place.
I mean, think about an extreme example, where you build all this expensive storage and you only store energy once or twice a year that you shift in today. The economic value of that is de minimis compared to the cost of actually building the battery or buying the battery.
So there are some technologies that are designed to be cheaper. So far, the only ones that are cheaper have much worse efficiencies, like, as low as 50%, which means that half the energy that you put in, you never get out because it's lost in either heat or some other kind of chemical losses. So there's a lot of work that's got to be done on energy storage.
But there are jurisdictions that are avoiding future transmission and peaker plant investments by taking the money that they used to spend on those and paying people fixed amounts per year to have storage capacity available.
And so for example, I can say, well, I used to have this natural gas peaker plant. I think what I'm going to do is, I'm going to pay somebody to build a large utility scale battery storage facility, fill it with electricity, either powered by renewables or natural gas. And now, I don't need to build more transmission, and I can decommission my peaker plant.
So that's a policy option that a lot of communities are adopting. I just don't know that it's going to save them a hell of a lot of money, but it's one option that's out there.
And I guess there's some shadow costs as well. When you talk about lithium-ion batteries, we may be finding more lithium, but then the lithium has to be refined. And I gather the process of both mining it and refining it is not something most people would want to live next door to. Is that a fair assessment?
Like anything else, it can be done cleanly. But the more cleanly you want to do it, the more expensive it is. And so a lot of rare Earth minerals and other transition mineral processing gets done in emerging market countries for all the obvious reasons.
There's lithium in the United States. But I mean, what it would take to get approvals to build a lithium mining and refining operation in Nevada, I mean, that could easily-- you're looking at 10 to 15 years.
But battery storage is expanding. There are economic incentives. There are there are places in the country where it makes sense, but it's not radically altering the speed of the transmission. That's the thing to keep in mind. The mere the mere fact that energy can now be stored in a utility-scale form isn't necessarily accelerating the pace of the transmission, because that's not the biggest stumbling block.
So if we were going to prioritize where the biggest stumbling block is at the focus for leadership and capital allocation, is it the extension of the grid itself?
It's definitely going to be transmission. I think unlike-- I think you shouldn't decommission nuclear plants before you absolutely have to. You want to keep those things around as long as you can.
You're still going to have to build natural gas pipelines, because you still need natural gas as a bridge fuel as you go through this. But I would say--
And when you read the "Electravision" paper, the biggest issue is the one we started talking about upfront, which is, how are we going to pay, and who's going to pay, and how much will it cost to incentivize people to switch from their existing legacy energy machines and devices to the new electrified ones? and that's a very expensive and slow process.
There's a lot of industrial heat that takes place at less than 200 degrees centigrade, drying processes and the terminal processes for dehydrating things. You could certainly use electric heat pumps for that kind of thing. You don't need to have a blast furnace to do hydration, dehydration. But like you said, all of these things cost money, and some of these existing facilities have 20, 30, 40 years left on their useful lives.
Well, it seems that of all the different elements that we can commit capital to and commit policy focus on, the one that's immutable, that's usable for all of the decarbonization modalities, is the grid. If you look at the sources that go into the grid, it's sort of like, where's the electricity generated? Is it wind? Is it solar? Is it-- whatever.
So think about something like wind. Wind has had some major setbacks very recently, where a number of large project projects have just had the plug pulled on them because there were input price changes.
Right. And people bid. People bid. They won the auctions and then said, oh, my god. I can't make a profit. And then they withdrew their bids. They sacrificed some kind of down payment they put in. And then a lot of times, they'll participate in the next auction anyway after resetting their price points higher.
There was a lot of inflation in the wind supply chain in 2021, 2022 that hurt a lot of companies. And right now, the whole cost structure of wind is being reset to higher levels.
Right. Which I think just goes to the idea that we need to be, from a leadership and public messaging standpoint, honest with consumers. Because if what we're trying to do-- at the end of the day, if what our nation needs to do is earn the trust of the energy consumer to get them to buy into a policy and follow it for the common good, you don't do that by misrepresenting what's going to happen and disappointing people.
Right. You also need to stop disappointing people by having the Electrify America charging network have 20% or 30% of the charging stations offline. It's kind of amazing, in this day and age, where everything is digital, that that company, unlike Tesla, can't ensure a higher reliability rate of their charging stations on the network. I mean, that's going to contribute to EV aversion more than anything else.
People are worried enough about their range anxiety. There are stories of people going from charging station to charging station, and the lines are long. They're broken, or they don't charge at their advertised capacity. I mean, that should be easy pickings.
There also needs to be subsidies, as I mentioned, for the garage I park at in Brooklyn to put in charging stations in each parking spot. Otherwise, some of us will never buy a battery electric vehicle.
And one of the key uses is over the road trucks and heavy, heavy transportation, which electrification has not penetrated. One of the most anticipated--
It should.
Right.
It should.
So one of the most anticipated launches in recent years was Ford's F-150 Lightning. People stood in line for those things. They paid a six-figure price, etc.
They did, except there was-- my understanding is, for marketing purposes, Ford wanted to show an enormous order book. And the initial price that they offered the Ford F-150 at entailed a substantial negative margin for Ford. So that was not a sustainable price point. Now that the Ford F-150 price point is more reflective of what Ford needs to make money on that vehicle, the order book has gone down.
So you can entice a lot of people to do things if you charge less for them than they cost to make. So again, we don't really know what the what the true equilibrium pace of demand is for the Ford F-150 electric vehicle until we're another year or two into it.
What we do know is at the end of last year, the dealer lots were full of EVs, and days of inventory doubled versus the prior year. And the auto inventory-- I mean, the auto dealers collectively wrote a letter to the Biden administration, asking them to slow down some of the incentives, because they were having trouble selling the cars they had.
Right. Anything else?
Thank you. No, I think we're good.
OK. As a follow-up, in addition to the paper itself, there's a webcast that we did that covered some of these related topics that you can watch. It's on the website. And if anybody has any important follow-up questions that we didn't get a chance to discuss and you'd like to discuss them, please reach out to your J.P. Morgan coverage team, and we can try and get on that.
Thank you. You always enlighten us and bring truth to the conversation. We appreciate it. And I'd like to thank our audience for being with us today.
And I'm sorry I was late again. [LAUGHS] All right. Thanks everyone.
Thank you.
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Explore the 14th Annual Energy Paper: Electravision
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Energy Paper Overview
Descriptive audio
Good morning, everybody and welcome to the Eye on the Market podcast for our annual energy paper. This year, the paper is called Electravision. And before getting into some of the details I want to talk a little bit about how this energy journey began. Around 15 years ago once the smoke cleared from the financial crisis, I decided I wanted to understand energy at a much deeper level than I had.
So, I reached out to Vaclav Smil, one of the world's preeminent scientists. He didn't respond the first several times I contacted him. And finally, he said, who are you and why are you pestering me? And I explained who I was, and what I wanted to learn, and what I had read. And he said fine, if you really want to learn about energy show me that you really mean it. Come up to Manitoba in February, and we'll spend a couple of days with a blackboard and a pen, and so I did.
And here is a here's a picture of a sign that I took on my way to the hotel, where I met him. It says, "Welcome Manitoba Moose!!" I guess people welcome moose in Manitoba. We spent a couple of days going through some basic energy math. And for 12 years, Vaclav served as a Technical Advisor to this paper. And was among the most fantastic experiences I've ever had at JPMorgan, in terms of being able to communicate and learn from someone like that.
Vaclav was over 80 now and he's retired. We still communicate on a variety of topics. He's shared his recent essay with me, and she's allowed to share with you. And there's a link to it in the energy paper. And I could never have done any of this without his original guidance, which taught me how to think about energy issues.
So this year's paper it's called Electravision vision. And I don't think this is going to be a surprise as to why. The consensus path forward is electrification of everything because if you electrify it, you can virtually decarbonize it with wind, solar, hydro, battery storage, transmission, and possibly nuclear. And so, the idea is, let's let's electrify everything that moves.
And in principle from a mechanical engineering perspective, it can be done. But the obstacles are all related to things like physics and chemistry, cost, human behavior, and politics. So, this year's energy paper goes into the details. I wanted to show you just a few charts from the piece. But, it's a long piece like it is every year. It's got a lot of charts and tables and different sections. I'm just going to give you a very quick preview in this in this podcast/webcast. I'm showing slides here. So if you're listening, this might be the kind of thing that you want to-- you can listen to it, but you can also watch it on the video if you go to the web page where we post these things.
So to be clear, the fossil fuel share of primary energy is falling. In other words, the share of global energy use from fossil fuels is falling, and it is falling at roughly the same pace that it fell during the 1970s and early '80s during the nuclear era. But that's the share of primary energy. Since global energy consumption continues to rise, we haven't reached a peak in emissions while fossil fuel consumption yet. Those numbers are still rising. They're rising more slowly than they used to, but they're still rising.
And what's happening is that the gap between fossil fuel use and renewable energy is beginning to close. It should start to close more rapidly now-- given for the fourth year in a row, spending has outstripped traditional fossil fuel spending and 2 to 1, 3 to 1, whatever the ratio is. So this gap should continue to close, but it's going to take a long time to close.
And one of the primary takeaways that we get every year and particularly this year, is if natural gas is going to be around for a long time, and we think it will, and it's also impossible to conceive of and understand human prosperity right at this point without the contribution from natural gas, that system is going to need investment to make sure it can be delivered safely, and this methane footprint is going to have to be managed more closely. But there's no question when you look at the numbers that natural gas is going to be a critical part of human prosperity for a very long time.
And here's one of the reasons why. We have a chart here that shows the two major things going on. There is electrification of the grid, and then there's how much are we how much are we using the grid. So, the green line here is the electrification of the grid. These are global numbers. And the grid is greenifying rapidly with all the wind and mostly solar buildout taking place around the world.
We're now over 30% globally, of electricity generation coming from renewables. And that number is rising quicker. What's not rising very quickly is the electricity share of global energy consumption. What are we using electricity for? So, to put it in clear terms, what's happening quickly is the energy that we're consuming for air conditioning, space cooling, computers, data centers, things like that. That's becoming greener. But the uses of electricity in the broad economy are rising very, very slowly. And the electrification share of the global economy has hasn't even risen 5% in the last 10 years. So that's a very, very slow process, and and this year we look at why.
Now, Electravision is this vision that we spell out in the executive summary. And what would that roadmap look like for the US? Well, it's primarily based on the notion that electric vehicles, using electric motors, and electric heat pumps are more efficient than their fossil fuel counterparts. In other words, EV motors are 90% efficient compared to something between around 25% and 30% for internal combustion engines for vehicles. And electric heat pumps are much more efficient than their furnace and boiler counterparts for winter heating.
So, if you can electrify it, you can actually shrink your energy footprint at the same time you decarbonise. So here we have a chart that's one of the main focal points of the piece, which is OK, we start out where we are now. We decarbonize the current grid by adding more wind and solar. We decarbonize road transportation with the cars and trucks. And then we decarbonize winter heating with residential and commercial heat pumps. And then we decarbonize decarbonize some amount of industrial production with industrial.
It all sounds very straightforward. And again, from a mechanical engineering perspective it can work. The issues are all around cost implementation, chemistry, and physics, and other things. And here's a summary of what it would take. We have a table here that looks at the current situation for the US and what Electavision would entail. And it's a pretty big difference.
