A Q&A between Nightview Capital’s Director of Research Eric Markowitz and renewables expert Tony Seba on the biggest disruption of the 2020s: The energy market.
“Think of this as the Internet of Energy,” Tony Seba says to me in a recent conversation.
For those investors unfamiliar with Seba, it’s time to start paying attention—in my opinion, the Stanford lecturer is one the sharpest researchers studying the renewable energy disruption. In the following Q&A, Tony and I talk about a variety of subjects, but in particular, we discuss the vast market opportunity that exists across the energy sector: The coming boom in EV sales, autonomous driving, and the coming decentralization of the energy grid that will upend the incumbent oil and gas industry.
This is not our first conversation: Three years ago, myself and Nightview Capital founder Arne Alsin first spoke with Seba, who is the author of the #1 Amazon best-selling book “Clean Disruption of Energy and Transportation,” “Solar Trillions” and “Winners Take All”, among several others. He is also the founder of RethinkX, an independent think tank that analyzes and forecasts the scope, speed and scale of technology-driven disruption and its implications across society.
In this first Q&A, published in September 2017, we talked about a shared thesis among our firm and Seba: That most Wall Street analysts seemed then (and still now) to fundamentally misunderstand the opportunity set surrounding the electrification and automation of transportation. We discussed just how quickly the incumbents of this industry may become obsolete, just how big the market opportunity would become, and how non-linear growth rates could accelerate trajectories faster than most anticipated.
“The mainstream models tend to think linearly,” Seba said back then. “Meaning that—take the number of EV sales this year and say, look, what do I think the growth is going to be over the next few years — 11%, 12% or 15% — and just do the spreadsheet and see what comes out at the end. That is a linear model. It is all incremental changes. And in some cases, some may see themselves as being aggressive by putting up bigger numbers. But no successful technology has been adopted linearly. Once they get up to a tipping point, they are adopted on a super-exponential basis, until that technology grabs 80% of the market.”
Recently, Seba published his latest work, “Rethinking Energy 2020-2030,” which lays out a fundamental re-write—just beginning now—across the multiple-trillion-dollar energy infrastructure system.
This research dovetails similarly with the research we at Nightview Capital are currently focused on: How low-cost and highly efficient batteries paired with systems-level software are creating the opportunity for virtual power plants and a fully decentralized grid. We believe this is the biggest disruption of the modern era—and Seba would agree.
Our view, broadly speaking, is that we are moving from an incumbent system of dirty and expensive fossil fuel extraction and refinement to a low-cost, decentralized system of energy collection through solar and wind, storage through batteries, and distribution of energy through software. This decentralized system will have profoundly disruptive effects across not just the energy system, but across global industries, from shipping to manufacturing to transportation. Naturally, we are studying the disruptors leading this transition.
As I read Seba’s recent report, it became clear to me that he had reached a similar conclusion: We are on the precipice of perhaps the biggest disruption of the last 100 years.
“We are on the cusp of the fastest, deepest, most profound disruption of the energy sector in over a century,” Seba starts out in his latest report. “Like most disruptions, this one is being driven by the convergence of several key technologies whose costs and capabilities have been improving on consistent and predictable trajectories – namely, solar photovoltaic power, wind power, and lithium-ion battery energy storage.”
But here is the key piece of information that I found so fascinating in Seba’s report: He compares the new paradigm shift to clean energy as analogous to the creation of the Internet itself.
To think of it in real terms, Seba’s idea, and one that we agree with, is that the future of energy looks a lot like the creation of the Web: A system in which the costs of sharing and creating new “bits” of information are near-zero, and a platform on which new services and companies can unlock trillions of dollars of new value for investors. The old system of energy that created value—extraction, refinement, etc.—will make way for a new system that will create value: collection, storage, and distribution via software.
