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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
The world needs more power, more reliability,
and more infrastructure, all at the same time.
Meeting those demands may require one of the
largest industrial rebuilds in generations.
Welcome to the TCW Investment Perspectives podcast.
I'm your host, Michael Reilly.
As Chief Investment Officer for Equities at TCW, I
spend a great deal of time thinking about the long-term
forces shaping markets and investment opportunities.
Today, we'll discuss the transformation taking place across
the global power system and challenge some of the common
assumptions investors hold about the energy transition.
To help unpack what's driving this shift and where it may be headed,
I'm joined by two guests with unique perspectives on the topic.
First, Eli Horton, Managing Director and Portfolio Manager for
TCW's Thematic Equities and Durable Growth Equities Strategies.
Eli is one of the firm's leading investors focused on the energy transformation.
We're also joined by Stan Miranda, founder and CEO of the TrueNorth Institute.
Stan has spent decades working with institutional investors and is
deeply involved in accelerating investment toward the technologies,
infrastructure, and businesses that are enabling the energy transition.
Eli, Stan, thank you both for joining us.
Thanks, Michael.
Stan, maybe we'll start with you.
Let's look at the big picture.
When most people hear energy transition, they think of solar
panels, wind farms, electric vehicles, and climate policy.
But you've often described what we're living
through as the fifth energy transition.
What do you mean by that?
I do think, Michael, it's useful to remind ourselves of how
important energy has been to the human race throughout history.
So it all started a million years ago with fire.
And when man controlled fire, that potentially determined the
fact that the human race was the dominant race on the planet.
And it took a million years before the next energy transition,
which was defined by more kinetic sources of power,
which is wind and water and actually even animals.
And then again, another 4, 700 years went by.
Coal defined the third energy transition from 1700 for
about 150 years before oil and gas was used commercially in
the late 1800s, that being the fourth energy transition.
And the oil and gas era lasted for nearly 150 years without much of interest,
other than perhaps a fleeting interest from nuclear power in the 1950s.
Really, oil and gas has been one of the most
recent long-duration energy transitions.
And then the fifth energy transition appeared
probably around 1980s with photovoltaics.
And then the combination of aerodynamics and
graphite and power electronics created wind energy.
And then we all knew about the success of lithium-ion batteries.
But the fifth energy transition is really defined by just the huge accumulation
of technologies that created a much broader array of energy sources.
And many describe it as the electro-technical revolution
because what we're seeing is energy sources shifting
massively away from atoms in favor of electrons.
You think about the full impact of technologies and their demand for
energy behind them, and there is a self-reinforcing energy demand spiral
created by all the new technologies being introduced in the world.
Many technologies being developed require energy to exploit
them, not just AI and machine learning, but cryptocurrencies,
quantum computing, robotics, high-performance computing
for genomics and drug discovery all require more energy.
So really, that's what I think of when we think about the
current energy transition that's massively transforming the
economics of industries and companies around the world.
So that's fascinating, Stan, when you frame it through that lens.
I guess I'd ask, you know, investors have been
hearing about the energy transition for years.
So why is this moment right now different from five or ten years ago?
And what has changed that makes this period particularly important?
AI has boosted the fifth energy transition to a whole new
level of importance in the world today, as everyone knows.
While this transition started with photo-voltaics in the 1980s, AI has created a
major new dimension to the extent that virtually every company's future success
in nearly every industry will be determined by their use of AI to compete.
To the extent the pace of AI growth is constrained today and in the
future by energy supply, not by compute, access to power is now
the source of competitive advantage of nations and industries.
So this is a whole new dimension to the global energy
transition that has only emerged in the last year or two.
What will be the sources of energy that powers data centers
in the next two to three years and over the long term will
really determine how different companies succeed and fail?
Will the gridlock, as they call it, continue to hold
back energy generation growth in the US and Europe?
And what whole new grids will be formed outside
of those currently regulated into cul-de-sacs?
You know, the Microsofts, the NVIDIAs, Anthropics will not sit still, but
China takes the lead in AI due to China's more unconstrained access to power.
So how this plays out impacts the value of all companies across all sectors.
Hyperscalers are becoming energy companies.
They have energy departments, they're building energy infrastructure.
So this is a whole new dimension which gives real
energy behind the energy transition going forward.
Sure.
Well, Eli, let's maybe take that and let's
bring that big picture view into the market.
How do you translate this perspective into
actionable investment insights and opportunities?
So I think Stan set the table really nicely there.
