« Exchanges at Goldman Sachs

Emission Control: The Expanding Low Carbon Economy

2016-08-12

Until recently, low carbon technologies like wind and solar were a niche part of the global energy landscape. But Goldman Sachs Research's GS SUSTAIN team, which focuses on identifying long-term industry leaders, says that low carbon technologies like onshore wind, solar PV, LEDs and hybrid/electric vehicles are now "taking off the training wheels" and rapidly gaining share. According to GS SUSTAIN's Jaakko Kooroshy, these four technologies not only could help global carbon emissions peak as early as 2020, versus mainstream expectations of a peak closer to 2030-they're also poised to reshape competitive dynamics across the global economy.

This podcast was recorded on July 11, 2016.

All price references and market forecasts correspond to the date of this recording.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2016 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs, where people from our firm shed their insights and developments currently shaping markets industries in the global economy. I'm Jake's, Ewart Global, had of corporate communications. Here at the firm last December, one hundred ninety five countries came together in Paris to strike a landmark climate change agreement. The deal's ambitious targets to reduce greenhouse gas emissions are adding to the global push for low carbon economy that is less dependent on fossil fuels. To discuss the Tec, jeez, making this possible and the implications for existing industries. I'm joined today by Yahkuk Hiroshi of Goldman Sachs Research, ECHO walk into the problem. Thank you very much he got up. Where are we in the transition to a low carbon economy? If you go back to the ninety nineties, when a lot of their development started around us, we really didn't have any.
Low carbon technologies tajik debate about what to do about climate change, but not a lot of technological solutions. Absolutely we didn't have low carbon sources for power generation other than hydro nuclear. At the time we were far away from alternative sources. In lighting we didn't have the prospects even off. attentive vehicle technology, we think were now at an inflection point and reason for that is that we think that low carbon technologies are now taken off the training wheels, so their select technologies out there not all But some of them that are now rapidly gaining scale and taking market share in things like lighting power generation waters, and we think that is changing the way. Dad powers generate the way it's toward the way it's consumed and now taken together. That's what we describe ass, the low carbon economy, so with your gs, sustained team at Goldman Sachs,
miss achieve outlined. A decent four pillar. Technologies that underpin the low carbon economy, walk us through the pillars and why? you see the Messiah good for the environment, but in certainly viable economic investments. Yes, so if you too, bowed low carbon technologies as a very long list out, but we think- actually only very few of them matter, because they combine scale and rapid growth, so if you think about technologies like nuclear or biofuels, these are big markets today, but there actually grown heavily slowly so nuclear has technology, has lost market share and global electricity generation since the ninety nine ease and then a whole range of other technologies like, for example, fuel cell vehicles, carbon capture and storage, concentrated solar power that are simply too small to matter honor. five to ten year scale, not showing enough growth really matter. Some of these signals
These are grown relatively fast. But if you think about something, I feel safe vehicles, the market leader expect for first vehicle that is now available. Thirty thousand in sales by two twenty. So in an eighty million car market that is too small to matter so talk about the four they do matter. It's a shortlist of usual suspects. First and foremost, that's elegies, solar, pv, onshore wind not the all sure, stuff and increasingly hybrid electric vehicles, and what we see here is markets that are now. terms of revenue today, already hundreds of billions of U S dollars and A groan relatively quickly the changes that were seeing in these different industries effect. The competitive dynamic within those the streets in what are we seeing already today? We think the best way to think about these technologies is quorum, quote good old fashioned tech disruption. So what s happening?
is that these new technologies are eroding the competitive advantages of the incumbent. The barriers to entry are coming down and see a number of new entrants pushing into these markets, and that leads to a fragmentation of those markets and increasing competitive pressures and margin compression. So that makes it very difficult, what incumbents, but is also very difficult environment for many of these new entrants As I hear you described, the competitive dynamics decides simple, as bet on the new entrants in bed against the incumbents. How do you think this could play out over time and some of these industries He absolutely, I think, you're right there, so if you think back maybe ten years These technologies were starting to take off we're very excited about, say, solar companies. Solar has exceeded all expectations as a technology, but if you look at solar companies from an investor standpoint, they have often struggle to create sustainable,
returns, and I think we had a very interesting example of that this year, the two biggest corporate bankruptcies in the? U S here today are a coal company and a solar company, and they both went past ten days apart and we see similar dynamics happening in the lighting industry and its interesting to think about how the transition to electric vehicles is eroding the competitive advantages of the incumbent, ass, their expertise in the so feeble engine is no longer as valuable as before the long term, I must have a lot of these technologies. Is that do submissions and we won't lose. Economic growth while we'll be the emissions impact of these technologies, and when do you think the impact will really kick in. So in our research we have tried to stand the impact of these technologies on global emission pathways and our key take away from this is