As Seba writes:
- In the last two decades we have seen similar disruptions of traditional information-based industries by the Internet, digital media, smartphones, and cloud computing that deliver products and services at near-zero marginal cost. The resulting superabundance of information and communication has created trillions of dollars of new value, dozens of new industries, and tens of millions of new jobs, which together have had a dramatic impact on the economy and society at large. These information technologies transformed the world of bits, and SWB [solar, wind, batteries] will transform the world of electrons in a similar way…
I wanted to discuss these concepts more in depth with Seba, so I recently arranged a follow-up conversation with him via Zoom. His predictions, to me at least, are bold but realistic in terms of scope.
Below is an edited transcript of our conversation.
We spoke roughly three years ago about the coming disruption to transportation. Open-ended question here, but what has surprised you about the last three years?
Honestly—not much. Prices of lithium-ion batteries have come down at about the same rate as I predicted. On EVs, [electric vehicles], I predicted that 2020 would be the tipping point—maybe 2021 for the EV disruption. That appears to be correct, too.
The idea that we are wedded to the individually owned ICE (internal combustion engine)
industry essentially has gone out the window. It’s good to see that good, solid research actually pays off.
What about automakers? We talked about the incumbents then, but what’s your assessment on their progress to electrify their fleets?
OEMs are going to have a hard time. If you look at the history of disruption, disruptions come from the outside. So the companies disrupting the transportation industry—most of them did not even exist until relatively recently.
Taking a step back, this is true within industry, but it’s also true with entire countries. I recently wrote Rethinking Humanity, in which we looked at the history of societies in the whole world going back over the last 10,000 years. And what we found was that at the societal level,
whether it’s Rome or Egypt or Sumer, one order has dominated the next one. So even at the societal level, disruptions come from the outside—right from the edge.
At the company level, it’s the same idea. It’s more about a company’s organizational capabilities. Essentially, by and large, the OEMs have been late to the party. This is not swapping a gasoline vehicle’s engine for a battery. EVs are a fundamentally different product.
And when you add the fact that EVs are computers on wheels, then the skills that you need internally are dramatically different. So yes, it’s electric, but it’s also a computer on wheels. Most OEMs don’t have software capabilities at all.
I don’t want to comment on individual companies but essentially some of them are going to transition to being more like Foxconn where they make cars for others, but they’re not all going to make it.
Over the next five years, we’re going to see bankruptcies of OEMs. It’s a fragile industry.
It doesn’t mean they’re all going to go bankrupt, but they have to go all-in. A lot of OEMs are paying lip service. A lot of OEMs are treating this as a portfolio, right? Unless you’re all in, you’ll have very little chance to survive.
What’s your take on the major oil and gas companies? They like to use the word “transition” — are you seeing similar problems for the incumbents of the major fossil fuel companies?
I see the same dynamics. Coal has been crashing for a long time. And oil companies, some of them, are doubling down, and some of them are paying lip service to renewables, that “we’re going to reduce greenhouse gases by 40%”
But again, this is not an emission-driven disruption. It’s a technology-driven disruption.
They may be able to have 40% fewer emissions because their volume is going to go down 40%, but that’s not because they’re going to do anything to change their production. If they made a transition say five, six years ago, they had time to catch up to the renewable industry.
But right now, extracting oil molecules and shipping them across the ocean or in a pipeline and pushing it into gas stations is a fundamentally different business model from solar or wind and batteries. Right? So, what works in the world of molecules—oil, gas—does not work in the world of electrons.
So are these companies going to make it in a world of electrons? The jury is still out. If you made that transition, like Ørsted, five or six years ago, they had time to adjust and change their business model and go all-in.
But if you see a fossil fuel energy company saying they they’re just going to change quickly,
“We’ll just quickly adapt”—that’s going to be a problem. That’s a little bit like saying, “I’m in the newspaper business, and the Internet is a news business, so I can make it.” Famous last words, right?
This is not a one-to-one substitution of the molecule business. And unless you go all in, and you change your organization and your metrics, then they’re also going to have a hard time transitioning into the world of electrons.
One of the sections of the report that’s thought-provoking is that “history always shows that the new system is much larger than the one it displaces…” How will the solar, wind, and battery industry be larger than the current energy infrastructure?