And the one word that comes to mind after listening to his thoughts is change.
And I think that large scale systems change is a fact pattern that produces
really interesting investment opportunities, especially for that of
an active fundamental investor who can go in and do deep work and
identify opportunities that the market hasn't sorted out just yet.
So there's a lot going on here.
Stan said a few things.
You mentioned the huge accumulation of technologies that are
combining for new energy sources, many new technologies, AI.
All of these lead to the fifth energy transition.
We are looking at some of the largest structural change in many decades.
They're coinciding to be an incredibly large capital investment cycle, which, by
the way, is colliding with what I often call chronic cyclical underinvestment.
If you look at the grid in the United States, if you look at the
manufacturing and industrial base, the infrastructure that is
literally required to power these technologies of the future.
And so where that creates opportunity for us and the businesses that enable
these changes, the companies that are actually providing the components for
the grid, building the grid, businesses that
are enabling the fifth energy transition.
So a lot of change from all of those factors makes for
some pretty unique investment opportunities, in my view.
You know, all of that said, there are still several common
misconceptions about the energy transition or energy transformation.
What are some of those key misconceptions?
There's a whole bunch, probably more than we have time to go through.
I'll give you a few.
So one that we have been very outspoken about is the importance of what
I'll call decarbonization or migration to lower carbon sources of energy.
But there's been a very significant misunderstanding of what
portfolio decarbonization and real-world decarbonization mean.
So that's one.
A couple that come up as well, quite commonly with my conversations
with investors, would be that venture capital and private
markets is where all the energy transition opportunity lies.
And another that I'll throw at you is around electrification,
the demand for power that is solely an AI story.
Let's double-click on that first myth, Eli.
Investors often do equate a decarbonizing
portfolio with real-world decarbonization.
Why is that a mistake?
How the world has gone about this for some time
is by what we call decarbonizing portfolios.
So essentially, divesting the heavy-emitting businesses,
creating indices that have certain low-carbon targets.
And what has happened while this effort has taken place is
you've seen AUM from those climate funds grow, and you've
seen a corresponding growth in real-world emissions.
It's portfolio decarbonization, not real-world decarbonization.
When you divest a business, you effectively limit its access to capital.
When you limit a company's access to capital,
the cost of capital grows or increases.
And a variety of projects that the CEO is evaluating will no longer
exceed that cost of capital, and so those projects get shelved.
Some of those projects are inevitably investments in efficiency,
lower-carbon solutions, and it delays the transition.
And maybe we can turn to the second myth you pointed out.
You know, there is a perception that venture capital and pure-play
climate technology companies are leading this transition.
What does the data actually show?
So it's a very capital-intensive transformation that's taking place.
So B&F has estimates that over $3 trillion are being
invested in decarbonization per year currently, that that
number grows to $5 trillion by the end of the decade.
By our estimates, about three-quarters of the energy
transformation is financed in the public markets.
They're mission-critical enablers of the energy transformation.
You can't extend the grid without more transformers, and you aren't
going to find a company that can supply high-voltage transformers
at scale in a cost-affordable way in the private market.
And so while the private and venture markets are very important
for fostering innovation, we think that there's a very meaningful
and oftentimes overlooked opportunity in the public markets.
Stan, maybe we can turn to that third myth and the surge in electricity demand.
How are you seeing data centers affect the energy transition?
And do you agree that the constraints around power
generation and the grid extend well beyond AI?
The estimates are that roughly 10-15% of future
electricity demand will come from data centers.
There's another 85-90% of electricity growth which is coming just from global
economic growth, more air conditioners and electric vehicles and so forth,
and also from other new technologies like hydrogen
is very electricity consumptive and so forth.
But in the short term, data centers are
clearly driving the biggest gap in demand.
And it's a very interesting dynamic in that, as we just
said, the grid cannot accommodate the data centers
near-term growth and so whole new grids are being created.
So you'll hear us use the word bottlenecks all
the time because they're popping up everywhere.
They're obviously on the compute side, but they're everywhere
in the industrial economy from some of the transformers
to switching gear to people to build these assets.
And usually where there's bottlenecks, there's investment opportunities.
So while AI captures the headlines, this growth has much more
breadth and durability than AI, which is another exciting point.
Absolutely.
You know, both of you have spent years researching the
energy transition, the energy transformation, and have been
engaging with companies across the ecosystem for decades.
I guess, what has really surprised you most along the way?
We have seen how mistakes can cause problems
in Europe multiple times now in five years.