the impact on the missions might be bigger and come earlier than a lot of people anticipated. So we think that these four technologies how global carbon emissions peak, perhaps The assembly has twenty twenty RADA Dan towards twenty. Thirty, as it is in mainstream projections, so, to give you an example. We think that these four technologies so ill at ease on shore wind, solar panels. hybrid electric vehicles already today. Saving The one gig a ton of emissions per year, and we see that increasing to five cake at times by twenty twenty five. Just to put that into context. If we think about energy related global emissions, that's over thirty three kick at once, so we are actually talking about quite sizeable of emissions that are being saved through these technologies. One people missing in their projections, just the rapidity with which these technologies can take home yeah, we are now at a point where women solar for exam,
are at a hundred gigawatts of power generation capacity per year to electricity supply. That is much more then we could have imagined just to three years ago, and I think there now he too shale, it's interesting when the Shell revolution was gaining pay very good or evil satellite coming two thousand eleven exactly people were dismissing used ass, a flash in the pan. The economics were thought to be marginal and to two years later, the low price half. We could see similar types of developments from these ignored so probably the most advanced pillar- and you mentioned- this- is lighting- it projected by when twenty six and ten light bulbs will be ladys. What learning take away from have awaiting industry evolved over the last couple of years. I find a lightning sector a fascinating case, so, if you think about, ladies, they had. One percent market share in two thousand ten: why Russia was years ago exactly and we now in a situation in the. U S were more than half of flying. Sales are already realities and we
globally. We might go towards six and ten seven and ten by twenty twenty. That is probably one of the fastest technology shifts in human history. Now, how did we get that part of it was regulation so you had bans on incandescent light bulbs in the: U S, and Europe and China, part of it, was a very rapid technology. Development cost reductions were similar to the semiconductor industries and the quality of the Ladys in rapidly so that today and a lady in lighting quality is comparable to an incandescent light bulb. We then came into a situation where, from a consumer standpoint in reality is not much more expensive delighting quality a similar and the lifetime is perhaps ten years, on Patton incandescent light bulb Dennis? One half is so in the energy sector. What enabled this rapid shift is that the life a relatively short, so you get
huge turnover internal, exactly and the system switching COS and legible. So you can just unscrew the existing law, Bob and replace it with a reality, if you think you are Change your power source, exactly the transition the power generation sector has been going on for much longer time by will probably still need several decades to complete, because we talk in several billions of investments for bigger power plant. We think about lifespans of twenty to forty years rather than twelve eighteen months, but is it possible that will see power plants that were built on fossil was today or in the last five years, the obsolete sooner than would have guessed. There are cases in Europe where brand new gas fired power stations are basically mothballed. ready, and the reason for that is that solar and wind power, that is on the great and countries like Germany, makes it very difficult for gas fired power stations to come:
the business model is based around the idea that they basically switch on during peak demand and with a lot wind and solar energy grid. They economics for some of these gospel brownstone work out anymore. One of the things you ve written a lot about as the battery and how could serve as a strategic linchpin of the carbon economy, point what you mean by that in order to get into the next phase of this transition, which is the waters in it you will need a battery. That is good enough and cheap enough for a mainstream car. If you get that that will also revolutionise the economics of wind and solar, so the big question in the industry today is how fast, with a battery technology, improve how cheap. Become and what will be the chemistry stand ultimately allowed at battery to work when they see that tipping point coming, or is it impossible to forecast at this point? Well win?
in a situation where, over the last five years, we ve hats, rapid improvements in battery technology until twenty twenty dose will continue. Why is tat? We have quite good visibility on that, because we taken chemistry is that we understand very well and we basically scaling them, and so If you look at something like a gig factory, that's being built in the motto or similar type of battery plants are being built in China. What do you do? Is Hake Technologies that we know and produce them at scale, and we know what it does to costs easier model drop rapidly posts. Twenty twenty there's much bigger question marks because we don't know what a potential is to further optimize the existing chemistry's and if we are forced paths, post, twenty twenty to switch to other chemistry's, it's very difficult to say what
will be or which chemistry status will be. So, as you think, about the battery being the strategic linchpin. Electric vehicles are really critical. P woman talking about electric vehicles for years, but deployments bins, far very minimal. In fact, pure electric vehicles are still just one percent of global Carson less than one percent. What is to happen for electric vehicles become a bigger factor in the automotive space. If we look at electric vehicle We are now in a situation where the auto industry needs to look to alternative drive, trying technologies, and if we go back two years it was still a big question mark. What does alternative dry strains might look like, so we were debating fiercer vehicles, various forms of hybrids, electric vehicles. The jury is in many ways still out, but the rapid advances in back
