Randall Coleman, CFA
Climate change is real! Climate change is a hoax! Man-made carbon emissions are the cause of climate change! Man has nothing to do with carbon in the atmosphere! Where is the truth and what does it matter to investors? The answer is, it doesn’t matter what the truth is. For one thing, you and I won’t be around long enough to judge the final results. Regardless of opinion, what does matter is that government regulation is forcing changes to consumer behavior and, like it or not, we have to deal with it. Your personal “belief” in climate change is as irrelevant as your belief in the Easter Bunny or gravity. Do you believe in gravity? It doesn’t matter because you live in an environment that is bound by its forces. Despite a heap of evidence, some people still “believe” the earth to be flat. As investors, we are bound by reality, the cards we are dealt. Government regulation is dealing out of a deck stacked with EV cards. How shall we play our hand?
Before we try to answer that, let’s look at the cards we’re being dealt. Last week, New Jersey joined eight other states to ban future sales of internal combustion engine (ICE) cars, with a phase-out beginning in 2027 and becoming fully effective in 2035. Joining California, Connecticut, Maryland, Massachusetts, New York, Oregon, Rhode Island, and Washington, New Jersey’s addition brings to 30% the portion of the country that is currently subject to an ICE phase out. Several other states have legislation in the works to join the EV parade. We fully expect this ball to keep rolling, eventually covering the entire country. After all, the US is simply taking steps to meet its obligations as it agreed in the 2015 Paris Accords.
Consequences abound, some obvious, some a little more obscure. According to Bloomberg’s BNEF research group, California, leading the charge in the electric vehicle revolution, is expected to have 8.7 million commercial and passenger EVs by 2030. The adoption of EVs in California is expected to increase power demand for charging from 3.4TWh (TeraWatt hours) in 2022 to nearly 10x more, 29TWh in 2030. BNEF coolly asks, Is California ready for the wave of electric vehicles coming onto its grid? This is after several years of record summer heat waves causing blackouts and brownouts throughout the state. I guess you could say the grid was ready, as long as people didn’t want to drive anywhere. Or turn on their air conditioners.
Unintended consequences. As written, the rules these states have adopted target percentages of new cars sales within each state. For a die-hard ICE driver, it looks like a pretty simple step to cross a state line and buy a car with a gasoline engine in a neighborhood with a less restrictive framework. If there is no demand for EV’s, it will be tough for states to meet the designated sales percentages. Prohibitions always encourage some portion of the population to “game” the system to circumvent the rules.
As investors, how do we cope with regulators seemingly barreling full-speed ahead into an EV unknown? One option is to hedge, to maintain exposure to both sides, the EV and the ICE worlds. After all, despite years and years of anti-smoking campaigns, tobacco companies are still going strong. According to the EIA graph above, this isn’t a bad idea, given that global ICE sales have another 15 years to go before they ostensibly peak in 2038.
Using California as the glaring example, the state needs to triple its electrical grid in short order and needs to build out its EV charging network. This is a tall order and a significant growth driver for any number of industrial equipment and electrical supply companies. With EV mandates gaining traction around the world, this theme is a global investment trend. Combined with energy production and distribution, energy efficiency is a related growth engine. If you haven’t heard of a “heat pump” yet, you will. (Heat pumps are a highly efficient means of transferring heat from a cool space to a warm space. They are used for both heating and cooling.)
While the EV/electrification/energy efficiency theme is not new, its global traction has taken hold. These are major themes that play a significant role in our portfolios at ACM. Have we moved on completely from fossil fuels? Of course not. The vast global petroleum network that gets oil from the ground and gas into your (or your neighbor’s, if you already have an EV) tank still accounts for over 99.2% of the global fleet. Conventional (ICE) light duty vehicles are not expected to peak globally until 2038, fifteen years in the future. The world will need petroleum companies for a long time.
Let’s not put all our eggs in one basket. That’s the opposite of diversification.
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