Elon Musk stole all the headlines – with a decent supporting role from South Australian Premier Jay Weatherill – on Friday, as the two men announced that Tesla's largest ever battery would be built 200 kilometres north of Adelaide.
Which is big news in itself, but those headlines are masking a subtle shift for investors. Well, subtle in pace, at least, but the ramifications are huge. Climate change might have become politicised – to say the least – but the changes to energy generation and storage are fast becoming almost completely economic – and that will have significant ramifications for the stock market.
![Tesla chief executive Elon Musk (left) and SA Premier Jay Weatherill announced the world's biggest lithium ion battery ...](http://web.archive.org./web/20170712043607im_/https://www.fairfaxstatic.com.au/content/dam/images/g/x/7/q/8/1/image.related.articleLeadwide.620x349.gx7pwa.png/1499584875259.jpg)
Mixing politics and investing is never a good idea. One blinds you to the other, which is neither good for your portfolio, or the country.
Those who've been hoping for groundbreaking technologies to revolutionise the world would have lost a fortune backing every ASX company with a dream, no matter how worthy.
But the reverse is also likely true. Those who snub their noses at climate change – or simply expect no change in the energy market – are taking a significant risk.
The cost of traditional energy generation and distribution is skyrocketing. NSW energy retailers have put through double-digit price increases just this month alone. And at the same time, the cost of alternative energy generation – particularly solar – continues to fall. As does the cost of storage.
And those trends are playing out at a macro level – it's incredibly unlikely we ever see a new coal-fired power station built in Australia (unless for purely ideological reasons) – and at a micro level – households continue to install solar panels and, increasingly, batteries, hand over fist.
Whether your politics welcomes or decries the changes, the economics is clear – the world is moving away from coal (and, to a lesser extent, gas) at speed.
No, it's not the same velocity at which we change prime ministers, but hey, nothing is. However, given the usually sleepy pace of change when it comes to energy generation, the uptake of solar and storage is incredibly quick.
Which is bad news if your business relies on long-term old-style power generation. Even the likes of AGL boss Andy Vesey has acknowledged that the company's own future isn't in coal. Which is bad news if you like to carry lumps of the stuff into parliament, for example.
There are no protesters. No barricades. No one is going to overthrow the government. But the energy revolution is quietly underway. And investors need to be at the forefront of the change.
No, not to hasten it, but to benefit from it – and to make sure it doesn't damage your portfolio along the way.
Change is happening
Let's say you run a lemonade stand. It's an expensive stand, requiring $1 worth of lemons for each lemonade. You sell each lemonade for $1.10, so you're happy. After all, you're the lowest-cost lemonade stand in your neighbourhood.
Now, the guy across the road – let's call him Elon – has a lemon tree but it's small, so each lemon produced from it is expensive. But his tree keeps growing. As it produces more lemons, the cost-per-lemon falls.
You have an advantage for a while: you're the stand everyone knows. You employ other kids, so you're important to the economy. And some of your customers don't want a new lemonade stand. They like the current one.
But then Elon hits a tipping point. His lemons are cheaper than yours. He starts selling lemonade for $1. You start selling less lemonade. That's OK for a little while: you put your prices up to $1.20, and most of your current customers keep buying. But, little by little, customers drift away. Elon's lemonade is cheaper, but your costs mean you can't cut prices to compete. Plus, some people want to shop with Elon because his lemons are organic.
It's an imperfect analogy, but it's actually more kind to the incumbent than the current energy situation. That's because in the real world there are a heap more fixed costs for old-school energy providers – old power plants requiring maintenance, expensive workforces and the like. Plus, the per-kilowatt-hour cost of energy can only stay (relatively) low while the plants are at full capacity. If the output falls – because demand falls – most of those fixed costs stay, well, fixed.
Meaning profit falls far, far faster than volume. It's a trickle at first. Then a flood. And given you can't easily lower the cost of power production from coal and gas plants, it's devilishly difficult – if not impossible – to avoid.
Foolish takeaway
You don't have to be a tree-hugging greenie to understand the challenge facing traditional power. Already, one in six Australian households have solar panels, so the horse has bolted. And yes, there are political forces blowing this way and that, but the real issue is far more mercantile. As Bill Clinton might say, it's the economy, stupid.
Maybe solar peters out to nothing. Ditto wind. Maybe battery storage is a flash in the pan. I doubt it. But investors need to be far more clear-eyed. You can be the buggy-whip maker, decrying the coming of the new automobile technology. Or you can acknowledge that the winds of change are blowing: and traditional energy investments have the odds stacked well and truly against them.
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Scott Phillips is the Motley Fool's director of research. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). ScottTheFool@gmail.com