we technology make it more likely that electric vehicle might be the winner that now, if you think about how that transition works, we expect that to be similar to the lady case or to the case in power generation. So you need to contain, you'd, rapid cost reductions and performance and projected come there's enough investment, so we think but we also need the regulatory support we have to. With the emission limits, but we also see governments thinking about new ways of incentivize in this transition and ultimate, What we need is consumer acceptance that various allowed a man, but the likelihood that we get to a disruptive change trajectory in the auto industry with electric vehicles is certainly increased of last year. So let's take a step back and look at the global picture. China's in a lot of attention recently, because pollution, environmental damage from its rapid growth is increasingly a pair. And really been noticed by that citizens. There, on the other hand,
also the world's largest investor in renewable energy. How could China drive? transition to a low carbon economy watching? among the many countries that are very seriously think about how to change the way that they use energy and consume energy. China is today the biggest market for low carbon technologies. It's the biggest market for wind and solar it's also among the biggest markets for Ladys in its also- and this is something that a lot of people are now- the biggest market for electric vehicles- almost half of electric vehicles. Last year, fully electric vehicles were sold in China. What we see happening now in China is that actually the energy landscape is changing course losing market share in electricity generation and we believe that coal demand and also coal production in China for the first time in decades, like decline,
So it is certainly one of the markets where the future for these technologies of creative, where there is a lot of interesting bit models and where we also see a lot of interesting regulatory support. Suffice, people in Beijing. This limit some license plates. The availability of licence plates of two hundred fifty thousand license plate that day give out per year they now reserving sixty thousand for what they call new energy vehicles, and that is a powerful hybrid and electric vehicles exactly India, it has also been very vocal. Has debate, may lead a group of developing countries in Paris in terms localizing concern over the trade off between a low carbon economy and economic development, how do you see that playing out over the next several years in places like India that worry, that rapid adoption of local, and technology could actually be an impediment to their growth. While I think what do you see in India is a government that is pursuing in all of the above strategy,
investing heavily in solar. Now or investing heavily in fossil fuels, but the economics will play a key factor here so now, in a situation where women Sola among the cheapest forms of adding new electricity generation capacity in some places over the next five to ten years? We're probably go to situation where data and cheapest sources in most places, and that includes places like India. So if you look at what Energy Minister saying there, they believed that the economics of Sole aim it becoming increasingly attractive if you compared, for example, to call oh, they have very ambitious targets, even without pricing in the externalities, around the costs of call absolutely. In the end, this is a commercial decision. Companies have to make economic work for them, and we see a big potion and meant in renewables. In India. We will have to see
This transition works out, but what makes India interesting from our perspective that this could be? The first economy had ceased large scale, industrialization based on low carbon technologies, so big part of India, have a great. Today. The ownership of cars are still very low, so without major investments these sectors already. India has the potential to move directly to were distributed, electric red, yet disability power generation could play a big role in providing energy for a lot of people that are today lacking energy axis of the Sun Carson existing system. yeah, I mean there's always the big uncertainties associated with it, but the potential is there and I think that they think of His name focus on making this a reality, the Argo to close it out. How will the technologies we discussed evolved over the next decade?
in particular, we think about other emerging technologies. If you look at low carbon technologies, they are not happening in isolation and allow the outer trends that we're talking about in Goldman Sachs Research life, for example, drones, the blockchain autonomous vehicles. They interact with these technologies turns out, for example, being used to survey wind turbines, the blockchain, maybe in the future, not today, but maybe in the future, might be used to trade energy in a decentralized net and the Future electric because may very well be autonomous vehicles at the same time. So it is very difficult to say today how the interactions between these different trends will work out. But what we could see is that these different strands reinforce each other and accelerate the transition even more beyond what you projected today, absolutely right, aka. Thank you very much. Thank you. That concludes this episode of exchanges.
When sacks I'm Jake Seaward. We hope you join us again. Next, on the spot asked was recorded on July, eleventh two thousand sixteen all price. France's and market forecasts correspond to the date of this recording this podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in this package does not cost, to research or recommendation from any Goldman Sachs Entity to the listener, neither Goldman Sachs,
nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast in any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast or not necessarily those of Goldman Sachs and Goldman Sachs, is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity,
Transcript generated on 2021-10-14.