We tend to take electricity for granted. It almost seems like an old fashioned technology, developed by nineteenth century figures like Thomas Edison or Nikola Tesla, and fathered by scientists such as Michael Faraday who first experimented with it in the 1830s
Electricity, however, is the fuel of the future. It is clean, safe and reliable, particularly when generated by renewable sources like solar or wind. Our electricity infrastructure is becoming increasingly sophisticated , with many branding the network of the future as a ‘smart grid’ where there is two way communication between the utility and customers Even the current pioneers of electric power are acquiring a futuristic tinge now, such as with Elon Musk and Tesla’s high profile attempts to break into the electric car market
Perhaps because of electricity’s prominence in our everyday lives, it is surprising how dependent we are on other fuel sources. In industry, for example, electricity accounts for only a quarter of total energy consumption, as measured in billion tonnes of oil equivalent. Even in buildings, it accounts for only around half of the total energy used. Transportation, meanwhile, is predominantly supplied with primary fuel, especially in lighter vehicles, shipping and air travel

As the global economy continues to grow and becomes more sustainable, however, we are becoming far more reliant on electric power. Electricity demand grew by 4% in 2018, twice as fast as overall energy demand, and while only 23% of fuel is used to generate a current today, that is expected to rise to more than 35% by 2040. Our increasing use of data and data centres, rising levels of urbanisation, and the trend towards electric vehicles all point to a bigger future role for into growing importance of electricity.

Data, data everywhere

We live in a much more data intensive world nowadays, with data centres powering everything from Facebook, Google search and YouTube to routine computer programmes and business applications. Between 2018 and 2022, the amount of data processed outside of the core (i.e. your smartphone, work computer) is expected to increase more than sevenfold. That is leading to a big increase in demand for data centres worldwide, which even today account for around 1% of the world’s electricity demand.
Data centres require vast amounts of electricity, both for their computing power and for cooling to ensure they don’t overheat. Much of the increase in electricity demand from more data centres has been offset by gains in efficiency so far. Alphabet (parent company of Google), for example, has used algorithms to improve the efficiency of the cooling systems in its data centres, reducing energy consumption by up to 40%. There are limits to improved efficiency, however, and the large scale gains achieved so far seem unlikely to be repeated. This continued explosion in the use of data, which will be augmented when higher bandwidth 5G telecom services are rolled out, should drive increased demand for electricity.

Rising urbanisation drives energy demand

As the world grows wealthier and urbanises, energy use is likely to increase and become more concentrated in larger metropolitan areas. While cities can be more efficient in terms of their energy use (e.g. through public transport systems), city dwellers tend to have higher incomes and thus a greater appetite for energy. Today, cities account for around two thirds of global energy demand and 75% of CO2 emissions. An urbanising world population is the second big driver for propelling electricity demand upwards.

The scale of this change is significant. By 2030, 752m people are forecast to live in megacities, those with a population of 10m plus. More than two thirds of the world’s population is projected to live in urban areas by 2050, with the UN expecting all of the world’s population growth between 2018 and 2050 to be accommodated in urban areas.
Developing countries in Asia and Africa are likely to see the biggest jump in urbanisation, potentially leading to a much bigger rise in demand for ventilation and cooling systems. At the same time, global warming and the fact that cities tend to retain heat in concrete and road surfaces, is expected to lead to rising demand for cooling systems in cities such as London, New York and Tokyo.

The move to electric vehicles

If the world is to combat problems such as climate change, clean electricity will feature heavily as a solution. The highest profile example of this is the replacement of the internal combustion engine (ICE) with an electric engine and battery.

While electric vehicle sales will remain a relatively minor part of the automotive market for the foreseeable future, such growth represents a significant incremental source of demand for electricity. On some estimates, electric vehicles could account for 5% of global electricity consumption by 2040, with sales rising from 2 million vehicles a year currently to 56 million. That stands in the context of around 85m cars sold each year today.
Any structural change inevitably creates winners and losers, but the move away from ICE vehicles is perhaps one of the largest changes we will see over the coming years. Electrification is likely to pose significant challenges for many automotive components manufacturers; the drivetrain in an ICE vehicle contains more than 2,000 moving parts, compared to around 20 in the drivetrain of an electric vehicle. The scale of this change could even have an economy-wide impact for countries like Germany.

How will increased electricity demand affect the industrial companies we look at?

Of course, demand for power creates opportunities for companies building the network too. Schneider Electric, a French industrial group, is one potential beneficiary here. The company specialises in electrical distribution equipment like low and medium voltage switchgear, as well as critical power and cooling systems, and electrical distribution and cooling equipment for data centres. Data centres require equipment that is extremely reliable playing into the hands of the larger, more capable suppliers
Second, increasing urbanisation has led to an upturn in the number of skyscrapers and tall buildings being built worldwide. The total number of buildings standing at more than 200m reached 1,478 in 2018, with the world expected to have added another 150 in 2019. This has strongly benefitted Swiss-based Schindler, the world’s second largest provider of elevators, escalators and moving walkways. The company is also benefitting from servicing more of its products after installation, helping to smooth out ups and down in the construction cycle.
Finally, a company that looks set to benefit from the move to electric vehicles is Aptiv, which focuses on the advanced safety, electrification, automation and connectivity aspects of cars. Aptiv is not a pure play on electric vehicles – its business should also benefit from our increasing demand for safety – but its competitive strength lies in redesigning cars to accommodate all of the extra circuits and electrical infrastructure that go into a car nowadays.

Is electricity’s rise assured?

Speaking of future expectations, Peter Thiel, co-founder of Paypal, famously said that ‘we asked for flying cars (and) instead got 140 characters.’ There are of course problems with electricity. We are still building fossil fuel burning power stations. Roughly 46% of new generation capacity in 2018 was fossil fuel based, with renewables making up 45% and nuclear power the balance.

Provided we can solve the renewable problem, however, and the cost of technologies like wind and solar continues to come down, electricity is set for a starring role in the 21st century. There are few fuel sources as clean, reliable or safe, making it an ideal means of meeting our energy needs for the twenty first century, especially if we aim to raise the living standards of people in still developing countries. Companies like Schneider Electric, Schindler or Aptiv will be critical to this success.

Written by

Sanjay Patel
Equity Research Analyst
How green is your renewable power?

Bulb with green tree inside

Even if electricity is generated by renewable sources, it still needs to be taken to the end user in the most efficient way possible. To do this, substations ‘step up’ the voltage of electric power in order to transmit over long distances without losing too much energy. As the contribution of renewable power to the grid has grown, so has the use of substations to step up power and transmit electricity from often remote renewable power sources.
Substations have a pollution problem, however, because they use a gas called sulphur hexafluoride to prevent short circuits and accidents. Researchers at the University of Bristol claim to have seen a doubling in atmospheric concentration of SF6 over the last two decades, particularly concerning given that SF6 is 23,900 times more potent as a greenhouse gas than carbon dioxide when measured over a 100 year period.

To solve this, ABB has developed an alternative gas mixture, branded as ABB Airplus, which it claims has a 99.99% lower warming potential than SF6. While it needs to be rigorously tested, Airplus is the first green alternative gas mixture on the market, and may represent one solution to the world’s emerging SF6 problem.

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