And what you have is around a 33% decline-- fossil fuel usage would fall by a third. But in order to accomplish this, you'd have to grow the grid enormously. And so just to put some numbers around this, the increased electricity generation in the United States would be of a magnitude that where it last happened over 30 years.
So, in other words the grid expansion necessary took us 30 years last time to accomplish. More than 50% of this grid would would have to be would be intermittent and would need sufficient-- either battery storage, or peaker plants to accommodate. We'd need a 400% increase in wind and solar power. There'd be a massive buildout of transmission and distribution- which has been a major challenge.
I think that that even today, the costs of all this would be underestimated because of the duplication of infrastructure. There's very poor technological readiness of long duration energy storage. And we have a very slow replacement rate for vehicles, furnaces, and other combustion equipment right now. And then, the other issue of course, is the fact that electricity costs a lot more than natural gas per unit of energy.
So, the executive summary gets into the vision of Electravision. And then some of the constraints and the discussion about long it might take. Here, I'm showing the table of contents. So, in addition to that discussion about electrification, we have a link to Vaclav's latest essay. We have a section on China, which is the world's largest energy user-- which is building lots of everything. Coal, wind, solar, nuclear, hydro-- you name it. They're building a lot of everything.
We have a section which is very important with four pages of essential energy transition charts on a wide variety of topics that we update each year. We have a section on the investment returns on oil and gas, renewables, and nuclear shares. And then we have a section on nuclear power.
How much does it cost? Really hard to tell. We get into the details. But then we also talk about the consequences of decommissioning existing nuclear-- both in Germany, and in New York state. I take another swing at Lazard for their sloppy, levelized cost analysis. Which we did last year. We have some at last we have a section on some advanced electrification topics, mostly related to the concentration of load associated with people all charging, or heating their homes at the same time once they're electrified. We have a section on why you should probably skip any article you read that talks about how wonderful things are going, and what I call the PUNIES, which are the small countries with unique natural resource attributes. PUNY stands for Panama, Uruguay, Namibia, and Iceland.
We have a section on net zero oil. Which I hadn't heard of and then did some work on it. Occidental Petroleum is basically trying to continue to produce traditional oil that gets combusted, and then separately used direct air carbon capture to offset the carbon footprint of that combusted oil. It sounds simple. The details are not so simple. We go through the details. I'm deeply skeptical of anything based on direct air carbon capture, but I will keep an open mind to see what happens.
Similarly, we have a section on something called Bio-Oil. JPMorgan, as a firm contracted with a company to sequester bio oil from pyrolysis of corn Stover it's another kind of highly manual labor intensive approach to decarbonization we talk about that. And then at the end, we have a thought experiment on the reconstruction of gaza and the role that distributed solar power might play with some history that goes back to World War I and World War II.
And I'm not going to get into too much details. I think that section is better read in it's entirety than for me trying to summarize it. And then we close with some charts on energy supply and demand, global LNG markets, and then a must-read one pager on all the misadventures that are going on with Electrify America, Waymo, and my Jeep-- my woeful Jeep hybrid.
So here's just a few charts that I want to walk through before closing. The big issue with electrification of vehicles and winter heating is just the time it takes to replace to replace these combustion devices. In the United States, we're now up to roughly a 10% share of battery electric and plug-in hybrids as a percentage of total sales. As a share of the fleet, it's still around 2%. So, both of those numbers are going to rise over time, but it's going to take a lot longer for the share of fleet numbers than the share of sales numbers.
And then, in the United States and in Europe, how is new home construction every year-- is only-- is less than 1% of the stock of existing homes. Why does that matter? Most of the time, if you're if you're if we're relying on transition to heat pumps away from furnaces and natural gas heating systems, most of the time that takes place when new homes get built. But, that's a very, very, very slow process. So without the right kind of subsidies and training and equipment availability, that's also going to be very, very, very slow process.
And then, one of the things I'm very skeptical of, is there's a lot of hockey stick forecasts that industrial energy use is going to be electrified. Here, you can see industrial energy use of electricity as a share of total electricity use, has been stagnant for 40 years. And there's a variety of physical and chemical reasons for that, which we discuss in the paper. But even before you get into those, anything that hasn't changed for 40 years, you should be very skeptical when people tell you that it's going to change overnight in a meaningful way.
Then Electravision is heavily reliant on transmission. We have to move these electrons around. This transmission line growth is growing in the wrong direction. This is the anti-Electravision chart that's going on in the United States. We have a chart here that shows the new gigawatt miles of transmission line growth added every year-- and that number is falling quite sharply rather than rising for political reasons, NIMBY reasons, all sorts of stuff. And Electravision is going to be almost impossible to accomplish unless that number starts to go up.
The cost of the transition, when people ask me how much the transition might cost, I show them this chart. Which is-- if you add a megawatt of wind or solar, how much natural gas can you unplug because if you can unplug one megawatt for one megawatt then maybe it doesn't cost so much.
But that's not the case. So, the ISOs, is the Independent System Operators, provide data so that we can estimate this. And, roughly, you can only decommission or unplug 10% to 25% at most every time you add a megawatt. So you add a megawatt of wind and solar, you can decommission 20% of that number in terms of natural gas capacity, because you still have to keep most of it around. Now you don't use it as much-- and so its capacity factor goes down. But you still have to build it, and you still have to maintain it. And so-- there's essentially this duplication of infrastructure is a big part of why the transition itself is inherently inflationary.
In terms of nuclear, there's been so much discussion about nuclear over the last 18 months. How much would it cost to build a new plant? Who knows. There have been so few plants built in the Western world in the last 30 years-- just a handful. And unfortunately, the four examples of the ones that were built and completed all came in billions and billions of dollars over budget, and many, many, years late-- whether it's the US plant in Georgia, Flamanville in France, Hinckley Point in the UK, and a lot of the plants in Finland.
And in emerging economies, primarily Russia, China, and India, these plants are getting completed between 6 and 7 years-- sometimes eight years. But, what can be accomplished in China, India and Russia has no bearing or parallel to what it would take to do in the West for all the obvious regulatory and other reasons.
So, the West has announced its intention for a nuclear renaissance. I mean, even if it got jump started today, it could easily take 10 to 15 years to materialize and the cost could be staggeringly high if the recent plant completions are any indication that said decommissioning existing nuclear is a very challenging thing that can have negative outcomes. We have a couple of charts in here one on Germany, one on New York state.
Germany decommissioned almost all of its nuclear right before Russia invaded Ukraine. And as a result, the its dependence on imported liquefied natural gas was massively magnified, and one of the analyzes that we did was we said, what's the counterfactual? Suppose Russia-- suppose Germany didn't decommission all that nuclear power. Well, based on our number crunching, they would have needed 85% less natural gas at the time Russia invaded Ukraine, had they just kept their nuclear plants online-- which would have changed a lot of things in Germany and in Europe about its response to the invasion.
And then in New York state, the shutdown of Indian Point. New York City and Long Island used to have one of the best carbon footprints in the country. NYSERDA and some other New York agencies said, well don't worry, we're going to shut down Indian Point, and we're going to add a combination of wind, solar, and hydro, to make up the gap. So far, that's not happening.
And now New York has a higher carbon footprint than the rest of the US because of natural gas expansion and imports of electricity from neighboring states like Pennsylvania that are based on natural gas. Now, maybe the completion of some of the Blackstone's building the Champlain Express from Canada, that'll offset part of this. But while it's very expensive and difficult to build new plants, decommissioning existing ones need to be done very carefully.
And then the last couple of comments, we have a chart every year that looks at energy independence. After 40 years-- and I remember as a kid, in the early 1970s, when parents used to line up to get gas based on what the last digit of their license plate. Nixon was talking about the urgency of energy independence. 40 years later, the United States finally entered in Japan. While Europe and China compete for the same imports of natural resources.
So the energy transition has to be done in a way that doesn't sacrifice this energy independence, and right now, there are too many supply chains that are still China-reliant and so, you know, that's what Manchin was trying to accomplish with some of his negotiations with Schumer on the energy bill. The Biden Administration has basically steamrolled a lot of those Manchin concerns and in the interpretations of the energy bill. They are going full steam ahead for decarbonization at the expense of in my opinion of national security which is a balance that needs to be struck, I think, a little bit better.
Last thing, for investors renewable energy stocks have gotten absolutely decimated since their peak in 2021. With the Fed pivot, I think the declines-- the bleeding has stopped. The best thing to have owned over the last three years, was a portfolio that was long traditional energy, had short renewables, those returns have now kind of converged. And at this point, I think you can make a good argument for owning both of them in your portfolio, except you should be aware of one thing. And I'll close with this.
We have a chart in here that looks at operating margins by sector-- for clean energy, oil and gas, health care, tech, software, telecom, cyber robotics, fintech. In other words, how profitable are renewable energy companies right now, even with the subsidies they get? Compared to the traditional energy sector and a bunch of other stuff that people see as growth stocks.
And the answer is, they're not very profitable. The six indices that we're shelving generally have operating margins below 10%, which is not very growthy. Below most of the rest of the comparables that we showed here, and below the traditional energy sector. So, I think it's important for investors to understand, these are capital intensive businesses that are very that are very subsidy-reliant. And that even with the benefit of that, there's still not enough profitability to go around.
So, that's the end of the podcast. Thank you for listening. The paper is best digested over a long, snowy, weekend someplace where nobody's bothering you, and thanks for listening. Thanks for reading. And I'll see you again on this paper next year, a year from today. Bye.
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Text, J.P. Morgan, Eye on the Market. Slides are on the left and the speaker's video is on the right.
Text on slide, J.P. Morgan. Podcast: Electravision, Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset and Wealth Management. March 2024. J.P. Morgan Chase Bank, N.A. and its affiliates (collectively "J.P.M.C.B.") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("J.P.M.S."), a member of FINRA and S.I.P.C. J.P.M.C.B. and J.P.M.S. are affiliated companies under the common control of J.P. Morgan Chase and Co.. The views expressed herein may differ from other J.P. Morgan Chase and Co affiliates and employees. This constitutes our judgment based on current market conditions and is subject to change without notice. This has not been prepared with any particular investor in mind, and it may not be suitable for all investors. Investors should speak to their financial representatives before engaging in any investment product or strategy. This material should not be regarded as research or as a J.P. Morgan Research Report. Outlooks and past performance are not reliable indicators of future results. Copyright 2023 J.P. Morgan Chase and Co. All rights reserved. Investment Products: Not FDIC Insured, No Bank Guarantee, May Lose Value.
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(SPEECH)
Good morning, everybody and welcome to the Eye on the Market podcast for our annual energy paper. This year, the paper is called Electravision. And before getting into some of the details I want to talk a little bit about how this energy journey began. Around 15 years ago once the smoke cleared from the financial crisis, I decided I wanted to understand energy at a much deeper level than I had.
So, I reached out to Vaclav Smil, one of the world's preeminent scientists. He didn't respond the first several times I contacted him. And finally, he said, who are you and why are you pestering me? And I explained who I was, and what I wanted to learn, and what I had read. And he said fine, if you really want to learn about energy show me that you really mean it. Come up to Manitoba in February, and we'll spend a couple of days with a blackboard and a pen, and so I did.
And here is a here's a picture of a sign that I took on my way to the hotel, where I met him. It says, "Welcome Manitoba Moose!!" I guess people welcome moose in Manitoba.
