Written by the Mackenzie Bluewater Team
Decarbonization and Electrification – Key drivers for energy transition
Electrification and decarbonization are key energy transition strategies that are fundamental to efforts to slow climate change. Electrification - the replacing of fossil fuels with zero emissions electricity - speeds up the decarbonization process. These are massive global transitions in the energy sector as decarbonization and electrification continues to pick up steam. "Can the grid handle a full transition to Electric vehicles?" is one of the most common questions we get when discussing energy transition. The short answer is "no". If everyone you knew bought an electric vehicle tomorrow and started charging it in their garage, electricity grids in their current form would be overwhelmed quite quickly. While electric vehicles get the largest share of attention, the energy transition is much broader as a complete remaking of our electricity grid--from energy generation to energy consumption and everything in between--needs to happen over the next two decades.
As the world's largest provider of products and services tied to electrification, Schneider Electric is positioned to be a clear beneficiary of the drive to build a more sustainable, efficient, and digital energy infrastructure. The current electricity grid operates on a “hub-and-spoke” type of model--think of a large power plant that delivers energy across power lines to consumers of energy. The future involves a system that resembles more of a decentralized “mesh style” network involving wind farms, private solar systems and solar farms, battery storage and other forms of generation that are spread out across different areas of the network.
While this creates a more sustainable, and diversified energy system, it requires more advanced software and data systems to balance the energy load, in order to keep the overall system in balance. While we typically talk about Schneider as a beneficiary of large-scale energy transition, it is also an example of how AI is being used (and will be used in the future) to help create a system that allows forecasting and the shifting of resources in real time to create more flexible and resilient energy systems across the globe. Balancing a mesh style network with tens of thousands of interconnected power generation points plus energy storage, is a problem that is simply too difficult for unaided humans to solve. However, it is a perfect application for software-based AI. Schneider has spent the last decade shifting the company to be able to meet customer needs across the spectrum through the use of advanced software and AI and is now in a highly advantageous position to act as a key enabler of the energy transition as the world moves into the next generation of electrification.
Bluewater has added value for investors by focusing on the small number of companies that are leaders in their industries, led by best-in-class management teams that grow their businesses at rates superior to the overall economy. These companies have business models that allow them to weather these types of uncertain environments and increase their advantages over their competitors. All our businesses are highly profitable, generate substantial free cash flow, and have strong balance sheets. We expect that the earnings power of our companies will be significantly less impacted than the general market.
While these small number of truly special businesses almost always trade at a premium to average companies, the soft equity markets for durable-growth oriented businesses in 2022 has resulted in a narrowing of that premium. This sets up a unique opportunity to own companies that can provide stable cash flow that compounds at rates above the market over very long periods of time, while owning them at valuations not typically seen.
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