Power lines

Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking to Morten Springborg, global thematic specialist at C WorldWide Asset Management, about a global theme that he’s watching: the growing demand for electrical power. We talked about what’s driving the growth, where investment opportunities lie, and we started by asking why electrification is such an important consideration in the current moment.

Morten Springborg (MS): Electrification is a huge theme that covers the energy transition, as well as reshoring, as well as AI. It’s a super-theme, I would say, because it’s so supported by underlying strong thematic changes happening in our economies. The uncertainties about how big this is going to be are huge. But at the end of the decade, we could see that generative AI would consume up to 10% of U.S. electricity. And that is a space that has, up until last year, basically been flat for decades. Electricity — which today is only 20% of all primary energy consumed globally — will go to around 40% of all energy consumed globally by 2050. So that is an important thematic. And it’s important because all businesses that are exposed to the electrical grid will need to ramp up investments in a manner that we could not contemplate only a couple of years ago.

Other demand drivers

MS: We should also consider the effects of the growth of electric vehicles and electrification of light transportation in general.  If we took the extreme scenario, and everything got electrified in light transportation by 2050, it would mean that basically, 2 billion cars would be driving around on electricity and not on gasoline or diesel, which would reduce global oil demand by approximately 30% and it would increase — in the case of the U.S. or western Europe — our electricity demand by approximately 30% or 35%, compared to where we are today. So it’s not that big, a massive change for the electricity system. But it’s just one of the areas that are growing in the electricity consumption pool. In many markets, you will also see that, for example, heating is transitioning to electricity from heat pumps. And that’s another driver of electricity demand. And you’re going to have a lot of industrial processes that go from internal combustion technologies — from molecules — to electrons and electrification. So this is something that is as sure as anything I can see out there, that electricity demand will ramp strongly in the decade ahead.

Where investment comes into play

MS: The grids that we operate globally today were basically built out in the years after World War Two. And for the last 30 years, we have been talking about the need for upgrades of the electrical grid. And nothing has happened. Over the last two or three years, companies exposed to the build-out of grids have seen an explosion in their order book. So we’re talking cabling, we’re talking about transformer stations, substations, etc. If you go out now and order a transformer station, you’re going to wait two or three years before you can get it. If you want to have a sub-sea cabling for a wind farm, it’s going to take you between five and 10 years before you have it. That is also a constraint and a bottleneck for the greenification of our energy systems. And it’s potentially also going to be something that can slow down the deployment of AI. Because if you are a hyper-scaler who wants to build a new data center, the first thing you have to secure is, of course, power. And that is really, really difficult today, especially in the U.S. There’s a moratorium also in Ireland. They simply cannot cope with more data centers. And as a result, we’ve seen both Microsoft and AWS announce that they want to go nuclear so that they can secure their own power. What is more realistic in the short term, I think, actually, is that we’re going to see a huge revival in natural gas power stations. These huge energy consumers like data centers, they want to get around the instability in grids. You need to have a stable power source. And therefore many of these huge hyperscalers, they want to have power production behind the meter, so to say. And the quickest way you can do that today is actually to build natural gas-powered stations. That’s going to be a stronger thematic as a subtheme of electrification in the years ahead.

What’s the bottom line for investors

Well, themes are our prisms to a changing world. It’s our way of trying to understand where the investment opportunities are, where can we find growing total addressable markets. Electrification is extremely strong because it is supported by underlying strong thematic changes happening in our economies. So that’s an example of how we try to think about changes in the world and where we can allocate capital.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Morten Springborg of C WorldWide Asset Management. Visit us at InvestmentExecutive.com where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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