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Text, My energy journey began in Manitoba. A photo of a sign stuck in the snowy ground reads, Welcome Manitoba Moose!!
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We spent a couple of days going through some basic energy math. And for 12 years, Vaclav served as a Technical Advisor to this paper. And was among the most fantastic experiences I've ever had at JPMorgan, in terms of being able to communicate and learn from someone like that.
Vaclav was over 80 now and he's retired. We still communicate on a variety of topics. He's shared his recent essay with me, and she's allowed to share with you. And there's a link to it in the energy paper. And I could never have done any of this without his original guidance, which taught me how to think about energy issues.
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Text, Electravision. A picture of suburban homes with solar panels, wind turbines, and floating balls of light above them with mountains in the distance.
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So this year's paper it's called Electravision vision. And I don't think this is going to be a surprise as to why. The consensus path forward is electrification of everything because if you electrify it, you can virtually decarbonize it with wind, solar, hydro, battery storage, transmission, and possibly nuclear. And so, the idea is, let's let's electrify everything that moves.
And in principle from a mechanical engineering perspective, it can be done. But the obstacles are all related to things like physics and chemistry, cost, human behavior, and politics. So, this year's energy paper goes into the details.
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Text, Falling share of primary energy from fossil fuels, not level. A chart below titled falling fossil fuel shares mask reality of rising emissions shows percent in billion tonnes of CO2 of global fossil fuel share of primary energy decreased from 1965 to 2020, from 94% at 40 billion tonnes in 1965 to 82% at 5 billion tonnes in 2020. It also shows the percent in billions tonnes of CO2 of global emissions from energy has increased from 84% at 12 billion tonnes in 1965 to 92% at 35 billion tonnes in 2020. Text below, Source: EI Statistical Review of World Energy, J.P.M.A.M., 2023.
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I wanted to show you just a few charts from the piece. But, it's a long piece like it is every year. It's got a lot of charts and tables and different sections. I'm just going to give you a very quick preview in this in this podcast/webcast. I'm showing slides here. So if you're listening, this might be the kind of thing that you want to-- you can listen to it, but you can also watch it on the video if you go to the web page where we post these things.
So to be clear, the fossil fuel share of primary energy is falling. In other words, the share of global energy use from fossil fuels is falling, and it is falling at roughly the same pace that it fell during the 1970s and early '80s during the nuclear era. But that's the share of primary energy. Since global energy consumption continues to rise, we haven't reached a peak in emissions while fossil fuel consumption yet. Those numbers are still rising. They're rising more slowly than they used to, but they're still rising.
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Text, The fossil fuel-renewable gap. A chart below titled global fossil fuel and renewable energy use shows fossil fuel, primary energy, and fossil fuels post combustion energy increase from 1965 to 2020 from 150 and 100 exajoules to 500 and 300 exajoules. Renewable energy increases from 1965 to 2020 only slightly, from 0 to 50 exajoules.
(SPEECH)
And what's happening is that the gap between fossil fuel use and renewable energy is beginning to close. It should start to close more rapidly now-- given for the fourth year in a row, spending has outstripped traditional fossil fuel spending and 2 to 1, 3 to 1, whatever the ratio is. So this gap should continue to close, but it's going to take a long time to close.
And one of the primary takeaways that we get every year and particularly this year, is if natural gas is going to be around for a long time, and we think it will, and it's also impossible to conceive of and understand human prosperity right at this point without the contribution from natural gas, that system is going to need investment to make sure it can be delivered safely, and this methane footprint is going to have to be managed more closely. But there's no question when you look at the numbers that natural gas is going to be a critical part of human prosperity for a very long time.
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Text, The grid is getting greener but the purposes for which it's used are expanding more slowly. A chart below titled Grid decarbonization outpaces electrification of energy use shows the percent of renewable share of global electricity generation has increased from 19% in 1990 to 31% in 2023 while the percent of electricity share of global final energy consumption has increased from 16% in 1990 to 24% in 2023. Text below, Source EI Statistical Review of World Energy, I.E.A., J.P.M.A.M., 2023.
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And here's one of the reasons why. We have a chart here that shows the two major things going on. There is electrification of the grid, and then there's how much are we how much are we using the grid. So, the green line here is the electrification of the grid. These are global numbers. And the grid is greenifying rapidly with all the wind and mostly solar buildout taking place around the world.
We're now over 30% globally, of electricity generation coming from renewables. And that number is rising quicker. What's not rising very quickly is the electricity share of global energy consumption. What are we using electricity for? So, to put it in clear terms, what's happening quickly is the energy that we're consuming for air conditioning, space cooling, computers, data centers, things like that. That's becoming greener. But the uses of electricity in the broad economy are rising very, very slowly. And the electrification share of the global economy has hasn't even risen 5% in the last 10 years. So that's a very, very slow process, and and this year we look at why.
Now, Electravision is this vision that we spell out in the executive summary.
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Text, How Electravision would work. A chart below titled Electravision roadmap for the US shows coal, natural gas, oil, wind and solar, other R.E.N., and nuclear energy values in quadrillion BTUs of primary energy, now EIA convention (primary energy for fossil fuels, delivered energy for renewables and nuclear) for the current time, then step 1, step 2, step 3 and 4, and step 5. The current total BTUs amount to 85 with coal at 10, natural gas at 32, oil at 37, wind and solar at 3, other R.E.N. at 1, and nuclear at 3. After step 1, the decarbonization of the current grid via wind and solar, the coal decreases to 4 and wind and solar increase to 6 for a total of 80. After step 2, the decarbonization of road transport via EV cars and trucks, the oil decreases to 38 and the wind and solar increase to 8 for a total of 72. After step 3 and 4, the decarbonization of winter heating via residential and commercial heat pumps, the natural gas decreases to 25 for a total of 68. After step 5, the decarbonization of industrial production via industrial heat pumps, natural gas decreases to 23 for a total of 66. Text below, Source: E.I.A. data, J.P.M.A.M. assumptions, 2024. Other renewables is primarily hydropower.
(SPEECH)
And what would that roadmap look like for the US? Well, it's primarily based on the notion that electric vehicles, using electric motors, and electric heat pumps are more efficient than their fossil fuel counterparts. In other words, EV motors are 90% efficient compared to something between around 25% and 30% for internal combustion engines for vehicles. And electric heat pumps are much more efficient than their furnace and boiler counterparts for winter heating.
So, if you can electrify it, you can actually shrink your energy footprint at the same time you decarbonise. So here we have a chart that's one of the main focal points of the piece, which is OK, we start out where we are now. We decarbonize the current grid by adding more wind and solar. We decarbonize road transportation with the cars and trucks. And then we decarbonize winter heating with residential and commercial heat pumps. And then we decarbonize decarbonize some amount of industrial production with industrial.
It all sounds very straightforward. And again, from a mechanical engineering perspective it can work. The issues are all around cost implementation, chemistry, and physics, and other things.
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Text, Electravision. A table below shows current, Electravision, and Change values for Primary energy delivered (quads), 85.4, 66.5, and negative 22% respectively, Fossil fuel primary energy use (quads), 79.4, 52.2, negative 34%, Wind + solar generation (TWh) 645, 3,069, and 376%, Total electricity generation (TWh) 4,321, 5775, and 34%, Wind + Solar share of electricity generation, 15%, 53%, and 38%, and Renewable share of electricity generation, 23%, 59%, and 36%. Text below, Source, J.P.M.A.M, 2024. Using new E.I.A. conventions for primary energy.
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And here's a summary of what it would take. We have a table here that looks at the current situation for the US and what Electavision would entail. And it's a pretty big difference.
And what you have is around a 33% decline-- fossil fuel usage would fall by a third. But in order to accomplish this, you'd have to grow the grid enormously. And so just to put some numbers around this, the increased electricity generation in the United States would be of a magnitude that where it last happened over 30 years.
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Text, But... Similar increase in electricity generation took 30 years to achieve, 1993-2022. More than 50% of generation would be intermittent. 400% increase in wind/solar power. Transmission and distribution. Electricity and natural gas outage risks. Underestimation of cost due to duplication of infrastructure. Poor technological readiness of long duration energy storage. Low replacement rate for vehicles, furnaces and other combustion equipment. High cost of electricity vs natural gas per MJ.
(SPEECH)
So, in other words the grid expansion necessary took us 30 years last time to accomplish. More than 50% of this grid would would have to be would be intermittent and would need sufficient-- either battery storage, or peaker plants to accommodate. We'd need a 400% increase in wind and solar power. There'd be a massive buildout of transmission and distribution- which has been a major challenge.
I think that that even today, the costs of all this would be underestimated because of the duplication of infrastructure. There's very poor technological readiness of long duration energy storage. And we have a very slow replacement rate for vehicles, furnaces, and other combustion equipment right now. And then, the other issue of course, is the fact that electricity costs a lot more than natural gas per unit of energy.
So, the executive summary gets into the vision of Electravision. And then some of the constraints and the discussion about long it might take.
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Text, Table of contents, Electravision: the contours of an electrified future. The latest from Vaclav Smil. All Eyes on China: the world's largest energy user is building a lot of everything. Essential energy transition charts. Investment returns in oil & gas, renewable energy and nuclear-exposed shares. Nuclear power: Elusive measures of true cost, German decommissioning/deindustrialization and NY State. Lazard's epiphany does not go far enough: the inadequacies of levelized cost, Part 2. Advanced Electravision topics: timing, temperature, transmission and turbines. Why-drogen Epilog: A tough year for the green hydrogen industry. "Ignore the PUNIs": The distraction of small countries with unique natural energy resources. On "Net Zero" Oil: worth trying if it can be done close to very ambitious pro-forma projections. A proper burial: can sequestration of bio-oil gain more traction than CCS? What if? A thought experiment on the reconstruction of Gaza and the role of distributed solar power. Appendix 1: on US and European energy supply/demand and global LNG markets. Appendix II: EV misadventures with Electrify America, Waymo and Jeep.
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Here, I'm showing the table of contents. So, in addition to that discussion about electrification, we have a link to Vaclav's latest essay. We have a section on China, which is the world's largest energy user-- which is building lots of everything. Coal, wind, solar, nuclear, hydro-- you name it. They're building a lot of everything.
We have a section which is very important with four pages of essential energy transition charts on a wide variety of topics that we update each year. We have a section on the investment returns on oil and gas, renewables, and nuclear shares. And then we have a section on nuclear power.
How much does it cost? Really hard to tell. We get into the details. But then we also talk about the consequences of decommissioning existing nuclear-- both in Germany, and in New York state. I take another swing at Lazard for their sloppy, levelized cost analysis. Which we did last year. We have some at last we have a section on some advanced electrification topics, mostly related to the concentration of load associated with people all charging, or heating their homes at the same time once they're electrified. We have a section on why you should probably skip any article you read that talks about how wonderful things are going, and what I call the PUNIES, which are the small countries with unique natural resource attributes. PUNY stands for Panama, Uruguay, Namibia, and Iceland.
We have a section on net zero oil. Which I hadn't heard of and then did some work on it. Occidental Petroleum is basically trying to continue to produce traditional oil that gets combusted, and then separately used direct air carbon capture to offset the carbon footprint of that combusted oil. It sounds simple. The details are not so simple. We go through the details. I'm deeply skeptical of anything based on direct air carbon capture, but I will keep an open mind to see what happens.