So if you look at the past 20 years, the United States has gone
from a position of net importer of energy to net exporter.
And over that 20 year period, Europe has
actually become even less energy independent.
They have imported more energy over the past 20 years.
And that's created a ton of problems.
We've seen the Russian invasion of Ukraine
create an impact into natural gas flows.
We're now seeing it with the Strait of Hormuz.
I'm oftentimes surprised that we don't see more and more
investment at an accelerating pace to shore up energy security.
We're seeing it on the margin, but this is an area of
opportunity, I think, that's still out in front of us.
Sure.
Stan, what about you?
It's actually, as I think about it, the data center backlash is astounding.
And it's apparently bipartisan, and it's real.
I did some research recently on just what are
the priorities of different nation states.
And apparently, according to AI, Washington's number
one priority is beating China in the AI race.
And so how do I reconcile that with the data center backlash?
Well, that's the popular view, and I just do not understand it.
We see news articles on Virginia and the huge amount of tax
revenues and the benefits to education and health care.
Yet that doesn't sway most states in the country.
And so that's just really surprised me.
And not just AI, but data centers are driving our ability to stream movies.
And so it's such a net positive that surprised me hugely.
I think this is such a good point, by the way.
And I'll make the attempt to link my answer and Stan's answer by saying
that there's so many government decisions or political and policy
decisions that just get in the way of what matters most economically.
So you had this effort to only add renewables to the
grid in Europe and shut down coal and shut down nuclear.
But if you do these things too quickly, you end up with problems.
Now in the US, and I just was on the ground in Ohio where there's a
bunch of these data centers being built, and you wouldn't believe
the number of questions I got from people about water usage.
And is it even safe to be near a data center?
We have misguided, in my view, misguided policy.
We certainly are throwing misguided facts
into the market about these data centers.
And it's holding back economic development.
So maybe that's what's most surprising to me is the mistakes that society and
policy seems to be repeating over and over and delaying economic progress.
Yeah, I mean, that issue has really moved to the fore.
Well, maybe let's finish with a forward-looking question for both of you.
So say 10 years from now, when investors look back on this period, what do you
think they'll wish they had understood sooner about the energy transformation?
You know, I have no doubt about what that is likely to be.
I think we will look back and wonder why we didn't stop the progress
of China against the West in developing technologies, AI, and power.
Right now, China has about three times the
installed generation capacity of the United States.
But that's irrelevant compared to what they can do in the next 10 years.
They can grow unfettered that installed power base, whereas in the United
States and Europe, you have a huge number of barriers to growing out the grid.
And we will wish we'd fixed that problem, because the unfettered growth
of China's power infrastructure is going to put them in the lead on AI,
which is going to put their industries and their
companies in the lead competitively worldwide.
One of my favorite authors is Peter Zion of The Absent Superpower, which is
all about Thucydides' trap and whether China takes the lead over the U.S.
as the global superpower.
And I think that's what we're going to see.
I think that was an awesome answer.
And if we aren't going to fall into that trap or problem
that Stan outlined, we're going to need a lot of capital.
And I think that's what 10 years from now investors are
going to look back on and realize that, sure, this is a
technology cycle, but it's also a massive capital cycle.
And there are a number of S-curves that will be taking place.
Those most commonly get talked about on the frontier of AI.
I think there will emerge some very large winners from that.
I think what's even more interesting from my seat is that
it's not just trying to identify those businesses that
are reinventing technology and compute and intelligence.
It's the businesses that need to be involved
regardless of who wins that intelligence race.
The companies that use the picks and shovels term, they capture value.
And they're boring and they're often overlooked, but this is
a capital cycle and those are the recipients of the capital.
A tremendous discussion.
Eli and Stan, thank you both for sharing your insights.
As we've discussed, this isn't simply a story
about renewable energy adoption or climate policy.
It's really a broader transformation driven by growing demand for power,
industrial modernization, you've got electrification, grid expansion,
digital infrastructure, and of course the need for
greater reliability across the global economy.
And perhaps most importantly, the conversation highlighted that many
of the companies benefiting from this transformation may not be the
obvious names investors typically associate with the energy transition.
Thanks everyone for joining us on TCW's Investment Perspectives podcast.
For more information on TCW strategies, please visit tcw.com.
Thanks for listening and we'll see you next time as we continue
exploring the trends and opportunities shaping global markets.
Thank you for joining us today on TCW Investment Insights.
For more insights from TCW, please visit tcw.com/insights.
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