When you look at the history of disruptions, especially these 10X disruptions—foundational disruptions— what you see is that a new system is created with new metrics and new behaviors. And the new system is much larger than the old one, in terms of units, even though it’s cheaper on a per unit basis.
So, when you go back to the car disruption, the car did not just disrupt the horse. If you read history, and we see the echoes in mainstream analysis today, but they thought of the car as a faster horse. But the car was not a faster horse. The the car was a fundamentally different mode of transportation.
Not only did the car disrupt horses, but within 20 years, the size of the car market was many times larger, any way that you looked at it—in terms of miles, in terms of customers—than the existing system of the horse transportation system ever was.
We think a lot about virtual power plants (VPPs), and how we’re moving from a centralized system based on scarcity to the future of distributed, centralized energy. The business model to me looks more like a software platform but I’m curious how you think about it.
So, think of this as the Internet of Energy.
Think of it as how we went from print newspapers or film cameras—we moved from a depletable resource (paper, or film) to a digital resource with a super abundance.
With the Internet, we have an abundance of images and a super abundance of information, which we never did before. And creating new bits of information is essentially free, right? Everybody can post and share information, which we never could in the old industry. We can give away images or content for free, or we can charge for it. We have 7 billion people who generate, store, transmit, and consume digital information, which didn’t exist 30 years ago.
That is what’s going to happen in the energy world. Now, most of us are passive consumers of energy. We consume it, at the end of the month we pay for it.
That is going to dramatically change to a world where most of us, or many of us, are going to generate, store, use, and basically sell or give away energy.
And that changes everything. If I can sell energy to my neighbor, or if Walmart can sell or give away energy, that literally changes everything. On top of that, you have the idea that energy is going to be cheap AND distributed AND on the network. And that has a lot of implications for new products, just like the Internet created new business model innovations.
Just like we saw several companies over the last 15 to 20 years go from essentially startups or smaller companies, or even companies like Apple that were on the verge of bankruptcy become trillion-dollar companies. That’s what we’re going to see in energy. But it’s not going to be the companies that are going to be generating energy itself.
It’s going to be the companies in software and technology that see this world as an “Internet of Energy” where everybody is going to transact, generate, and store electrons. Energy is just the way we do information. Those are the companies that are going to succeed the most.
Again, the economics are going to be fundamentally different. There is one thing, one insight, one discovery that we named, that we thought was amazing, which is the idea that once you achieve 100% SWB, which in and of itself is going to be the cheapest possible electric power system out there by 2030, if you add a 20% incremental investment in the system, you could get 100 to 200% more superpower.
This means that there will be disproportionate return on the investments in an energy system. This is unheard of. I have never seen an extraction-based energy system, which is what we have today, have these types of economics. In other words, the more you extract resources, the more expensive it gets, and the more negative the returns are.
When you have a 20%+ incremental investment that gets you 200% more energy, we’ve just never seen that before. Nothing can compete with that. And if all you see is that, you realize “it’s over.” It’s over for all the incumbents—oil, gas, you name it. It’s pretty much over. They can’t compete with those new economics of energy.
Let’s stay on this theme. There’s this misconception that energy is an isolated industry. But energy touches every single industry in the world. So can you talk about the ripple effects of this disruption?
Linear mainstream analysis tends to see the world as siloed. But the world is not.
Going back 10,000 years ago, in our book Rethinking Humanity, we asked the question: “What enabled societies to dominate their world?” What we found was, whether it’s Rome or Egypt, was that every time there was a breakthrough to a new world order, there were five foundational sectors that were 10x disruptions.
They were: information, energy transportation, food and materials. And they’re all connected, right? More energy enables more transportation, cheaper energy enables better materials, and that’s why we went from bronze to iron and then to steel.
We have to think of all of these five as being one. Going forward, what we see is that all five are going to be disrupted. We see 10X disruptions in energy, transportation, food and materials. And they’re all connected. Seeing them as silos is essentially the best way to go bankrupt.