Similarly, we have a section on something called Bio-Oil. JPMorgan, as a firm contracted with a company to sequester bio oil from pyrolysis of corn Stover it's another kind of highly manual labor intensive approach to decarbonization we talk about that. And then at the end, we have a thought experiment on the reconstruction of gaza and the role that distributed solar power might play with some history that goes back to World War I and World War II.
And I'm not going to get into too much details. I think that section is better read in it's entirety than for me trying to summarize it. And then we close with some charts on energy supply and demand, global LNG markets, and then a must-read one pager on all the misadventures that are going on with Electrify America, Waymo, and my Jeep-- my woeful Jeep hybrid.
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Text, EV% of sales vs % of fleet. A chart below titled US B.E.V. and P.H.E.V. share of sales vs share of fleet shows the percent of share of sales increasing from 1% in 2017 to 10% in 2024 and while the share of the fleet only increases from about 0.3% in 2017 to 2% in 2024. Text below, Source ANL, B.N.E.F., J.P.M.A.M., January 2024.
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So here's just a few charts that I want to walk through before closing. The big issue with electrification of vehicles and winter heating is just the time it takes to replace to replace these combustion devices. In the United States, we're now up to roughly a 10% share of battery electric and plug-in hybrids as a percentage of total sales. As a share of the fleet, it's still around 2%. So, both of those numbers are going to rise over time, but it's going to take a lot longer for the share of fleet numbers than the share of sales numbers.
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Text, Heat pump sales limited by slow pace of housing turnover A chart below titled the slow pace of housing turnover shows the new single family house sales as % of single family housing stock is just below 0.8% for the US and the completed new homes as % of existing housing stock is just over 0.8% for the EU. Text below, Source: Census, OECD, J.P.M.A.M., 2023.
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And then, in the United States and in Europe, how is new home construction every year-- is only-- is less than 1% of the stock of existing homes. Why does that matter? Most of the time, if you're if you're if we're relying on transition to heat pumps away from furnaces and natural gas heating systems, most of the time that takes place when new homes get built. But, that's a very, very, very slow process. So without the right kind of subsidies and training and equipment availability, that's also going to be very, very, very slow process.
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Text, Industrial energy use is hard to electrify/decarbonize. A chart below titled electricity share of US industrial energy use unchanged for decades shows the share of industrial energy use of natural gas has gone from 33% in 1989 down to 30% in 2005 then up to 39% in 2023, petroleum has gone from 34% in 1989 to 39% in 2005 then down to 35% in 2023, and the electricity has roughly stayed at the same 15% from 1989 to 2023. Source: E.I.A., J.P.M.A.M. 2023.
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And then, one of the things I'm very skeptical of, is there's a lot of hockey stick forecasts that industrial energy use is going to be electrified. Here, you can see industrial energy use of electricity as a share of total electricity use, has been stagnant for 40 years. And there's a variety of physical and chemical reasons for that, which we discuss in the paper. But even before you get into those, anything that hasn't changed for 40 years, you should be very skeptical when people tell you that it's going to change overnight in a meaningful way.
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Text, Electravision? A chart below titled US transmission line growth shows the miles added per year is 4,000 in 2013, 2,750 in 2015, 3,100 in 2016, 1,750 in 2017, 3,100 in 2018, 2,000 in 2019, 2,250 in 2020, 1,000 in 2021 and 500 in 2022. Text below, Source: S&P Global, J.P.M.A.M., 2024. Note: Transmission lines are greater than 100 kV.
(SPEECH)
Then Electravision is heavily reliant on transmission. We have to move these electrons around. This transmission line growth is growing in the wrong direction. This is the anti-Electravision chart that's going on in the United States. We have a chart here that shows the new gigawatt miles of transmission line growth added every year-- and that number is falling quite sharply rather than rising for political reasons, NIMBY reasons, all sorts of stuff. And Electravision is going to be almost impossible to accomplish unless that number starts to go up.
(DESCRIPTION)
Text, The cost of the transition. A chart below titled How much natural gas capacity can be reduced per MW of new wind and solar power? shows the percent computed for 2021 assuming new wind and solar = 10% of demand is 29% for NYISO (NY), 25% for CAISO (California), 22% for ERCOT (Texas), 13% for PJM (Mid Atlantic), 13% for SOCO (Southeast), 12% for SPP (Midwest), 12% for ISNE (New England), and 11% for MISO (Upper Midwest). Text below, Source: E.I.A. data, J.P.M.A.M. computations, 2022.
(SPEECH)
The cost of the transition, when people ask me how much the transition might cost, I show them this chart. Which is-- if you add a megawatt of wind or solar, how much natural gas can you unplug because if you can unplug one megawatt for one megawatt then maybe it doesn't cost so much.
But that's not the case. So, the ISOs, is the Independent System Operators, provide data so that we can estimate this. And, roughly, you can only decommission or unplug 10% to 25% at most every time you add a megawatt. So you add a megawatt of wind and solar, you can decommission 20% of that number in terms of natural gas capacity, because you still have to keep most of it around. Now you don't use it as much-- and so its capacity factor goes down. But you still have to build it, and you still have to maintain it. And so-- there's essentially this duplication of infrastructure is a big part of why the transition itself is inherently inflationary.
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Text, Nuclear: who knows? US Vogtle: 7 years late, $16 billion over budget. Flamanville France: 5 times over budget, 17 year completion time. Hinckley Point UK: $13 billion over budget. Olkiluoto Finland: 14 years and 3 times over budget. A chart titled average nuclear plant completion time by year and region shows the number of years it took for developed countries versus emerging countries depending on the year construction started. Developed countries took 4 to about 10 or 12 years from 1950 to 1990 and only had two countries take 11 or 18 years after the year 2000. Emerging countries mostly stay in the 4 to 10 range throughout 1950 to 2020 with the longest two taking 18 years in the 1980s. Text, Source: Power Reactor System Database, J.P.M.A.M., December 2023.
(SPEECH)
In terms of nuclear, there's been so much discussion about nuclear over the last 18 months. How much would it cost to build a new plant? Who knows. There have been so few plants built in the Western world in the last 30 years-- just a handful. And unfortunately, the four examples of the ones that were built and completed all came in billions and billions of dollars over budget, and many, many, years late-- whether it's the US plant in Georgia, Flamanville in France, Hinckley Point in the UK, and a lot of the plants in Finland.
And in emerging economies, primarily Russia, China, and India, these plants are getting completed between 6 and 7 years-- sometimes eight years. But, what can be accomplished in China, India and Russia has no bearing or parallel to what it would take to do in the West for all the obvious regulatory and other reasons.
So, the West has announced its intention for a nuclear renaissance. I mean, even if it got jump started today, it could easily take 10 to 15 years to materialize and the cost could be staggeringly high if the recent plant completions are any indication that said decommissioning existing nuclear is a very challenging thing that can have negative outcomes. We have a couple of charts in here one on Germany, one on New York state.
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Text, Nuclear: decommissioning aftermath. Two charts. Chart on the left titled, German fossil fuel GENERATION required in 2022 with and without nuclear decommissioning, shows the actual terawatt per hour of electricity generation from fossil fuels in 2022 was 250 while the counterfactual assuming no decommissioning of nuclear since 2002 was 125, 49% less, and the actual electricity generation from natural gas in 2022 was 100 while the counterfactual assuming no decommissioning of nuclear since 2002 was 25, 84% less. Text below, Source Fraunhofer Institute, Energy Institute, J.P.M.A.M. 2023. The chart on the right titled The GHG impact of shutting down Indian Point, shows the CO2 emissions in pounds per MWh decreased from 890 in 2019 to 820 in 2022 in the US, 875 in 2019 to 780 in 2022 for ERCOT in Texas, and increased from 560 in 2019 to 890 in 2022 in NYC/ Long Island. Text below, Source: EPA eGRID data, 2022.
(SPEECH)
Germany decommissioned almost all of its nuclear right before Russia invaded Ukraine. And as a result, the its dependence on imported liquefied natural gas was massively magnified, and one of the analyzes that we did was we said, what's the counterfactual? Suppose Russia-- suppose Germany didn't decommission all that nuclear power. Well, based on our number crunching, they would have needed 85% less natural gas at the time Russia invaded Ukraine, had they just kept their nuclear plants online-- which would have changed a lot of things in Germany and in Europe about its response to the invasion.
And then in New York state, the shutdown of Indian Point. New York City and Long Island used to have one of the best carbon footprints in the country. NYSERDA and some other New York agencies said, well don't worry, we're going to shut down Indian Point, and we're going to add a combination of wind, solar, and hydro, to make up the gap. So far, that's not happening.
And now New York has a higher carbon footprint than the rest of the US because of natural gas expansion and imports of electricity from neighboring states like Pennsylvania that are based on natural gas. Now, maybe the completion of some of the Blackstone's building the Champlain Express from Canada, that'll offset part of this. But while it's very expensive and difficult to build new plants, decommissioning existing ones need to be done very carefully.
(DESCRIPTION)
Text, Energy independence and the energy transition. A chart below titled Energy dependence and independence shows the net imports of oil, natural gas and coal in millions tonnes of oil equivalence has increased from 700 in 1980 to 1,000 in 2020 in Europe, increased from 200 in 1980 to 600 in 2008 then decreased to negative 100 in 2020 in the US, increased from below 0 in 1980 to 800 in 2020 in China, and decreased from 0 in 1980 to negative 600 in 2020 in Russia. Text below, Source EI Statistical Review of World Energy, J.P.M.A.M. 2023.
(SPEECH)
And then the last couple of comments, we have a chart every year that looks at energy independence. After 40 years-- and I remember as a kid, in the early 1970s, when parents used to line up to get gas based on what the last digit of their license plate. Nixon was talking about the urgency of energy independence. 40 years later, the United States finally entered in Japan. While Europe and China compete for the same imports of natural resources.
So the energy transition has to be done in a way that doesn't sacrifice this energy independence, and right now, there are too many supply chains that are still China-reliant and so, you know, that's what Manchin was trying to accomplish with some of his negotiations with Schumer on the energy bill. The Biden Administration has basically steamrolled a lot of those Manchin concerns and in the interpretations of the energy bill. They are going full steam ahead for decarbonization at the expense of in my opinion of national security which is a balance that needs to be struck, I think, a little bit better.
(DESCRIPTION)
Text, Renewable energy stocks come back to earth. A chart titled Investment returns: renewables vs traditional energy shows the Index (100 = Jan 2019) starts at 100 in 2019 for both Renewables composite (equal weighted) and the MSCI World Energy Index (oil, gas and pipelines) and ends roughly the same at around 175 for both in 2024. The renewable composites increased sharply to 450 in 2021 before decreasing steadily while the MSCI World Energy index steadily increased except for a dip in 2020. The renewable composites are NASDAQ Clean Energy, Wilderhill Clean Energy, F.T.S.E. Renew/Alt Energy, S&P Global Clean Energy, and MAC Global Solar. Text below, Source: Bloomberg, J.P.M.A.M. February 9, 2024.
(SPEECH)
Last thing, for investors renewable energy stocks have gotten absolutely decimated since their peak in 2021. With the Fed pivot, I think the declines-- the bleeding has stopped. The best thing to have owned over the last three years, was a portfolio that was long traditional energy, had short renewables, those returns have now kind of converged. And at this point, I think you can make a good argument for owning both of them in your portfolio, except you should be aware of one thing. And I'll close with this.
