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The Magical Flywheel of Electrification

The Magical Flywheel of Electrification

What car do you drive?

Let’s suppose you went to work by car this morning. Unless you went in a hybrid car, which we will leave aside for now, you will have done so either in a car with a traditional internal combustion engine (ICE) or an electric vehicle (EV). The ICE car, of course, uses fossil fuels (petroleum) for energy, while the EV runs on electricity. It will not surprise you that if this electricity comes from renewable sources such as solar energy, switching to an EV reduces the need for fossil fuels. Simple.

Now, you would probably expect that driving to work in an EV would require the same amount of energy as driving to work in an ICE car; after all, it is exactly the same trip you are making with both types of vehicles. But this is the magical part. What really happens is that when we switch to an EV, the amount of primary energy needed to drive to work is drastically reduced. Primary energy basically means energy in its «raw» form.

The war on waste

The drastic reduction in primary energy needed to drive an EV can be explained quite simply: the current fossil fuel-based energy system is super inefficient. Only one-third of the primary (raw) energy that enters the energy system is actually used for tasks such as driving to work. Two-thirds is wasted, disappearing into the ether never to be seen again. Not so with electricity. This is because electricity is much more efficient and much less wasteful.

Using the car example again: switching to an EV (from renewable sources) requires 75% less primary energy to charge it than to power a traditional car. The same logic applies to almost everything, even to switching to an LED bulb in your kitchen. And most importantly, nothing about your experience has changed: your kitchen is just as well lit as it would have been with a coal-fired filament bulb.

Applying the same concept to all aspects of life, if we switched everything to renewable-based electricity today, we would only require one-third of current primary energy demand, because electricity is much more efficient.

Why does it matter?

Unfortunately, even influential organizations like the International Energy Agency (IEA) assume that all the embodied energy in the fossil fuels we burn today needs to be replaced by an equivalent amount of renewable energy. This is not the case, not even close. This is what Michael Liebrich and Saul Griffith* refer to as «the primary energy fallacy».

Not including this reality in economic models has very important side effects as it changes everything, from predicting how quickly we will reach net zero emissions to how capital is allocated to address climate change. It is probably the biggest driver of decarbonization that very few people are aware of.

If an electrified world requires only one-third of the current «primary energy demand», then this is good news: as electrification accelerates, the need for fossil fuels should decrease exponentially (and so should the demand for fossil fuels).

This is the magical effect of the electrification steering wheel.

*Saul Griffith is the author of the book “Electrify: An Optimist’s Playbook for Our Clean Energy Future”. Michael Liebrich is the author of the podcast “Cleaning Up”.

Spotlight on markets.

We end another week with gains in world stock markets driven by good macroeconomic data and the continued support of corporate results (we will see what happens with Nvidia’s, which will be published in a few days). With this background, the US markets closed with gains of +2.1% for the Nasdaq 100 and +1.5% for the S&P 500. In Europe, while the Ibex was able to keep pace and rose +2%, the EuroStoxx 50 was affected by several heavyweights (such as Infineon -2.6%) and fell -0.4%. The most notable headlines are the new all-time highs reached by several indices around the world, such as the Dow Jones, which exceeded 40,000 points for the first time on Friday, and the Dax, which touched 18,847 points.

In the debt markets there was some stabilization of levels with a slight exception in the US, where the cost of debt gave way when the CPI data was released. Although the +3.4% published (final data and expected by analysts) is still far from the +2% target that the FED has, it broke the streak of three consecutive months with data higher than estimates and returned to the gradual moderation trend that is what has led to the belief that the FED could maintain its annual target of up to three cuts of 25 bp in 2024. Thus, the 10-year Treasury ended at 4.42% (4.5% previous), the Bund did so at 2.52% and the Spanish 10-year bond at 3.28%, practically without changes in the week. On the other hand, the market currently discounts that the FED will carry out two interest rate cuts in 2024, the first of them occurring in September. Before the CPI data was known, expert bets were leaning towards a single cut in 2024.

With regards to the evolution of raw materials, it is important to highlight that the positive tone of the markets remains. Yesterday, Monday, May 20th, gold once again set a new historical high after having risen 1.8% the previous week. Crude oil on the other hand recovered some of the ground lost in recent weeks and rose +1.5%. In general, the commodities markets are experiencing notable increases thanks to the good global economic projections, for example, the forecasts of the European Commission improved to anticipate a GDP growth of +0.8% in 2024 and +1.4% in 2025, with inflation levels of 2.5% and 2.1% respectively. In the rest of the regions the forecasts have the same projections with the exception of China, where the good data that is known is counterbalanced by others that continue suggesting that the economy has not managed to reverse the situation of weakness caused by its real estate sector in the last year.

For the current week the most important information that could alter the course of the markets will come from the speeches of the members of the FED and the ECB, along with the data of economic activity that we will know both in Europe and the US (PMIs).

To conclude, we must comment that at a geopolitical level there has not been any positive news, quite the contrary. The Iranian president died in a helicopter accident this weekend which accentuates the complexity of the political situation in Iran, since Raisi was considered the heir to the government of the country. In Ukraine the conflict is intensifying in recent days with a strong increase in armed confrontations, while in Gaza a truce is not being reached and the intensity of military activity remains high. All this seems to be going unnoticed by investors and could trigger some corrections of certain importance in the markets in case of a deterioration in the global panorama.

The quote:

And we say goodbye with the following quote by Arnold Schwarzenegger, Austrian-American actor, businessman and politician: «In our society, the women who break barriers are those who ignore limits.»

Performance of major asset classes (20/05/2024)

This report does not provide personalized financial advice. It has been prepared independently of the specific financial circumstances and objectives of the individuals who receive it. This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information as of the date of issue of the report and is subject to change without notice. Portocolom Agencia de Valores S.A. assumes no obligation to communicate such changes or to update the content of this document. Neither this document nor its content constitutes an offer, invitation or solicitation to buy or subscribe for securities or other instruments or to carry out or cancel investments, nor can it serve as the basis for any contract, commitment or decision of any kind.