How should we think of all of these? Information is at the core of all of these disruptions. No matter where you’re investing—as a society or a company—information, meaning software AI, digital technology—is at the center of the core.
Transportation, think of it as an Internet on wheels. It’s all connected. Cars are going to be power plants on wheels. A Tesla has a roughly 75 to 100 kWh battery, which can power your average American home for 3-4 days. We’re not doing that today mostly because of regulatory reasons.
But there’s no reason why in California we should go through these brownouts and blackouts if we have an EV in the driveway. That makes absolutely no sense.
Again, it’s all connected, right? Transportation and energy become one going forward. And then information is at the center of all of it. In 10, 15 years, very few companies are going to make money selling cars themselves or even selling energy in kilowatt hours.
Essentially, if you want to make money in 10, 15 years, you need to think: Can you make money selling energy at 0 or approaching 0 dollars. The answer is that businesses will need to come up with new business model innovations and new product innovations. It’s the same thing with cars. This industry has got used to selling cars or selling oil to power the cars for a hundred years.
Going forward, 10 years from now, it’s going to an autonomous, on-demand electric world where the main metric is miles traveled. As a company, if you’re in transportation, you need to figure out a way to make money, where your main metric is miles traveled.
This should not be a surprise. Aviation is already like this. Aviation companies make money on passenger miles. So the same idea is going to apply to road transportation. It’s going to be a TaaS world, Transport As A Service. Sure, there are going to be companies that make money selling the hardware—the cars—but if you look at information technology—Google, Apple, Facebook, and so on—they don’t necessarily make money on the hardware. They make money mostly on the software. That’s where the opportunity is going forward.
The OEMs who don’t see that are either going to be out of business, or they’ll to transition to become more Foxconn’s—assembling stuff for others. That’s a business, but it’s not going to be the dominant companies within those industries.
You mentioned regulation. What are the barriers to enable this decentralized grid system? Often, we encounter investors who think politics will play a role in embracing or preventing the renewable energy disruption?
On a purely economic basis, SWB will disrupt the existing system. Having said that, regulation is important, though it’s not the driver of this disruption. Regulation seldom is.
Solar is already the cheapest form of energy generation. Solar is going to get a lot cheaper, and batteries are going to get a lot cheaper as well. This new system is going to generate energy that is cheaper than the operating costs of conventional energy generation.
The transportation world is competitive. Consumers have a choice. But in energy, we don’t have choices, right? We have monopolies—utility monopolies—and we’ve had them for a hundred years. So unless we change the regulatory framework and make electricity a competitive business, this is going to be slowed down so much that we’re going to be left paying for expensive, dirty energy. It’s also destructive to health and the environment.
At this point, the regulations that really matter are going to be the regulations that create an open, transparent, and more than anything, competitive energy and electricity market. A system where you can unleash private industry and entrepreneurs to create the products and services that this new system is going to require.
The utilities are not going to deliver the 100% SWB system. They’re just not. They don’t have the business model, they don’t have the organizational capabilities, they don’t have the skills. This is a fundamentally different business than a utility. This would be like asking Ma Bell to deliver an iPhone.
AT&T was a great 20th century company, but they would have been unable to deliver the Internet and the web and all the trillions of dollars that this has delivered.
If you ask me what is needed…
In order: One, give consumers and businesses the right to generate, store, use and trade energy and electricity without permission from the utility.
We don’t need permission from Internet provider to do this Zoom call, right? Or to post
something on a blog, or YouTube. We don’t need permission to buy something online. Why do we need permission to generate or sell electricity? This is ancient regulation from the 1920s.
We need energy rights for consumers and businesses. That’s the number one thing.
This is not going to cost the government any money. A lot of folks are talking about climate change, efficiency—but that’s not what’s going to turbocharge this market. Granting individuals this right is not going to cost the government any money.
The other thing that would really accelerate the system would be for solar wind and batteries to qualify as real estate investment trusts and limited partnerships.