(DESCRIPTION)
Text, Renewable energy stocks come back to earth (continued). A chart titled Operating margins by sector and index shows the operating margins percent in clean energy, oil & gas, healthcare, technology/software, telecom, and cyber, robotics, and fintech. Clean energy is below 10% with two indices in the negatives. Oil and gas is mostly above 10% with oil and gas exploration the highest at 35%. Healthcare is above 10% except for healthcare supplies at 8% with biotech the highest at 22%. Technology/Software is above 10% with just three indices in the low teens and system software the highest at 40%. Telecom's Telecom and Wireless are both 18%. Cyber, robotics, and fintech are all almost 10% except for MSCI Robotics index at 13%. Text below, Source, Bloomberg, J.P.M.A.M. 2023.
(SPEECH)
We have a chart in here that looks at operating margins by sector-- for clean energy, oil and gas, health care, tech, software, telecom, cyber robotics, fintech. In other words, how profitable are renewable energy companies right now, even with the subsidies they get? Compared to the traditional energy sector and a bunch of other stuff that people see as growth stocks.
And the answer is, they're not very profitable. The six indices that we're shelving generally have operating margins below 10%, which is not very growthy. Below most of the rest of the comparables that we showed here, and below the traditional energy sector. So, I think it's important for investors to understand, these are capital intensive businesses that are very that are very subsidy-reliant. And that even with the benefit of that, there's still not enough profitability to go around.
So, that's the end of the podcast. Thank you for listening.
(DESCRIPTION)
Text on slide, J.P. Morgan. Podcast: Electravision, Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset and Wealth Management. March 2024. J.P. Morgan Chase Bank, N.A. and its affiliates (collectively "J.P.M.C.B.") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("J.P.M.S."), a member of FINRA and S.I.P.C. J.P.M.C.B. and J.P.M.S. are affiliated companies under the common control of J.P. Morgan Chase and Co. The views expressed herein may differ from other J.P. Morgan Chase and Co affiliates and employees. This constitutes our judgment based on current market conditions and is subject to change without notice. This has not been prepared with any particular investor in mind, and it may not be suitable for all investors. Investors should speak to their financial representatives before engaging in any investment product or strategy. This material should not be regarded as research or as a J.P. Morgan Research Report. Outlooks and past performance are not reliable indicators of future results. Copyright 2023 J.P. Morgan Chase & Co. All rights reserved. Investment Products: Not FDIC Insured, No Bank Guarantee, May Lose Value.
(SPEECH)
The paper is best digested over a long, snowy, weekend someplace where nobody's bothering you, and thanks for listening. Thanks for reading. And I'll see you again on this paper next year, a year from today. Bye.
(DESCRIPTION)
Text, J.P. Morgan
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Descriptive audio
Good morning, everybody and welcome to the Eye on the Market podcast for our annual energy paper. This year, the paper is called Electravision. And before getting into some of the details I want to talk a little bit about how this energy journey began. Around 15 years ago once the smoke cleared from the financial crisis, I decided I wanted to understand energy at a much deeper level than I had.
So, I reached out to Vaclav Smil, one of the world's preeminent scientists. He didn't respond the first several times I contacted him. And finally, he said, who are you and why are you pestering me? And I explained who I was, and what I wanted to learn, and what I had read. And he said fine, if you really want to learn about energy show me that you really mean it. Come up to Manitoba in February, and we'll spend a couple of days with a blackboard and a pen, and so I did.
And here is a here's a picture of a sign that I took on my way to the hotel, where I met him. It says, "Welcome Manitoba Moose!!" I guess people welcome moose in Manitoba. We spent a couple of days going through some basic energy math. And for 12 years, Vaclav served as a Technical Advisor to this paper. And was among the most fantastic experiences I've ever had at JPMorgan, in terms of being able to communicate and learn from someone like that.
Vaclav was over 80 now and he's retired. We still communicate on a variety of topics. He's shared his recent essay with me, and she's allowed to share with you. And there's a link to it in the energy paper. And I could never have done any of this without his original guidance, which taught me how to think about energy issues.
So this year's paper it's called Electravision vision. And I don't think this is going to be a surprise as to why. The consensus path forward is electrification of everything because if you electrify it, you can virtually decarbonize it with wind, solar, hydro, battery storage, transmission, and possibly nuclear. And so, the idea is, let's let's electrify everything that moves.
And in principle from a mechanical engineering perspective, it can be done. But the obstacles are all related to things like physics and chemistry, cost, human behavior, and politics. So, this year's energy paper goes into the details. I wanted to show you just a few charts from the piece. But, it's a long piece like it is every year. It's got a lot of charts and tables and different sections. I'm just going to give you a very quick preview in this in this podcast/webcast. I'm showing slides here. So if you're listening, this might be the kind of thing that you want to-- you can listen to it, but you can also watch it on the video if you go to the web page where we post these things.
So to be clear, the fossil fuel share of primary energy is falling. In other words, the share of global energy use from fossil fuels is falling, and it is falling at roughly the same pace that it fell during the 1970s and early '80s during the nuclear era. But that's the share of primary energy. Since global energy consumption continues to rise, we haven't reached a peak in emissions while fossil fuel consumption yet. Those numbers are still rising. They're rising more slowly than they used to, but they're still rising.
And what's happening is that the gap between fossil fuel use and renewable energy is beginning to close. It should start to close more rapidly now-- given for the fourth year in a row, spending has outstripped traditional fossil fuel spending and 2 to 1, 3 to 1, whatever the ratio is. So this gap should continue to close, but it's going to take a long time to close.
And one of the primary takeaways that we get every year and particularly this year, is if natural gas is going to be around for a long time, and we think it will, and it's also impossible to conceive of and understand human prosperity right at this point without the contribution from natural gas, that system is going to need investment to make sure it can be delivered safely, and this methane footprint is going to have to be managed more closely. But there's no question when you look at the numbers that natural gas is going to be a critical part of human prosperity for a very long time.
And here's one of the reasons why. We have a chart here that shows the two major things going on. There is electrification of the grid, and then there's how much are we how much are we using the grid. So, the green line here is the electrification of the grid. These are global numbers. And the grid is greenifying rapidly with all the wind and mostly solar buildout taking place around the world.
We're now over 30% globally, of electricity generation coming from renewables. And that number is rising quicker. What's not rising very quickly is the electricity share of global energy consumption. What are we using electricity for? So, to put it in clear terms, what's happening quickly is the energy that we're consuming for air conditioning, space cooling, computers, data centers, things like that. That's becoming greener. But the uses of electricity in the broad economy are rising very, very slowly. And the electrification share of the global economy has hasn't even risen 5% in the last 10 years. So that's a very, very slow process, and and this year we look at why.
Now, Electravision is this vision that we spell out in the executive summary. And what would that roadmap look like for the US? Well, it's primarily based on the notion that electric vehicles, using electric motors, and electric heat pumps are more efficient than their fossil fuel counterparts. In other words, EV motors are 90% efficient compared to something between around 25% and 30% for internal combustion engines for vehicles. And electric heat pumps are much more efficient than their furnace and boiler counterparts for winter heating.
So, if you can electrify it, you can actually shrink your energy footprint at the same time you decarbonise. So here we have a chart that's one of the main focal points of the piece, which is OK, we start out where we are now. We decarbonize the current grid by adding more wind and solar. We decarbonize road transportation with the cars and trucks. And then we decarbonize winter heating with residential and commercial heat pumps. And then we decarbonize decarbonize some amount of industrial production with industrial.
It all sounds very straightforward. And again, from a mechanical engineering perspective it can work. The issues are all around cost implementation, chemistry, and physics, and other things. And here's a summary of what it would take. We have a table here that looks at the current situation for the US and what Electavision would entail. And it's a pretty big difference.
And what you have is around a 33% decline-- fossil fuel usage would fall by a third. But in order to accomplish this, you'd have to grow the grid enormously. And so just to put some numbers around this, the increased electricity generation in the United States would be of a magnitude that where it last happened over 30 years.
So, in other words the grid expansion necessary took us 30 years last time to accomplish. More than 50% of this grid would would have to be would be intermittent and would need sufficient-- either battery storage, or peaker plants to accommodate. We'd need a 400% increase in wind and solar power. There'd be a massive buildout of transmission and distribution- which has been a major challenge.
I think that that even today, the costs of all this would be underestimated because of the duplication of infrastructure. There's very poor technological readiness of long duration energy storage. And we have a very slow replacement rate for vehicles, furnaces, and other combustion equipment right now. And then, the other issue of course, is the fact that electricity costs a lot more than natural gas per unit of energy.
So, the executive summary gets into the vision of Electravision. And then some of the constraints and the discussion about long it might take. Here, I'm showing the table of contents. So, in addition to that discussion about electrification, we have a link to Vaclav's latest essay. We have a section on China, which is the world's largest energy user-- which is building lots of everything. Coal, wind, solar, nuclear, hydro-- you name it. They're building a lot of everything.
We have a section which is very important with four pages of essential energy transition charts on a wide variety of topics that we update each year. We have a section on the investment returns on oil and gas, renewables, and nuclear shares. And then we have a section on nuclear power.
How much does it cost? Really hard to tell. We get into the details. But then we also talk about the consequences of decommissioning existing nuclear-- both in Germany, and in New York state. I take another swing at Lazard for their sloppy, levelized cost analysis. Which we did last year. We have some at last we have a section on some advanced electrification topics, mostly related to the concentration of load associated with people all charging, or heating their homes at the same time once they're electrified. We have a section on why you should probably skip any article you read that talks about how wonderful things are going, and what I call the PUNIES, which are the small countries with unique natural resource attributes. PUNY stands for Panama, Uruguay, Namibia, and Iceland.
We have a section on net zero oil. Which I hadn't heard of and then did some work on it. Occidental Petroleum is basically trying to continue to produce traditional oil that gets combusted, and then separately used direct air carbon capture to offset the carbon footprint of that combusted oil. It sounds simple. The details are not so simple. We go through the details. I'm deeply skeptical of anything based on direct air carbon capture, but I will keep an open mind to see what happens.
Similarly, we have a section on something called Bio-Oil. JPMorgan, as a firm contracted with a company to sequester bio oil from pyrolysis of corn Stover it's another kind of highly manual labor intensive approach to decarbonization we talk about that. And then at the end, we have a thought experiment on the reconstruction of gaza and the role that distributed solar power might play with some history that goes back to World War I and World War II.
And I'm not going to get into too much details. I think that section is better read in it's entirety than for me trying to summarize it. And then we close with some charts on energy supply and demand, global LNG markets, and then a must-read one pager on all the misadventures that are going on with Electrify America, Waymo, and my Jeep-- my woeful Jeep hybrid.
So here's just a few charts that I want to walk through before closing. The big issue with electrification of vehicles and winter heating is just the time it takes to replace to replace these combustion devices. In the United States, we're now up to roughly a 10% share of battery electric and plug-in hybrids as a percentage of total sales. As a share of the fleet, it's still around 2%. So, both of those numbers are going to rise over time, but it's going to take a lot longer for the share of fleet numbers than the share of sales numbers.
And then, in the United States and in Europe, how is new home construction every year-- is only-- is less than 1% of the stock of existing homes. Why does that matter? Most of the time, if you're if you're if we're relying on transition to heat pumps away from furnaces and natural gas heating systems, most of the time that takes place when new homes get built. But, that's a very, very, very slow process. So without the right kind of subsidies and training and equipment availability, that's also going to be very, very, very slow process.
