Tectonic Shifts: Investing In Energy Transitions

James Bradford Vivid Capital Management


We follow a simple premise at Vivid Capital Management — that there are unmatched investment opportunities in the enormous shift taking place in the way we produce electricity and transport ourselves. The energy and transportation shifts are expected to take approximately 50 years to transition, as they are simply too massive to complete in a short timeframe. To illustrate the relative magnitude, annual smartphone sales are 1.5 billion units per year. Assuming the average smartphone costs US$800, that’s US $1.2 trillion in annual revenue. Big right? Now, in comparison, we consume about 100,000,000 barrels of oil per day. Assuming US $70/barrel, that’s US$2.5 trillion dollars of oil consumption per year-more than double annual smartphone sales. Since we will be transitioning away from oil, this should serve as somewhat illustrative of the magnitude of the transitions underway; these are clearly tectonic shifts taking place. And that’s just oil! There’s also the transition of natural gas to wind, ICE vehicles to electric vehicles, coal to solar, diesel trains to electric trains, and the list goes on. In terms of investment thematics, we can’t think of a bigger overall thematic, a longer duration thematic or a more durable thematic. Let’s get into some specifics. To limit global warming to 1.5 degrees Celsius by 2050 (which the scientific community urges is vital to prevent runaway global warming and a climate disaster) we are going to need to increase annual battery production capacity from 250 GWh to 2500 GWh (some forecasters have it >6,000 GWh) by 2030 and to over 14,000 GWh by 2050! That’s over 50 times growth! Even if one were to assume an incredible improvement in battery energy density from 260 Wh/kg to 650 Wh/kg, we will still need to mine more than 15 times more battery metals by mass in 2050 than we do today! Importantly, recycling is unlikely to spoil the party because there is simply won’t be enough scrap battery material to make a dent in the demand for many years. Uranium also has a promising outlook. With demand already outstripping supply today and more net reactors being built globally, it is difficult to imagine anything but buoyant uranium prices. Carbon-free nuclear power is a key component in the transition. Vivid has done well navigating the transition. The Vivid Energy Fund was up 116 per cent net of fees and expenses in 2020, up 23 per cent last year, up over 32 per cent this year and the energy and transportation transitions are just in their infancy. With all of the above-noted enthusiasm, one would be excused for thinking that at Vivid, we love everything and are simply starry-eyed investors who are perennial energy transition bulls. Quite the contrary. The main reason we are up as much as we are this year is because our short book performed very well this year. Large short positions were also a big reason we were up so much in early 2020. A big copper short was our vehicle of choice this year starting in about April through to June and July. So, we are skeptics by nature but the opportunities ahead in the energy transition are clear as day to us. With unmatched growth, scale and duration in the energy and transportation transitions, why would anyone invest in anything else? And it’s just getting started.



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