Those two things would unlock trillions of dollars of private money to go into this space. MLPs have been used by the conventional energy industry for decades, and there’s no reason why they shouldn’t be used by solar, wind and batteries.
Again, there’s no reason why I can build a mall with a REIT, but, solar doesn’t qualify. That is nonsensical. These are simple things for the government to do without really impacting the treasury.
If anything, we see how this is going to generate huge revenues. It will repatriate industries. It’s going to generate so many new jobs and economic activity that it totally makes sense to do these kinds of things.
What’s the importance of scale in the new energy paradigm?
So, over the last 10,000 years, the fundamental business model has been built around extraction. It’s what I call the extraction age—it’s dealing with scarcity. In the past, the idea was scale. The bigger companies, bigger oil companies, had better economics than smaller oil companies. And that allowed them to dominate.
In the information network era, what I call the creation model of production, it’s not about scale, it’s about network effects.
We’re seeing that regulating an information network, the way we regulated an industrial company, does not work. Washington and Brussels and pretty much everyone in the West has had problems regulating Facebook and Twitter and all these information networks, because they’re still using the lens that we used a hundred years ago.
They talk about breaking up these utilities. But it’s hard to break them up. We need new models of regulation to regulate the information. That applies to Facebook and to Twitter, and the same thing is going to be true of the internet of energy and the internet of transportation.
What would you tell a room full of investors?
When you look at this disruption history, once you you’re past the rupture point, disruptions happen very quickly.
We’re there for both energy and transportation. The disruption is going to happen very, very quickly. The incumbents are going to be wiped out, very quickly. And the first thing that goes is your market cap and your finances. So even if you believe that, there is a “transition” that might take 10 or 20 years—which is not going to be the case—but even if you assume that that’s the case, that does not mean that the incumbents will survive that long.
I introduced the idea, like a fire, all you need is a spark—and you get these million-acre forest fires. It’s the same idea. Market trauma happens early. You may only need a two or three
percent penetration rate of the new technology in order for the incumbent’s market share to collapse financially. We’ve seen that, for instance, with GE. GE Power collapsed pretty much in 2018, and it happened quickly, even though at the time, solar and wind were only two or three percent of the market.
And don’t look at it linearly. There are a lot of feedback loops that will mean that a lot of companies, without naming names, will be disrupted very quickly from a financial perspective.
Look at, for instance, car loans. Within five years, if I’m right, all new vehicles sales in the mainstream are going to be electric. Now, what’s going to happen with resale value of internal combustion engine cars at a time when all new cars are electric? They’re going to collapse.
Who wanted an old typewriter when the PC came out? Right? Who wanted a film camera when digital came out? Their prices collapsed to zero. So what happens to these companies when resale value of cars collapses to essentially zero? How does that loop back into the higher costs of production for ICE vehicles and the overall economics of these companies?
To summarize: Once you’re past the rupture point, disruptions happen very quickly.
Market trauma means that the finances of incumbents are disrupted very, very quickly—a lot quicker than the market share that those incumbents have. At this point, even with pushback from the government and the incumbents, essentially all new CapEx in the conventional energy value chain—coal, gas, diesel—all of those assets are stranded. It’s going to be a matter of when they’re taken out of commission—not if.
Disclosures:
This has been prepared for information purposes only. This information is confidential and for the use of the intended recipients only. It may not be reproduced, redistributed, or copied in whole or in part for any purpose without the prior written consent of Nightview Capital.
The opinions expressed herein are those of Tony Seba and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This is not an offer to sell, or a solicitation of an offer to purchase any fund managed by Nightview Capital. This is not a recommendation to buy, sell, or hold any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions Nightview Capital makes in the future will be profitable or equal the performance of the securities discussed herein. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. Nightview Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Recommendations made in the last 12 months are available upon request.
Nightview Capital Management, LLC (Nightview Capital) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Nightview Capital including our investment strategies and objectives can be found in our ADV Part 2, which is available upon request. WRC-20-13