And then, one of the things I'm very skeptical of, is there's a lot of hockey stick forecasts that industrial energy use is going to be electrified. Here, you can see industrial energy use of electricity as a share of total electricity use, has been stagnant for 40 years. And there's a variety of physical and chemical reasons for that, which we discuss in the paper. But even before you get into those, anything that hasn't changed for 40 years, you should be very skeptical when people tell you that it's going to change overnight in a meaningful way.
Then Electravision is heavily reliant on transmission. We have to move these electrons around. This transmission line growth is growing in the wrong direction. This is the anti-Electravision chart that's going on in the United States. We have a chart here that shows the new gigawatt miles of transmission line growth added every year-- and that number is falling quite sharply rather than rising for political reasons, NIMBY reasons, all sorts of stuff. And Electravision is going to be almost impossible to accomplish unless that number starts to go up.
The cost of the transition, when people ask me how much the transition might cost, I show them this chart. Which is-- if you add a megawatt of wind or solar, how much natural gas can you unplug because if you can unplug one megawatt for one megawatt then maybe it doesn't cost so much.
But that's not the case. So, the ISOs, is the Independent System Operators, provide data so that we can estimate this. And, roughly, you can only decommission or unplug 10% to 25% at most every time you add a megawatt. So you add a megawatt of wind and solar, you can decommission 20% of that number in terms of natural gas capacity, because you still have to keep most of it around. Now you don't use it as much-- and so its capacity factor goes down. But you still have to build it, and you still have to maintain it. And so-- there's essentially this duplication of infrastructure is a big part of why the transition itself is inherently inflationary.
In terms of nuclear, there's been so much discussion about nuclear over the last 18 months. How much would it cost to build a new plant? Who knows. There have been so few plants built in the Western world in the last 30 years-- just a handful. And unfortunately, the four examples of the ones that were built and completed all came in billions and billions of dollars over budget, and many, many, years late-- whether it's the US plant in Georgia, Flamanville in France, Hinckley Point in the UK, and a lot of the plants in Finland.
And in emerging economies, primarily Russia, China, and India, these plants are getting completed between 6 and 7 years-- sometimes eight years. But, what can be accomplished in China, India and Russia has no bearing or parallel to what it would take to do in the West for all the obvious regulatory and other reasons.
So, the West has announced its intention for a nuclear renaissance. I mean, even if it got jump started today, it could easily take 10 to 15 years to materialize and the cost could be staggeringly high if the recent plant completions are any indication that said decommissioning existing nuclear is a very challenging thing that can have negative outcomes. We have a couple of charts in here one on Germany, one on New York state.
Germany decommissioned almost all of its nuclear right before Russia invaded Ukraine. And as a result, the its dependence on imported liquefied natural gas was massively magnified, and one of the analyzes that we did was we said, what's the counterfactual? Suppose Russia-- suppose Germany didn't decommission all that nuclear power. Well, based on our number crunching, they would have needed 85% less natural gas at the time Russia invaded Ukraine, had they just kept their nuclear plants online-- which would have changed a lot of things in Germany and in Europe about its response to the invasion.
And then in New York state, the shutdown of Indian Point. New York City and Long Island used to have one of the best carbon footprints in the country. NYSERDA and some other New York agencies said, well don't worry, we're going to shut down Indian Point, and we're going to add a combination of wind, solar, and hydro, to make up the gap. So far, that's not happening.
And now New York has a higher carbon footprint than the rest of the US because of natural gas expansion and imports of electricity from neighboring states like Pennsylvania that are based on natural gas. Now, maybe the completion of some of the Blackstone's building the Champlain Express from Canada, that'll offset part of this. But while it's very expensive and difficult to build new plants, decommissioning existing ones need to be done very carefully.
And then the last couple of comments, we have a chart every year that looks at energy independence. After 40 years-- and I remember as a kid, in the early 1970s, when parents used to line up to get gas based on what the last digit of their license plate. Nixon was talking about the urgency of energy independence. 40 years later, the United States finally entered in Japan. While Europe and China compete for the same imports of natural resources.
So the energy transition has to be done in a way that doesn't sacrifice this energy independence, and right now, there are too many supply chains that are still China-reliant and so, you know, that's what Manchin was trying to accomplish with some of his negotiations with Schumer on the energy bill. The Biden Administration has basically steamrolled a lot of those Manchin concerns and in the interpretations of the energy bill. They are going full steam ahead for decarbonization at the expense of in my opinion of national security which is a balance that needs to be struck, I think, a little bit better.
Last thing, for investors renewable energy stocks have gotten absolutely decimated since their peak in 2021. With the Fed pivot, I think the declines-- the bleeding has stopped. The best thing to have owned over the last three years, was a portfolio that was long traditional energy, had short renewables, those returns have now kind of converged. And at this point, I think you can make a good argument for owning both of them in your portfolio, except you should be aware of one thing. And I'll close with this.
We have a chart in here that looks at operating margins by sector-- for clean energy, oil and gas, health care, tech, software, telecom, cyber robotics, fintech. In other words, how profitable are renewable energy companies right now, even with the subsidies they get? Compared to the traditional energy sector and a bunch of other stuff that people see as growth stocks.
And the answer is, they're not very profitable. The six indices that we're shelving generally have operating margins below 10%, which is not very growthy. Below most of the rest of the comparables that we showed here, and below the traditional energy sector. So, I think it's important for investors to understand, these are capital intensive businesses that are very that are very subsidy-reliant. And that even with the benefit of that, there's still not enough profitability to go around.
So, that's the end of the podcast. Thank you for listening. The paper is best digested over a long, snowy, weekend someplace where nobody's bothering you, and thanks for listening. Thanks for reading. And I'll see you again on this paper next year, a year from today. Bye.
(DESCRIPTION)
Text, J.P. Morgan, Eye on the Market. Slides are on the left and the speaker's video is on the right.
Text on slide, J.P. Morgan. Podcast: Electravision, Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset and Wealth Management. March 2024. J.P. Morgan Chase Bank, N.A. and its affiliates (collectively "J.P.M.C.B.") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("J.P.M.S."), a member of FINRA and S.I.P.C. J.P.M.C.B. and J.P.M.S. are affiliated companies under the common control of J.P. Morgan Chase and Co.. The views expressed herein may differ from other J.P. Morgan Chase and Co affiliates and employees. This constitutes our judgment based on current market conditions and is subject to change without notice. This has not been prepared with any particular investor in mind, and it may not be suitable for all investors. Investors should speak to their financial representatives before engaging in any investment product or strategy. This material should not be regarded as research or as a J.P. Morgan Research Report. Outlooks and past performance are not reliable indicators of future results. Copyright 2023 J.P. Morgan Chase and Co. All rights reserved. Investment Products: Not FDIC Insured, No Bank Guarantee, May Lose Value.
Disclaimer page before the speaker's video appears on the right. Text, J.P. Morgan. The views and strategies described herein may not be suitable for all clients and are subject to investment risks. Certain opinions, estimates, investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice. This material should not be regarded as research or as a J.P. Morgan research report. The information contained herein should not be relied upon in isolation for the purpose of making an investment decision. More complete information is available, including product profiles, which discuss risks, benefits, liquidity, and other matters of interest. For more information on any of the investment ideas and products illustrated herein, please contact your J.P. Morgan representative. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Investment and Insurance Products: Not A Deposit, Not FDIC Insured, Not Insured By Any Federal Government Agency, No Bank Guarantee, May Lose Value.
(SPEECH)
Good morning, everybody and welcome to the Eye on the Market podcast for our annual energy paper. This year, the paper is called Electravision. And before getting into some of the details I want to talk a little bit about how this energy journey began. Around 15 years ago once the smoke cleared from the financial crisis, I decided I wanted to understand energy at a much deeper level than I had.
So, I reached out to Vaclav Smil, one of the world's preeminent scientists. He didn't respond the first several times I contacted him. And finally, he said, who are you and why are you pestering me? And I explained who I was, and what I wanted to learn, and what I had read. And he said fine, if you really want to learn about energy show me that you really mean it. Come up to Manitoba in February, and we'll spend a couple of days with a blackboard and a pen, and so I did.
And here is a here's a picture of a sign that I took on my way to the hotel, where I met him. It says, "Welcome Manitoba Moose!!" I guess people welcome moose in Manitoba.
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Text, My energy journey began in Manitoba. A photo of a sign stuck in the snowy ground reads, Welcome Manitoba Moose!!
(SPEECH)
We spent a couple of days going through some basic energy math. And for 12 years, Vaclav served as a Technical Advisor to this paper. And was among the most fantastic experiences I've ever had at JPMorgan, in terms of being able to communicate and learn from someone like that.
Vaclav was over 80 now and he's retired. We still communicate on a variety of topics. He's shared his recent essay with me, and she's allowed to share with you. And there's a link to it in the energy paper. And I could never have done any of this without his original guidance, which taught me how to think about energy issues.
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Text, Electravision. A picture of suburban homes with solar panels, wind turbines, and floating balls of light above them with mountains in the distance.
(SPEECH)
So this year's paper it's called Electravision vision. And I don't think this is going to be a surprise as to why. The consensus path forward is electrification of everything because if you electrify it, you can virtually decarbonize it with wind, solar, hydro, battery storage, transmission, and possibly nuclear. And so, the idea is, let's let's electrify everything that moves.
And in principle from a mechanical engineering perspective, it can be done. But the obstacles are all related to things like physics and chemistry, cost, human behavior, and politics. So, this year's energy paper goes into the details.
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Text, Falling share of primary energy from fossil fuels, not level. A chart below titled falling fossil fuel shares mask reality of rising emissions shows percent in billion tonnes of CO2 of global fossil fuel share of primary energy decreased from 1965 to 2020, from 94% at 40 billion tonnes in 1965 to 82% at 5 billion tonnes in 2020. It also shows the percent in billions tonnes of CO2 of global emissions from energy has increased from 84% at 12 billion tonnes in 1965 to 92% at 35 billion tonnes in 2020. Text below, Source: EI Statistical Review of World Energy, J.P.M.A.M., 2023.
(SPEECH)
I wanted to show you just a few charts from the piece. But, it's a long piece like it is every year. It's got a lot of charts and tables and different sections. I'm just going to give you a very quick preview in this in this podcast/webcast. I'm showing slides here. So if you're listening, this might be the kind of thing that you want to-- you can listen to it, but you can also watch it on the video if you go to the web page where we post these things.
So to be clear, the fossil fuel share of primary energy is falling. In other words, the share of global energy use from fossil fuels is falling, and it is falling at roughly the same pace that it fell during the 1970s and early '80s during the nuclear era. But that's the share of primary energy. Since global energy consumption continues to rise, we haven't reached a peak in emissions while fossil fuel consumption yet. Those numbers are still rising. They're rising more slowly than they used to, but they're still rising.
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Text, The fossil fuel-renewable gap. A chart below titled global fossil fuel and renewable energy use shows fossil fuel, primary energy, and fossil fuels post combustion energy increase from 1965 to 2020 from 150 and 100 exajoules to 500 and 300 exajoules. Renewable energy increases from 1965 to 2020 only slightly, from 0 to 50 exajoules.
