The fourth industrial revolution is coming, but it will be driven by renewable energy rather than robotics and artificial intelligence, writes Investec Asset Management's Michael Power.
As significant as advances in robotics and AI are, as with all previous such revolutions, the next industrial revolution will be driven by the release of a new form of energy into humanity’s ecosystem.
The global economy has always evolved thermodynamically: bursts of energy followed by dissipation followed by a new burst then dissipation, and so on.
The first two industrial revolutions used steam and electrical energy to leverage humanity’s brawn. The third used computer energy to leverage humanity’s brain.
The fourth will release renewable energy, mostly solar and wind, into our ecosystem, thereby making cheap and indeed almost free energy near universally available to all.
And before long, renewable energy will allow cheap water from desalination to be widely available. Renewable energy in terms of energy return for energy invested is already head and shoulders above fossil fuels.
The global economy evolves thermodynamically
The other two hallmarks of an industrial revolution – apart from the release of a new form of energy – are that the costs of providing and using that energy fall geometrically rather than arithmetically, thus facilitating a matching rate of adoption that rises geometrically rather than arithmetically.
This is the essence of what makes that new energy source so ‘revolutionary’.
We are on the cusp of the renewable revolution.
Indeed, we are entering a period of ‘free’ energy, free in the sense that once the capital expenditure itself is complete, the fuel feedstock is free – it doesn’t have to be mined or pumped and burnt.
Whereas the UK led the first Industrial Revolution and the US led the second and third, China will lead the fourth.
This is because its productive might is driving down costs, and so prices of solar and wind energy and its demand is underwriting the growth in the rate of adoption.
China’s expressed determination to clean up its environment is backed up by physical reality – these aren’t empty promises or platitudes.
In August 2017, the government publicly reprimanded and punished nearly 100 senior officials in Gansu province for severe ecological damage, in a sign that President Xi is willing to take on China’s ponderous yet powerful bureaucracy.
But the real action is on China’s drive for renewable energy self-sufficiency.
Already, low-cost, energy-short China is driving the industrial economics of the renewable energy revolution in both wind and solar energy.
We believe that the value creation derived from the Fourth Industrial Revolution will outstrip value destruction.
Coal and oil will suffer as did horsepower with the arrival of the automobile.
Tropical and subtropical emerging markets that are energy and water-short could benefit even more than developed nations, which could see a jumpstart in their productivity growth.
“Currently, either wind or solar power is the cheapest new source of power in the US, Australia, India, and large parts of Europe, Southeast Asia and Latin America.
We project that by 2020, renewables will be the cheapest form of power generation in every region where we cover utilities other than a few countries in Southeast Asia.”
- Morgan Stanley research, July 2017
Michael Power is a strategist at Investec Asset Management.
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