In the 1930s, the American engineer Theodore Paul Wright made a curious observation about the manufacture of aeroplanes. Mapping the cost of their production over time, he noticed that each time the cumulative number of planes produced doubled, the cost of producing each plane fell by a fixed percentage. That is, the proportional reduction in cost between the 1000th and 2000th plane produced was the same as that between the 2000th and 4000th, the 4000th and 8000th, and so on, the data forming a neat ‘experience curve’, following a power law.
Interestingly, this phenomenon is not unique to aeroplanes. When engineers and economists started looking for it, similar trends were found all over the manufacturing sector, from the production of semiconductors (where Wright’s Law, as it is now known, has mapped falling costs of computing power more accurately than Moore’s Law) to the Ford Model T, the cost of which fell by 15 per cent each time cumulative production doubled.
Such experience curves are also tantalisingly applicable to many technologies at the core of the energy transition, from electric vehicles and solar panels to wind turbines and batteries. It is very likely that such trends will apply to hydrogen electrolysers and carbon capture technology too, though these technologies are still so nascent as not yet to have produced enough reliable data.
Where we do have large data series and can look at costs over long periods, the adherence to the learning rate is extremely high, though the learning rates themselves are often much steeper than those seen in the manufacture of planes or Model Ts. The cost of solar energy, for example, has dropped by some 36 per cent with each doubling of cumulative installed capacity.
But thinking of these curves only as lines on a graph is a mistake. In some ways, an experience curve is a process – one that is self-reinforcing. Cheaper products make customers more likely to adopt a given technology, adoption stimulates greater demand, greater demand leads to higher production volumes, higher production volumes lead to lower unit prices, lower unit prices lead to higher demand, and so on.
By way of example, aeroplanes were once used almost exclusively for mapping enemy positions in the first world war. They could only be afforded only by governments throwing huge sums at any technology which promised to break the deadlock of trench warfare. While it is tragic that it took a war to prove the potential of aviation, the technological improvements and higher production volumes instigated by the conflict paved the way for planes cheap enough to be viable for passengers and express freight.
The same thing happened with semiconductors. While computing power was initially reserved for state intelligence services and NASA programmes with multibillion-dollar budgets, scale and technological improvement eventually made computers mass-marketable to consumers in the late 1970s. The profits from those early PCs led to reinvestment in manufacturing facilities, research and development, and supply chains, which meant cheaper, better PCs, and higher profits in turn when the next generation went on sale. Those profits were reinvested, the process repeated itself, and the rest is history.
Given these past trends, it may be possible to use the development of the digital transition to predict how the energy transition will unfold, given the common economics underlying the respective technologies. Intriguingly, an examination of how things are currently developing in energy markets appears to corroborate many of the prospective parallels. So, what can we learn from history?
For starters, we shouldn’t think of the energy transition as linear. Back in 1980, Bill Gates famously defined success as “a computer on every desk and in every home”. Over 40 years later, there is not in fact a computer in every home (at least not how most people understood ‘computer’ in 1980), but this doesn’t mean that the digital transformation has failed. It is simply that desktop PCs have been superseded by laptops, smartphones, tablets, and wearables. We don’t all need a desktop computer because we have devices in our pocket with literally millions of times more processing power than the 32kg guidance computers that powered the Apollo space missions. Therefore, measured against the targets of 1980, we have simultaneously failed and wildly overachieved.
We should expect these shifting goals to have parallels in the energy transition. The first generation of green energy technologies, such as battery electric vehicles (BEVs), rigid solar photovoltaic (PV) panels, and onshore wind turbines are now cheaper (or close to being cheaper) than fossil fuel equivalents. With plummeting costs and a growing profit incentive from the private market, we should expect an inflection in their deployment now that subsidies, and the accompanying bureaucracy, are superfluous. Though the proliferation of digital devices has exploded since 1980 (again, because it became profitable to sell them widely without subsidies), we should expect the proliferation of green technologies to happen much faster given the existential imperatives involved, the trillion-dollar government budgets set aside for this explicit purpose, and the legal requirement for governments to report their progress on a yearly basis, none of which were there to catalyse the development of computing.
Yet just as desktop PCs were gradually replaced by laptops, tablets and smartphones, so too should we expect BEVs, rigid solar PV panels and onshore windfarms to be replaced in turn by newer, cheaper, more efficient and qualitatively better technologies, many of which are already seeing costs move quickly towards commercial viability. Onshore wind demand will slowly be cannibalised by demand for less obstructive and more efficient floating windfarms, small offshore turbines will be replaced with 20MW giants, short-range BEVs that take all night to charge may be superseded by fuel cell electric vehicles, and even rigid solar panels will likely be phased out eventually in favour of 3D-printed solar film which can be put anywhere and everywhere, further decentralising energy production.
As such, although we often think of the energy transition as a shift from A to B, from 51bn tons of CO2 to net zero, from ‘1990 levels’ to ‘pre-industrial levels’, or even as a ‘race’, implying well-defined starting and finishing lines, this is not a useful way to think about the transition, just as defining digital success by the proportion of homes with desktop PCs is not. Instead, the transition will be more like that undergone by the hypothetical Ship of Theseus, of which every plank and oar was gradually replaced with a stronger, sturdier substitute, until no piece of the original ship remained.