(SPEECH)
And what's happening is that the gap between fossil fuel use and renewable energy is beginning to close. It should start to close more rapidly now-- given for the fourth year in a row, spending has outstripped traditional fossil fuel spending and 2 to 1, 3 to 1, whatever the ratio is. So this gap should continue to close, but it's going to take a long time to close.
And one of the primary takeaways that we get every year and particularly this year, is if natural gas is going to be around for a long time, and we think it will, and it's also impossible to conceive of and understand human prosperity right at this point without the contribution from natural gas, that system is going to need investment to make sure it can be delivered safely, and this methane footprint is going to have to be managed more closely. But there's no question when you look at the numbers that natural gas is going to be a critical part of human prosperity for a very long time.
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Text, The grid is getting greener but the purposes for which it's used are expanding more slowly. A chart below titled Grid decarbonization outpaces electrification of energy use shows the percent of renewable share of global electricity generation has increased from 19% in 1990 to 31% in 2023 while the percent of electricity share of global final energy consumption has increased from 16% in 1990 to 24% in 2023. Text below, Source EI Statistical Review of World Energy, I.E.A., J.P.M.A.M., 2023.
(SPEECH)
And here's one of the reasons why. We have a chart here that shows the two major things going on. There is electrification of the grid, and then there's how much are we how much are we using the grid. So, the green line here is the electrification of the grid. These are global numbers. And the grid is greenifying rapidly with all the wind and mostly solar buildout taking place around the world.
We're now over 30% globally, of electricity generation coming from renewables. And that number is rising quicker. What's not rising very quickly is the electricity share of global energy consumption. What are we using electricity for? So, to put it in clear terms, what's happening quickly is the energy that we're consuming for air conditioning, space cooling, computers, data centers, things like that. That's becoming greener. But the uses of electricity in the broad economy are rising very, very slowly. And the electrification share of the global economy has hasn't even risen 5% in the last 10 years. So that's a very, very slow process, and and this year we look at why.
Now, Electravision is this vision that we spell out in the executive summary.
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Text, How Electravision would work. A chart below titled Electravision roadmap for the US shows coal, natural gas, oil, wind and solar, other R.E.N., and nuclear energy values in quadrillion BTUs of primary energy, now EIA convention (primary energy for fossil fuels, delivered energy for renewables and nuclear) for the current time, then step 1, step 2, step 3 and 4, and step 5. The current total BTUs amount to 85 with coal at 10, natural gas at 32, oil at 37, wind and solar at 3, other R.E.N. at 1, and nuclear at 3. After step 1, the decarbonization of the current grid via wind and solar, the coal decreases to 4 and wind and solar increase to 6 for a total of 80. After step 2, the decarbonization of road transport via EV cars and trucks, the oil decreases to 38 and the wind and solar increase to 8 for a total of 72. After step 3 and 4, the decarbonization of winter heating via residential and commercial heat pumps, the natural gas decreases to 25 for a total of 68. After step 5, the decarbonization of industrial production via industrial heat pumps, natural gas decreases to 23 for a total of 66. Text below, Source: E.I.A. data, J.P.M.A.M. assumptions, 2024. Other renewables is primarily hydropower.
(SPEECH)
And what would that roadmap look like for the US? Well, it's primarily based on the notion that electric vehicles, using electric motors, and electric heat pumps are more efficient than their fossil fuel counterparts. In other words, EV motors are 90% efficient compared to something between around 25% and 30% for internal combustion engines for vehicles. And electric heat pumps are much more efficient than their furnace and boiler counterparts for winter heating.
So, if you can electrify it, you can actually shrink your energy footprint at the same time you decarbonise. So here we have a chart that's one of the main focal points of the piece, which is OK, we start out where we are now. We decarbonize the current grid by adding more wind and solar. We decarbonize road transportation with the cars and trucks. And then we decarbonize winter heating with residential and commercial heat pumps. And then we decarbonize decarbonize some amount of industrial production with industrial.
It all sounds very straightforward. And again, from a mechanical engineering perspective it can work. The issues are all around cost implementation, chemistry, and physics, and other things.
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Text, Electravision. A table below shows current, Electravision, and Change values for Primary energy delivered (quads), 85.4, 66.5, and negative 22% respectively, Fossil fuel primary energy use (quads), 79.4, 52.2, negative 34%, Wind + solar generation (TWh) 645, 3,069, and 376%, Total electricity generation (TWh) 4,321, 5775, and 34%, Wind + Solar share of electricity generation, 15%, 53%, and 38%, and Renewable share of electricity generation, 23%, 59%, and 36%. Text below, Source, J.P.M.A.M, 2024. Using new E.I.A. conventions for primary energy.
(SPEECH)
And here's a summary of what it would take. We have a table here that looks at the current situation for the US and what Electavision would entail. And it's a pretty big difference.
And what you have is around a 33% decline-- fossil fuel usage would fall by a third. But in order to accomplish this, you'd have to grow the grid enormously. And so just to put some numbers around this, the increased electricity generation in the United States would be of a magnitude that where it last happened over 30 years.
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Text, But... Similar increase in electricity generation took 30 years to achieve, 1993-2022. More than 50% of generation would be intermittent. 400% increase in wind/solar power. Transmission and distribution. Electricity and natural gas outage risks. Underestimation of cost due to duplication of infrastructure. Poor technological readiness of long duration energy storage. Low replacement rate for vehicles, furnaces and other combustion equipment. High cost of electricity vs natural gas per MJ.
(SPEECH)
So, in other words the grid expansion necessary took us 30 years last time to accomplish. More than 50% of this grid would would have to be would be intermittent and would need sufficient-- either battery storage, or peaker plants to accommodate. We'd need a 400% increase in wind and solar power. There'd be a massive buildout of transmission and distribution- which has been a major challenge.
I think that that even today, the costs of all this would be underestimated because of the duplication of infrastructure. There's very poor technological readiness of long duration energy storage. And we have a very slow replacement rate for vehicles, furnaces, and other combustion equipment right now. And then, the other issue of course, is the fact that electricity costs a lot more than natural gas per unit of energy.
So, the executive summary gets into the vision of Electravision. And then some of the constraints and the discussion about long it might take.
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Text, Table of contents, Electravision: the contours of an electrified future. The latest from Vaclav Smil. All Eyes on China: the world's largest energy user is building a lot of everything. Essential energy transition charts. Investment returns in oil & gas, renewable energy and nuclear-exposed shares. Nuclear power: Elusive measures of true cost, German decommissioning/deindustrialization and NY State. Lazard's epiphany does not go far enough: the inadequacies of levelized cost, Part 2. Advanced Electravision topics: timing, temperature, transmission and turbines. Why-drogen Epilog: A tough year for the green hydrogen industry. "Ignore the PUNIs": The distraction of small countries with unique natural energy resources. On "Net Zero" Oil: worth trying if it can be done close to very ambitious pro-forma projections. A proper burial: can sequestration of bio-oil gain more traction than CCS? What if? A thought experiment on the reconstruction of Gaza and the role of distributed solar power. Appendix 1: on US and European energy supply/demand and global LNG markets. Appendix II: EV misadventures with Electrify America, Waymo and Jeep.
(SPEECH)
Here, I'm showing the table of contents. So, in addition to that discussion about electrification, we have a link to Vaclav's latest essay. We have a section on China, which is the world's largest energy user-- which is building lots of everything. Coal, wind, solar, nuclear, hydro-- you name it. They're building a lot of everything.
We have a section which is very important with four pages of essential energy transition charts on a wide variety of topics that we update each year. We have a section on the investment returns on oil and gas, renewables, and nuclear shares. And then we have a section on nuclear power.
How much does it cost? Really hard to tell. We get into the details. But then we also talk about the consequences of decommissioning existing nuclear-- both in Germany, and in New York state. I take another swing at Lazard for their sloppy, levelized cost analysis. Which we did last year. We have some at last we have a section on some advanced electrification topics, mostly related to the concentration of load associated with people all charging, or heating their homes at the same time once they're electrified. We have a section on why you should probably skip any article you read that talks about how wonderful things are going, and what I call the PUNIES, which are the small countries with unique natural resource attributes. PUNY stands for Panama, Uruguay, Namibia, and Iceland.
We have a section on net zero oil. Which I hadn't heard of and then did some work on it. Occidental Petroleum is basically trying to continue to produce traditional oil that gets combusted, and then separately used direct air carbon capture to offset the carbon footprint of that combusted oil. It sounds simple. The details are not so simple. We go through the details. I'm deeply skeptical of anything based on direct air carbon capture, but I will keep an open mind to see what happens.
Similarly, we have a section on something called Bio-Oil. JPMorgan, as a firm contracted with a company to sequester bio oil from pyrolysis of corn Stover it's another kind of highly manual labor intensive approach to decarbonization we talk about that. And then at the end, we have a thought experiment on the reconstruction of gaza and the role that distributed solar power might play with some history that goes back to World War I and World War II.
And I'm not going to get into too much details. I think that section is better read in it's entirety than for me trying to summarize it. And then we close with some charts on energy supply and demand, global LNG markets, and then a must-read one pager on all the misadventures that are going on with Electrify America, Waymo, and my Jeep-- my woeful Jeep hybrid.
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Text, EV% of sales vs % of fleet. A chart below titled US B.E.V. and P.H.E.V. share of sales vs share of fleet shows the percent of share of sales increasing from 1% in 2017 to 10% in 2024 and while the share of the fleet only increases from about 0.3% in 2017 to 2% in 2024. Text below, Source ANL, B.N.E.F., J.P.M.A.M., January 2024.
(SPEECH)
So here's just a few charts that I want to walk through before closing. The big issue with electrification of vehicles and winter heating is just the time it takes to replace to replace these combustion devices. In the United States, we're now up to roughly a 10% share of battery electric and plug-in hybrids as a percentage of total sales. As a share of the fleet, it's still around 2%. So, both of those numbers are going to rise over time, but it's going to take a lot longer for the share of fleet numbers than the share of sales numbers.
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Text, Heat pump sales limited by slow pace of housing turnover A chart below titled the slow pace of housing turnover shows the new single family house sales as % of single family housing stock is just below 0.8% for the US and the completed new homes as % of existing housing stock is just over 0.8% for the EU. Text below, Source: Census, OECD, J.P.M.A.M., 2023.
(SPEECH)
And then, in the United States and in Europe, how is new home construction every year-- is only-- is less than 1% of the stock of existing homes. Why does that matter? Most of the time, if you're if you're if we're relying on transition to heat pumps away from furnaces and natural gas heating systems, most of the time that takes place when new homes get built. But, that's a very, very, very slow process. So without the right kind of subsidies and training and equipment availability, that's also going to be very, very, very slow process.
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Text, Industrial energy use is hard to electrify/decarbonize. A chart below titled electricity share of US industrial energy use unchanged for decades shows the share of industrial energy use of natural gas has gone from 33% in 1989 down to 30% in 2005 then up to 39% in 2023, petroleum has gone from 34% in 1989 to 39% in 2005 then down to 35% in 2023, and the electricity has roughly stayed at the same 15% from 1989 to 2023. Source: E.I.A., J.P.M.A.M. 2023.
(SPEECH)
And then, one of the things I'm very skeptical of, is there's a lot of hockey stick forecasts that industrial energy use is going to be electrified. Here, you can see industrial energy use of electricity as a share of total electricity use, has been stagnant for 40 years. And there's a variety of physical and chemical reasons for that, which we discuss in the paper. But even before you get into those, anything that hasn't changed for 40 years, you should be very skeptical when people tell you that it's going to change overnight in a meaningful way.
