“The things best to know are first principles and causes, but these are perhaps the most difficult…to grasp, for they are the farthest removed from the senses.” - Aristotle

Swapping Eeyore (3Q23 letter) with Aristotle isn’t easy, especially since we have far more in common with the former than the latter. However, the Energy Transition is extraordinarily complex and capital-intensive, and the implications of recent regulatory and capital allocations decisions are manifesting themselves in real-time. Thus, it seems appropriate to turn to a first principle assessment of the fundamental assumptions underpinning consensus views of the path to net zero.

One of the benefits of being sector agnostic is that we aren’t beholden to a predefined set of expected or acceptable results. Instead, we rely on basic economic, engineering, and mathematical analysis to determine a range of possible future outcomes.

This approach is useful when attempting to disaggregate the Energy Transition into analytically manageable components. Few topics are as intertwined, nuanced, and prone to circular references as the push to decarbonize global energy systems. Adding to the complexity is the fact that discussions about climate change have become so fraught with emotion - they are so close to “the senses” - that attempts to balance benefit with cost or to differentiate between what can be done today with what may or may not be scalable and economic in the future are often met with a mix of curiosity and animosity.

Investors don’t get the benefit of emotion, however. Allocating capital to both generate a reasonable return and to facilitate efforts to expand and decarbonize global energy supplies is far from straightforward. Out of necessity, we revert to first principles to understand what the future may hold and to identify investment opportunities within.

Click here to continue reading the full commentary.