The utility sector can be broken into different parts. Utilities generate the main part of their electricity from an energy source which is either natural gas, hydro, solar, wind, or nuclear. Some companies are big in distribution while others have a lot power generation assets. Other companies are more project oriented such as Orsted which means that they deploy know-how and capital in building out a power generation asset such as an offshore wind power farm and then they sell it to infrastructure investors such as pension firms. Finally there are the electric equipment manufacturers.
One of the main features of the forecasts mentioned in the first section is that they all assume wind power to dominate the transition which might be the case if electrolysis costs come down enabling large scale green hydrogen production. It seems many are still underestimating solar which actually expected to grow in annual capacity from around 200 GW in 2022 to around 500 GW in 2026. Solar in many ways have shown better technology improvements that wind and it is less complicated to build out than wind power with less maintenance. In any case, the future is difficult to predict and an investors should be bet on many different energy sources.
As we have highlighted in other previous equity notes the electrification will create opportunities in other areas such as copper mining, lithium mining, electrolysis equipment, electric vehicle makers, wind, solar, fuel cells, batteries, and charging stations.
Electrification went into hyper growth with AC
The history of electricity is fascinating. It started in the years 1831-32 with Michael Faraday discovering the operating principles of electromagnetic generators. Later came the incandescent light bulbs invented by Joseph Swan in 1878 in the UK and by Thomas Edison in 1879 in the US with Edison’s proving to be more efficient. The first central power station is believed to be in Godalming, Surrey, UK in late 1881, and was hydroelectric power station illuminating streets of arc lamps and incandescent lamps. Then came the UK’s Electric Lighting Act 1882 setting up the regulation of power generation.
The first large scale power station in the US was Edison’s Pearl Street Station in New York in September 1882 which was powered by steam engines and by 1884 it supplied power to 508 customers with 10,164 lamps. The New York banker J.P. Morgan had been an early investor in Edison’s electric light company seeing the potential of this new technology. On Thursday, June 8, 1882, Edison Electric Company president Major Sherbourne Eaton wrote to Edison: “Morgan’s house was lighted up last night. I was not there but I am told that the light was satisfactory and that Morgan was delighted”.
The initial problems of electrification in the late 19th century was the use of low-voltage direct current (DC) power stations which are not very efficient in transporting electricity over long distances. However, Edison’s many DC power stations would soon get a competitor in the form of high voltage alternating current (AC) power stations which could transport electricity efficiently over long distances and then use transformers to reduce the voltage so it could be safely used in households. This massively increased the efficiency of power generation and especially distribution enabling explosive growth in electrification. The competition between DC and AC has also been called the “War of the currents”.A final interesting historical aspect of the first age of electrification is that electric utilities became massive profit engines and investors speculated heavily in electric utility stocks making them the horse that led the US stock market into its massive bubble state in the roaring 1920s before the crash in 1929. It was not difficult to understand why. Electricity output increased in the US from 5.9mn kWh in 1907 to 75.4mn kWh in 1927 which is a blistering 13.6% annualized growth. In the same period, the real price of electricity declined 55%. Electrification did once captivate investors and electricity transforming society in the coming decades it will for sure come with many opportunities and maybe a new speculative bubble.