Energy in 2030: An Investment Outlook

 

Takeaway

  • Energy-related investments such as refineries and power plants make up more than half of the long-term capital expenditures in the U.S., excluding real estate
  • New technologies like electric cars and LED lights could have a significant effect on how we consume energy
  • Public policy decisions such as fracking regulations can affect supply and demand of fuel sources and the evolution of technology

On September 27 the McCombs Department of Finance will host its third-annual Alternative Investments Conference. I will be moderating a panel on the future of energy.

More than half of the long-term capital expenditures (excluding real estate) in the United States are energy-related investments. These include refineries, power plants, wind farms, drilling rigs, pipelines, transmission lines, etc. To intelligently evaluate these long-term investments today, investors and analysts need to have a view of how we will be producing and consuming energy over the next 50 years.

While we can speculate about the state of energy markets in 2050, my hope is that we can have a serious informative discussion of how we will consume and produce energy in the 2020s, 7 to 17 years in the future.  

The participants on this panel include individuals who are either making these long-term investment choices or people who evaluate those investors. They include:

  • Greg Beard, Head of Natural Resources for Apollo, a private equity firm
  • Helen Currie, Senior Economist at ConocoPhillips
  • Stephan Dolezalek, Managing Director at VantagePoint Capital Partners, a venture capital firm that invests in alternative energy and electric cars
  • Michael Lapides, an equity analyst at Goldman Sachs who covers electric utilities

My first question will be about the energy mix. Currently, most of the electricity in the United States is generated from fossil fuels — coal and natural gas — and very little is generated from alternatives like solar and wind. I’m sure that the proportion of power generated by wind and solar will be higher by 2030, but will the increase be material? Are we likely to generate 10 percent of our electricity from these alternative sources? Is 20 percent a possibility?

How we answer the above question depends on our views about a number of different factors that can influence how we produce and consume energy:

The first is technology: Do we see technological improvements that will significantly lower the costs of alternatives? Will we see technological improvements that allow us to better deal with the intermittencies of these alternatives, such as a smarter grid that allows us to recharge our electric cars only at night when the wind is blowing? More generally, will new technologies, like electric cars and LED lights, have a significant effect on how we consume energy?

The second factor has to do with the supply and the costs of extracting fossil fuels: At what point will we start running out of natural gas? Are there extraction costs, such as the cost of water, which can significantly increase the cost of natural gas? Obviously, the technological hurdles associated with moving to solar energy are much lower with $10 gas rather than $5 gas. So are we likely to see $10 gas or $5 gas in 2030?

The third issue is public policy: Policy can directly affect the supply and demand for various energy forms and can indirectly affect the evolution of technology. There is currently substantial discussion of regulations that affect the production of natural gas (e.g., fracking regulations) as well as the ability to sell the natural gas (e.g., export restrictions). Current policy choices have also affected the transportation of hydrocarbons (e.g., the Keystone pipeline). Will these policies have a long-term affect on energy prices? Although it is currently on the back burner, I expect to see more discussion of policies that affect the pricing of carbon emissions as well as policies that influence our use of nuclear power.

High carbon prices will certainly speed up the transition toward alternatives and will probably lead to a greater use of nuclear energy. Will we see a high carbon tax implemented soon? How will this influence the use of coal and natural gas for electricity generation? Is it likely that we will be sequestering carbon in the near future?

I hope you can join us for the discussion.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.
 

About The Author

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services, McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

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