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Text, Electravision? A chart below titled US transmission line growth shows the miles added per year is 4,000 in 2013, 2,750 in 2015, 3,100 in 2016, 1,750 in 2017, 3,100 in 2018, 2,000 in 2019, 2,250 in 2020, 1,000 in 2021 and 500 in 2022. Text below, Source: S&P Global, J.P.M.A.M., 2024. Note: Transmission lines are greater than 100 kV.
(SPEECH)
Then Electravision is heavily reliant on transmission. We have to move these electrons around. This transmission line growth is growing in the wrong direction. This is the anti-Electravision chart that's going on in the United States. We have a chart here that shows the new gigawatt miles of transmission line growth added every year-- and that number is falling quite sharply rather than rising for political reasons, NIMBY reasons, all sorts of stuff. And Electravision is going to be almost impossible to accomplish unless that number starts to go up.
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Text, The cost of the transition. A chart below titled How much natural gas capacity can be reduced per MW of new wind and solar power? shows the percent computed for 2021 assuming new wind and solar = 10% of demand is 29% for NYISO (NY), 25% for CAISO (California), 22% for ERCOT (Texas), 13% for PJM (Mid Atlantic), 13% for SOCO (Southeast), 12% for SPP (Midwest), 12% for ISNE (New England), and 11% for MISO (Upper Midwest). Text below, Source: E.I.A. data, J.P.M.A.M. computations, 2022.
(SPEECH)
The cost of the transition, when people ask me how much the transition might cost, I show them this chart. Which is-- if you add a megawatt of wind or solar, how much natural gas can you unplug because if you can unplug one megawatt for one megawatt then maybe it doesn't cost so much.
But that's not the case. So, the ISOs, is the Independent System Operators, provide data so that we can estimate this. And, roughly, you can only decommission or unplug 10% to 25% at most every time you add a megawatt. So you add a megawatt of wind and solar, you can decommission 20% of that number in terms of natural gas capacity, because you still have to keep most of it around. Now you don't use it as much-- and so its capacity factor goes down. But you still have to build it, and you still have to maintain it. And so-- there's essentially this duplication of infrastructure is a big part of why the transition itself is inherently inflationary.
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Text, Nuclear: who knows? US Vogtle: 7 years late, $16 billion over budget. Flamanville France: 5 times over budget, 17 year completion time. Hinckley Point UK: $13 billion over budget. Olkiluoto Finland: 14 years and 3 times over budget. A chart titled average nuclear plant completion time by year and region shows the number of years it took for developed countries versus emerging countries depending on the year construction started. Developed countries took 4 to about 10 or 12 years from 1950 to 1990 and only had two countries take 11 or 18 years after the year 2000. Emerging countries mostly stay in the 4 to 10 range throughout 1950 to 2020 with the longest two taking 18 years in the 1980s. Text, Source: Power Reactor System Database, J.P.M.A.M., December 2023.
(SPEECH)
In terms of nuclear, there's been so much discussion about nuclear over the last 18 months. How much would it cost to build a new plant? Who knows. There have been so few plants built in the Western world in the last 30 years-- just a handful. And unfortunately, the four examples of the ones that were built and completed all came in billions and billions of dollars over budget, and many, many, years late-- whether it's the US plant in Georgia, Flamanville in France, Hinckley Point in the UK, and a lot of the plants in Finland.
And in emerging economies, primarily Russia, China, and India, these plants are getting completed between 6 and 7 years-- sometimes eight years. But, what can be accomplished in China, India and Russia has no bearing or parallel to what it would take to do in the West for all the obvious regulatory and other reasons.
So, the West has announced its intention for a nuclear renaissance. I mean, even if it got jump started today, it could easily take 10 to 15 years to materialize and the cost could be staggeringly high if the recent plant completions are any indication that said decommissioning existing nuclear is a very challenging thing that can have negative outcomes. We have a couple of charts in here one on Germany, one on New York state.
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Text, Nuclear: decommissioning aftermath. Two charts. Chart on the left titled, German fossil fuel GENERATION required in 2022 with and without nuclear decommissioning, shows the actual terawatt per hour of electricity generation from fossil fuels in 2022 was 250 while the counterfactual assuming no decommissioning of nuclear since 2002 was 125, 49% less, and the actual electricity generation from natural gas in 2022 was 100 while the counterfactual assuming no decommissioning of nuclear since 2002 was 25, 84% less. Text below, Source Fraunhofer Institute, Energy Institute, J.P.M.A.M. 2023. The chart on the right titled The GHG impact of shutting down Indian Point, shows the CO2 emissions in pounds per MWh decreased from 890 in 2019 to 820 in 2022 in the US, 875 in 2019 to 780 in 2022 for ERCOT in Texas, and increased from 560 in 2019 to 890 in 2022 in NYC/ Long Island. Text below, Source: EPA eGRID data, 2022.
(SPEECH)
Germany decommissioned almost all of its nuclear right before Russia invaded Ukraine. And as a result, the its dependence on imported liquefied natural gas was massively magnified, and one of the analyzes that we did was we said, what's the counterfactual? Suppose Russia-- suppose Germany didn't decommission all that nuclear power. Well, based on our number crunching, they would have needed 85% less natural gas at the time Russia invaded Ukraine, had they just kept their nuclear plants online-- which would have changed a lot of things in Germany and in Europe about its response to the invasion.
And then in New York state, the shutdown of Indian Point. New York City and Long Island used to have one of the best carbon footprints in the country. NYSERDA and some other New York agencies said, well don't worry, we're going to shut down Indian Point, and we're going to add a combination of wind, solar, and hydro, to make up the gap. So far, that's not happening.
And now New York has a higher carbon footprint than the rest of the US because of natural gas expansion and imports of electricity from neighboring states like Pennsylvania that are based on natural gas. Now, maybe the completion of some of the Blackstone's building the Champlain Express from Canada, that'll offset part of this. But while it's very expensive and difficult to build new plants, decommissioning existing ones need to be done very carefully.
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Text, Energy independence and the energy transition. A chart below titled Energy dependence and independence shows the net imports of oil, natural gas and coal in millions tonnes of oil equivalence has increased from 700 in 1980 to 1,000 in 2020 in Europe, increased from 200 in 1980 to 600 in 2008 then decreased to negative 100 in 2020 in the US, increased from below 0 in 1980 to 800 in 2020 in China, and decreased from 0 in 1980 to negative 600 in 2020 in Russia. Text below, Source EI Statistical Review of World Energy, J.P.M.A.M. 2023.
(SPEECH)
And then the last couple of comments, we have a chart every year that looks at energy independence. After 40 years-- and I remember as a kid, in the early 1970s, when parents used to line up to get gas based on what the last digit of their license plate. Nixon was talking about the urgency of energy independence. 40 years later, the United States finally entered in Japan. While Europe and China compete for the same imports of natural resources.
So the energy transition has to be done in a way that doesn't sacrifice this energy independence, and right now, there are too many supply chains that are still China-reliant and so, you know, that's what Manchin was trying to accomplish with some of his negotiations with Schumer on the energy bill. The Biden Administration has basically steamrolled a lot of those Manchin concerns and in the interpretations of the energy bill. They are going full steam ahead for decarbonization at the expense of in my opinion of national security which is a balance that needs to be struck, I think, a little bit better.
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Text, Renewable energy stocks come back to earth. A chart titled Investment returns: renewables vs traditional energy shows the Index (100 = Jan 2019) starts at 100 in 2019 for both Renewables composite (equal weighted) and the MSCI World Energy Index (oil, gas and pipelines) and ends roughly the same at around 175 for both in 2024. The renewable composites increased sharply to 450 in 2021 before decreasing steadily while the MSCI World Energy index steadily increased except for a dip in 2020. The renewable composites are NASDAQ Clean Energy, Wilderhill Clean Energy, F.T.S.E. Renew/Alt Energy, S&P Global Clean Energy, and MAC Global Solar. Text below, Source: Bloomberg, J.P.M.A.M. February 9, 2024.
(SPEECH)
Last thing, for investors renewable energy stocks have gotten absolutely decimated since their peak in 2021. With the Fed pivot, I think the declines-- the bleeding has stopped. The best thing to have owned over the last three years, was a portfolio that was long traditional energy, had short renewables, those returns have now kind of converged. And at this point, I think you can make a good argument for owning both of them in your portfolio, except you should be aware of one thing. And I'll close with this.
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Text, Renewable energy stocks come back to earth (continued). A chart titled Operating margins by sector and index shows the operating margins percent in clean energy, oil & gas, healthcare, technology/software, telecom, and cyber, robotics, and fintech. Clean energy is below 10% with two indices in the negatives. Oil and gas is mostly above 10% with oil and gas exploration the highest at 35%. Healthcare is above 10% except for healthcare supplies at 8% with biotech the highest at 22%. Technology/Software is above 10% with just three indices in the low teens and system software the highest at 40%. Telecom's Telecom and Wireless are both 18%. Cyber, robotics, and fintech are all almost 10% except for MSCI Robotics index at 13%. Text below, Source, Bloomberg, J.P.M.A.M. 2023.
(SPEECH)
We have a chart in here that looks at operating margins by sector-- for clean energy, oil and gas, health care, tech, software, telecom, cyber robotics, fintech. In other words, how profitable are renewable energy companies right now, even with the subsidies they get? Compared to the traditional energy sector and a bunch of other stuff that people see as growth stocks.
And the answer is, they're not very profitable. The six indices that we're shelving generally have operating margins below 10%, which is not very growthy. Below most of the rest of the comparables that we showed here, and below the traditional energy sector. So, I think it's important for investors to understand, these are capital intensive businesses that are very that are very subsidy-reliant. And that even with the benefit of that, there's still not enough profitability to go around.
So, that's the end of the podcast. Thank you for listening.
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Text on slide, J.P. Morgan. Podcast: Electravision, Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset and Wealth Management. March 2024. J.P. Morgan Chase Bank, N.A. and its affiliates (collectively "J.P.M.C.B.") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("J.P.M.S."), a member of FINRA and S.I.P.C. J.P.M.C.B. and J.P.M.S. are affiliated companies under the common control of J.P. Morgan Chase and Co. The views expressed herein may differ from other J.P. Morgan Chase and Co affiliates and employees. This constitutes our judgment based on current market conditions and is subject to change without notice. This has not been prepared with any particular investor in mind, and it may not be suitable for all investors. Investors should speak to their financial representatives before engaging in any investment product or strategy. This material should not be regarded as research or as a J.P. Morgan Research Report. Outlooks and past performance are not reliable indicators of future results. Copyright 2023 J.P. Morgan Chase & Co. All rights reserved. Investment Products: Not FDIC Insured, No Bank Guarantee, May Lose Value.
(SPEECH)
The paper is best digested over a long, snowy, weekend someplace where nobody's bothering you, and thanks for listening. Thanks for reading. And I'll see you again on this paper next year, a year from today. Bye.
(DESCRIPTION)
Text, J.P. Morgan
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About Eye on the Market
Michael Cembalest is the Chairman of Market and Investment Strategy at JP Morgan Asset Management. Since 2005, Michael has been the author of the Eye on the Market, which covers a wide range of topics across markets, investments, economics, politics, energy, municipal finance and more.
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