On the surface, energy seems like a pretty stagnant industry these days. Oil has dominated transportation for most of the last century while natural gas and coal provide a vast majority of the electricity we consume. That's not all that different than the way things were at the turn of the 20th century.
But if you look at the overall energy mix over more than two centuries there's a lot more change in energy than you might expect. The question is: Could another shift be afoot within just the next generation or two?
The energy evolution timescale
You can see in the chart below that the U.S. was once a country that got nearly all of its energy from wood. The energy source was plentiful and cheap as far as fuels went at the time. But since 1850 wood has almost entirely been replaced by coal, petroleum, natural gas, nuclear, and hydroelectric energy.
What's surprising about this chart is how quickly energy sources can be replaced. Over the course of 50 years wood went from a main source of energy to a has-been compared to coal. In turn, coal's domination of the market has fallen from nearly 80% in 1900 to below 20% today, driven by the rise of petroleum and natural gas.
But keep in mind that market share and unit consumption aren't the same thing. Coal's market share has dropped since 1900 but we're using so much more energy today that its consumption on an annual basis is still up over that time.
This began the question: What's next for the energy industry? We know that energy sources don't stay dominant forever and disruption can happen relatively quickly. But is that disruption already here?
I'll point you to the first chart and the green sliver showing up at the top right corner and then the second chart and the green line that doesn't even show up until about the year 2000. Doesn't renewable energy's trajectory look a lot like coal in 1850 or petroleum in 1900? Maybe it's time to consider renewable energy's disruptive potential rather than dismiss it as its market share grows.
Time for an energy revolution
For investors, I think it's time to think about what's next for energy, not what seems like it's always been. Fossil fuel -- whether it's oil, natural gas, or coal -- is coming under pressure for its harm on the environment but more importantly it's also getting more expensive to consume. In 1946 a barrel of oil cost $1.63 ($19.41 adjusted for inflation) and today it costs more than 30x that. Long-term, all fossil fuels' costs are rising as the easily discovered resources disappear.
Renewable energy is going in exactly the opposite direction as fossil fuels because it's cleaner and its installation costs are falling rapidly. According to a study by Lazard that looks at the total unsubsidized cost of energy sources, wind is 52% less today than it was five years ago and solar is 55% less. As a result, they're growing market share, as you can see in the charts above.
This dynamic creates a multi-trillion dollar opportunity for renewable energy companies who can ride the wave of installations over the next few decades.
How to play the energy revolution
There are two great ways to ride the next energy revolution taking place in the U.S., which could be a life changer for those who get in early.
In manufacturing, I think First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) are far and away the best in the solar industry, offering differentiated technology and better efficiency than Chinese competitors. They're vertically integrated, which means they do everything from making panels to building projects, and together they just launched a yieldco called 8point3 Energy Partners (NASDAQ:CAFD).
This venture will own projects First Solar and SunPower build, providing cash flows for 30 years or more. Long-term, owning projects will provide cash flows and reduce reliance on contracting projects year after year. That allows more reinvestment in R&D, which widens the lead over the competition, and leads to more profitable projects in the future. As big oil companies have shown, once you build a competitive advantage in a new energy source it's tough for competitors to overcome it.
You can see above that ever major change in energy has happened relatively quickly and usually early leaders take a majority of the market share. If renewable energy continues to grow First Solar and SunPower should be leaders, helped by their yieldco vehicles.