The Productivity Conundrum (Part IV of IV)
Issues to be addressed in this paper
In November 2018, I wrote a research paper called The Biggest Opportunity of a Lifetime? In it, I made a strong case for fusion energy and was subsequently at the receiving end of a fair amount of stick from some readers who argued, and probably continue to argue, that fusion energy is 30 years away and always will be.
In this final part of my paper on the productivity conundrum, I will share with you the latest developments in this long-running saga, and I am pleased to report that the sceptics may finally have been proven wrong. Fusion energy is definitely coming, and probably sooner than you think. It has admittedly taken far too long to get this far, but there is finally light at the end of the tunnel. After some important breakthroughs more recently, it is no longer a job for the scientists. The underlying theory has now been proven, and a suitable approach has been established – actually more than one, as you will see below. From this point onwards, it will be a job for the engineers to scale up the technology to a point where it becomes both technologically and financially viable.
When you read what is to follow, you will probably notice that this paper is different from most of my other papers – more technical in nature. The reason is simple – fusion energy is the single most important innovation in the post-Industrial Revolution era, hence why it is critically important that you understand the wider ramifications. We all dream of the occasional 10-bagger in our investment portfolio, but this one could exceed even the wildest imaginations. Investment opportunities rarely come bigger than this one.
You may wonder why I write about fusion energy in the context of pedestrian productivity growth. Why not write about in the context of climate change or disruption? That is indeed a fair point, and there shall be no doubt that the fusion story would fit seamlessly into both of those stories as well. Having said that, this research paper is about productivity, and the introduction of fusion energy – i.e. the introduction of an energy source that can be delivered to the end-user in virtually unlimited quantities at a very reasonable price – will do wonders to productivity, hence why it belongs in this paper too.
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Energy’s impact on productivity
Global GDP growth (in real terms) began to slow all the way back in the 1970s (Exhibit 1), at about the same time as governments began to throw serious money after renewables. During the last 50 years or so, global GDP growth has been on a near-constant decline, and that is despite the world ploughing ever more capital into renewables, and renewables accounting for a larger and larger share of total electricity generation.
In this paper, I will assume that productivity growth, and therefore also GDP growth, is defined by the cost of energy. The logic behind this assumption you will understand if you read chapter 7 in my book, The End of Indexing.
Let me re-introduce one of my favourite economic equations:
∆GDP ≈ ∆Workforce + ∆Productivity
In other words, if GDP growth is decelerating (as it is), either workforce growth or productivity growth, or both, must be slowing. The global workforce grew quite fast for much of the 1960s, 1970s and 1980s, as the baby boomers joined the workforce. Therefore, decelerating workforce growth cannot be the only reason why GDP growth has slowed over the last 50-odd years.
That brings me to the concept of Peak Oil which is a largely misunderstood concept. Whilst it is often interpreted as a school of thought that subscribes to the view that the world is about to run out of oil, in reality, Peak Oil is about the world running out of cheap oil.
Think about it the following way: while oil production has continued to grow, it has come at the expense of ever lower interest rates and the depletion of capital that goes along with that. Producing a barrel of oil in North America ties up more than 30 times more capital than it did at the peak of the second oil crisis in 1980, and that is having a devastating impact on productivity growth. For many years, the global economy benefitted from picking the low-hanging fruit when producing energy, but that fruit is long gone. The $64 million question is therefore – does a cheaper energy source exist, and can it be successfully mined? The answer to both of those questions is a resounding “yes”. Let me explain.
Why renewables are not the solution
Renewable energy forms are widely perceived to offer the solution the world is so desperately looking for, and many investors appear to have positioned themselves accordingly. Even respectable media like the Financial Times are gung-ho about wind and solar and frequently argue that abundant amounts of cheap, clean power will soon change everything for the better (see for example here).
Let’s take a closer look at that argument – cheap and clean power? One cannot argue against the claim that wind and solar offer access to clean energy. Most of the environment problems caused by fossil fuels will evaporate if we convert to renewables. However, as far as the cost is concerned, there is a problem. According to data from the EU, for every percentage point increase in the use of renewables in the electricity mix, the electricity bill has increased by 4.25 percentage points, and by almost 6 percentage points if one were to exclude solar-rich Portugal and Spain (Exhibit 2).
