National Conference on Public Employee Retirement Systems

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Electravision: 14th Annual Eye on the Market Energy Paper

By: Michael Cembalest, J.P. Morgan Asset Management

Energy is critical for modern economies and societies, and for the last 14 years Michael Cembalest has published an annual paper to assist institutional investors, including public pension fund trustees and staff, understand its complex nature. In this year's 14th Annual Eye on the Market Energy Paper, he tackles Electravision, which is the predominant vision for the future involving the electrification of everything.
This is an excerpt from NCPERS Spring 2024 issue of PERSist, originally published April 25, 2024. 

The fossil fuel share of global energy use is falling at ~0.40% per year as the renewable transition progresses. That's almost exactly the same pace of decarbonization that occurred from 1973 to 1988 during the nuclear buildout. To be clear, global CO2 emissions have not declined since energy consumption keeps rising; what's falling is the share of primary energy from fossil fuels, not their level.

The fossil-renewable gap should close at a faster pace given growing global initiatives to decarbonize; global transition spending has exceeded fossil fuel spending for the fourth year in a row and the gap is widening. Looking ahead, the fiscal costs of the U.S. energy bill could reach$900 billion by 2030 and $1.1 trillion by 2035. But as things stand now, renewable energy is used almost exclusively to decarbonize the grid and its main purposes: space cooling, lighting, refrigeration, data centers, electronics, and some space heating. The grid's use for industrial production and transport is still small.

The consensus path forward is Electravision, the electrification of everything. The reason: if something can be electrified, it can eventually be decarbonized via wind, solar, and energy storage. While this transition is underway, it will take time due to chemistry, physics, cost, human behavior, and politics. As a result, current human prosperity is difficult to imagine without substantial contributions from natural gas. This gas ecosystem needs sufficient investment to avoid electricity and natural gas outages, and its methane footprint needs greater attention (a topic covered in last year's 13th Annual Energy paper). This year's paper gets into the details of Electravision, along with sections on nuclear power, China, “decarbonized oil”, levelized costs, hydrogen, bio-oil, EV emissions, the latest from Vaclav Smil, and concluding thoughts on solar power and Gaza's energy future.

Building wind/solar capacity and convincing owners of vehicles, furnaces, and other devices to electrify might not be the hardest part. Building more transmission might be. Utilities spend almost as much on transmission and distribution as they do on power generation. In October 2023, the Department of Energy released a report on transmission needed by 2035 in a scenario that sounds like Electravision: “higher load and high clean energy growth”. The DoE's estimate of required growth in transmission and interregional transfer capacity is very large (see box/table), particularly compared to declining growth in new transmission shown on the next page. Notably, the DoE does not believe that more distributed storage necessarily results in lower transmission needs.

Without legislative and cultural changes allowing transmission to replicate the growth of the interstate highway system, fiber optic cables, national rail, civil aviation, waterways, and other infrastructure, Electravision will remain just that: a vision.

An important caveat: our Electravision scenario assumes that total U.S. energy needs will not change much over the next two decades. Unchanged U.S. energy demand is consistent with the last couple of decades; the energy needs of a growing U.S. population have been offset by improving energy efficiency. However, the rise of AI might change that. One illustrative example: the PJM (mid-Atlantic) region has made sharp increases to projections of future power demand. These increases are entirely due to an increase in data centers which serve advanced computing/AI needs. Constellation Energy estimates that the AI revolution could require more power in the U.S. than the future electric vehicle fleet. If that's the case, the productivity benefits from AI better be large enough to offset the increase power load. Bottom line: the rise of AI could make the journey to Electravision longer, harder, and most costly.

Please see link to explore the full research paper: 14th Annual Eye of the Market Energy Paper: Electravision.

About the Author
Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management, a global leader in investment management and private banking. He is responsible for leading the strategic market and investment insights across the firm's Institutional, Funds and Private Banking businesses.

Mr. Cembalest is also a member of the J.P. Morgan Asset Management Investment Committee and a member of the Investment Committee for the J.P. Morgan Retirement Plan.

Mr. Cembalest earned an M.A. from the Columbia School of International and Public Affairs in 1986 and a B.A. from Tufts University in 1984.

This is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that take into account all of the particular facts and circumstances of an investor's own situation. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
© 2024 JPMorgan Chase & Co.


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