Through this lens, two more parallels with the digital transition can be seen. The first is a continuous deflationary trend as the cost of energy eventually falls, making all goods more accessible to consumers by reducing the costs embedded in their manufacture, distribution, use, and disposal, in a way not dissimilar to that brought about by the emergence of computing since the 1980s, though on a much greater scale.
The second is that, as with the digital transition, it is not simply that we will change our energy use, but that our energy use will change us. The emergence of cheap computing power has altered our behaviours, cultures, and societies, with everything from our dating habits to our attention spans transforming in their wake. If the cost of everything falls with the cost of energy, and this new but pervasive climate-induced anxiety subsides, then we should not only anticipate profound changes to our individual behaviour, but also for this new relationship with energy (and the planet) to result in new businesses, ideas, and cultural habits that are currently either unimaginable or untenable, just as bitcoin or phishing or memes would have been half a century ago. In other words, like the digital transition, this will not simply be a causal or even a reciprocal change, but a dialectical one.
Back in 2022, we’re just starting to see how the first stage of the transition could play out. In 2020, for the first time, most new renewable energy projects were cheaper than the cheapest fossil fuels, and many major economies are now phasing out subsidy programmes because they’re simply no longer needed. The cost of solar electricity has fallen by 90 per cent since 2009, and now represents one of the cheapest forms of energy ever produced.
There will, of course, be obstacles to rolling out wind and solar en masse. Our grids will need substantial investment after almost half a century of neglect, manufacturing supply chains will take time to get into gear, and ensuring that the energy is provided when it is needed will require a buildout of storage infrastructure based on green hydrogen and batteries.
Though the energy transition will not all be plain sailing, wind and solar energy are on a clear trajectory towards being radically better than any other form of energy generation hitherto invented. As we approach a world in which we can easily absorb a fraction of the sun’s energy and with it fulfil even our wildest energy needs, we will also find that we can decarbonise huge swathes of the economy with very little additional technology. Mass-produced electrolysers will provide a cheap source of hydrogen which can power vehicles and heavy machinery, heat homes, be burned in otherwise redundant natural gas plants, and be used as an industrial feedstock. Electrolysis will also give us a cheap and plentiful supply of green oxygen, which carries its own medical and industrial uses, and by pairing these products with carbon capture, we’ll be able to create synthetic hydrocarbons for a variety of uses, including plastics, safe in the knowledge that doing so isn’t damaging the planet, because the carbon involved had to be pulled out of the atmosphere in the first place. Though there will no doubt still be some emissions in 2050, most probably from industries such as concrete manufacture or farming, powering them with green energy means that they will still be less polluting than today. Meanwhile carbon capture technology should be able to mitigate most, if not all, of the adverse effects, while also enabling us to sequester much of the CO2 we continue to spew into the atmosphere today.
If this seems naively utopian, it is worth recalling the miracle of compounding; if the global rate of GDP growth is 3 per cent, then in absolute terms there will be as much economic value created in the next 23 years as there has been in the past 100. That is to say, the difference in ‘development’, in a broad sense between 2045 and today will be as big as that between today and 1922 – an intoxicating thought. Though it is tempting to imagine the new frontier of space or a healthcare revolution brought about by the dawn of genetic sequencing as the main drivers of this growth, the falling cost of energy, and by extension the cost of doing everything, will affect literally every government, business, household, and individual. Only time will reveal the full extent of the impact of the energy transition – though it is sure to be profound.
Risk Factors
The views expressed in this communication are those of Calum Holt and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in March 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for Profit and Loss
All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.
Stock Examples
Any stock examples and images used in this communication are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this communication are for illustrative purposes only.
Important Information
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Financial Intermediaries
This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.
Europe
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions ("FinIA"). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
China
Baillie Gifford Investment Management (Shanghai) Limited 柏基投资管理(上海)有限公司(‘BGIMS’) is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws. BGIMS is incorporated in Shanghai in the People’s Republic of China (‘PRC’) as a wholly foreign-owned limited liability company with a unified social credit code of 91310000MA1FL6KQ30. BGIMS is a registered Private Fund Manager with the Asset Management Association of China (‘AMAC’) and manages private security investment fund in the PRC, with a registration code of P1071226.
Baillie Gifford Overseas Investment Fund Management (Shanghai) Limited柏基海外投资基金管理(上海)有限公司(‘BGQS’) is a wholly owned subsidiary of BGIMS incorporated in Shanghai as a limited liability company with its unified social credit code of 91310000MA1FL7JFXQ. BGQS is a registered Private Fund Manager with AMAC with a registration code of P1071708. BGQS has been approved by Shanghai Municipal Financial Regulatory Bureau for the Qualified Domestic Limited Partners (QDLP) Pilot Program, under which it may raise funds from PRC investors for making overseas investments.
Hong Kong
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Suites 2713-2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.
South Korea
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Japan
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
Australia
Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a “wholesale client” within the meaning of section 761G of the Corporations Act 2001 (Cth) (“Corporations Act”). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a “retail client” within the meaning of section 761G of the Corporations Act.
This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.
South Africa
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
North America
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission ('OSC'). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Oman
Baillie Gifford Overseas Limited (“BGO”) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this material represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
Qatar
The materials contained herein are not intended to constitute an offer or provision of investment management, investment and advisory services or other financial services under the laws of Qatar. The services have not been and will not be authorised by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or the Qatar Central Bank in accordance with their regulations or any other regulations in Qatar.
Israel
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
Ref: 15425 10007517
