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The biggest question comes on the longevity of energy basket rally, surely this craziness will not last forever but it will stay for sometime

- Vikram Kotak

Dear Investors,

At the outset let me wish all of your very happy Deepawali and prosperous new Samvat year 2078

I have been reading and attending so many calls on alternate energy and the death of Fossil fuels and Thermal energy in years to come. The world has pledged to cut down traditional energy usage substantially over time. The top 3 Large Indian groups also committed billions of dollars on alternate energy investments. Two questions come to my mind one is prices of alternate energy will shoot up from here and same time we will see fossil fuels and thermal energy as thing of past. Let me try to put my thoughts on this.

  • According to the latest data, Wind Power is 71% cheaper in 2021 than in 2009 and the cost of solar energy dropped by 90%. In many cases, getting energy from new wind turbines and solar panels is now cheaper than getting energy from existing coal and gas plants.
  • Electric vehicle prices have fallen 84% since 2010, and Bloomberg NEF estimates that in just three years automakers will be able to “produce and sell mass-market EVs at the same price (and with the same margin) as comparable internal combustion vehicles in some markets.”
  • Energy storage, which will play an important role in enabling a renewable energy future, is getting cheaper by the day. The U.S. Energy Information Administration reported in October that just from 2015 to 2020 utility-scale battery storage costs dropped by nearly 60-70%.
  • Building an all-electric home able to get its heating and cooking energy from renewable sources is now more affordable than building a home that gets its energy from pipeline gas, based on 15-year cost analysisin seven cities.

The timing couldn’t be any better. The world needs to shift almost entirely away from fossil fuels over the next few decades if we are to prevent the worst impacts of global warming and we have a lot of work to do. And this is the best time to build when the prices of alternate energy are around the bottom.

The big question is that Prices of alternative energy after big fall is bottoming out? I am sure it is as the demand for new-gen energy and allied equipment is from 75% of the world population. With such demand, I am sure that the supply chain is not geared up at this level and we will see a massive jump in alternate energy costs in years to come. On the other hand, people think that Oil and coal are things of the past and on their way out. Then why so much rise in their prices, this must-have comes to shock, is this price only move on supply and demand, in my view predicting oil and coal is very expensive and uncertain exercise.

The dominant narrative is that alternate energy rush will kill off oil demand growth in a few years say a decade or so. But believe me; this narrative never foresaw the current massive rally in commodities and energy for some reason. Nobody ever projected coal demand will shoot up and price can see massive up-move. Coal demand is on the rise not only in emerging countries but the USA has seen much higher coal consumption this year in the last 6-7 years.

The short-term outlook about Fossil fuel and coal is quite interesting. With post covid world opening with a bang, much-intensified winter, much lower inventory than expected, and Exxon's $ 30bn programs on the fossil are delayed. On and above that shortage of oil tankers and sky-rocketing freight rates will be a double blow to the users. US crude oil inventories are 8-10% lower than the last 5-year average. This crazy demand can take Brent crude over $ 100 easily. For every USD $ 1 rise in crude prices, trade deficit in India increases by ~USD $ 1.2 bn. (As per RBI study in Jan 2019)

The thought process around the death of fossil fuels has been greatly exaggerated for now. Despite the push in ESG investing over the last few years, funds are now looking at high dividend yield, low PE energy stocks. Energy stocks are up by 50% and can do much more if this scenario prevails.

The biggest question comes on the longevity of energy basket rally, we are sure this craziness will not last forever but I am sure that this is going to stay here for some time. Also, an important point to note is how fast we can execute clean energy and emission ambitions. There is a huge disparity between execution and ambition of most countries.

According to the latest UNEP report, the CAPEX program of the top 15 biggest oil and gas producers is in favour of traditional fuels despite the Paris agreement on emission targets. I will bet my 2 cents on higher oil and coal prices to stay here at least in the foreseeable future.

Wish u once again very happy and clean air Diwali as the Supreme Court has allowed safe crackers only.