In other words, if renewable energy is getting cheaper, households, at least those in Europe, haven’t benefited yet. As you can see, across Europe, the more electricity that is generated by renewables, the higher residential electricity prices are. An electricity bill rising faster than CPI is akin to a non-productive use of capital and affects GDP growth negatively.
The underlying problem is the unreliability of both wind and solar as the primary energy source. The sun doesn’t always shine, and the wind doesn’t always blow. Alternatively, it is sometimes too windy, and too much electricity is generated, hence why grid prices go negative occasionally. This problem will eventually be solved when reliable grid batteries are introduced, but we are still years away from that.
According to an industry insider I discussed this topic with a few weeks ago, the UK grid price goes negative almost daily now. Wind accounts for such a big percentage of UK electricity generation that, almost every day, supply exceeds demand for short periods of time, leading the grid price to dip below zero momentarily. It is essentially this unreliability that causes electricity prices to be higher, the more of total electricity generation that is based on wind and/or solar, as a risk premium must be built in.
The implication of this is that productivity growth, and therefore also GDP growth, will continue to slow, unless (until) we come up with a more reliable, and a more cost-effective, energy source, and that is where fusion energy enters the frame. This doesn’t imply that there is no role for renewables at all. There most definitely is, but governments will come to realise – if they haven’t figured it out already – that they should never allow renewables to account for most of the primary energy supply.
What is fusion energy?
Fusion and fission energy are both nuclear energy forms, but that is about as far as the comparison goes. When you create energy in a fusion reactor, you essentially do the opposite of what you do in a fission (conventional nuclear) reactor. As you probably know, fission is about splitting a heavy, unstable nucleus into two lighter nuclei, whereas fusion makes two lighter nuclei collide, which releases vast amounts of energy (source: Duke Energy). In The End of Indexing, I provided some further insight into what fusion energy is. The following few paragraphs are from my 2018 book:
“Fusion is the most basic form of energy in the universe. It is what powers the sun and the stars, where energy is produced by a nuclear reaction in which two atoms of the same lightweight element, usually an isotope of hydrogen, combine into a single molecule of helium.
When scientists attempt to replicate that process, the most important ingredients are sea water and lithium, both of which are in ample supply; hence vast amounts of energy could be produced at a very reasonable cost - at least theoretically. Even better, the fusion process does not suffer from all the safety issues that accompany traditional nuclear power. So far so good, but there is a problem – and a big one at that.
Researchers can produce plenty of energy from fusion but not in a controlled way. The best example is the hydrogen bomb, where a huge amount of energy is released in a highly destructive manner. If the same amount of energy could be released gradually – in a controlled manner – we would have found the eternal solution to planet Earth’s energy requirements.
We would have virtually unlimited access to cheap energy, and greenhouse gasses would be a thing of the past. There would be little nuclear waste, and productivity would rise dramatically across the world, effectively dealing with the debt overhang. These factors in combination would resolve some of the biggest challenges mankind is faced with today.
Having said that, creating a controlled fusion reaction has proven very difficult. Because the nuclei have the same charge, they will electrically repel each other. To overcome the natural repulsion of the nuclei, you must give them sufficient energy. That means heating them up to about 12 million degrees but, as you heat a gas or plasma up, it expands and the atoms move further apart.
The trick is to contain the heated plasma long enough that the nuclei have the chance to collide and overcome the repulsive force. Researchers have now reached that point and have achieved energy breakeven, but there is still a long way to go, before the technology can be rolled out commercially.”
Fission is a very powerful energy form, but the powers released in a fission reactor are not even close to those released in a fusion reactor, reason being that fusion converts a much higher percentage of the mass within an atom into energy (Exhibit 3). This means that it will require a surprisingly modest amount of water and lithium (the two key ingredients in a fusion reactor) to fuel the entire world. Even better, the cost of doing so will be next to nothing, once the reactor has been built, which is admittedly very expensive.
The lithium from one laptop battery combined with half a bathtub of water will generate 200,000 kWh of electricity – the same as 70 tonnes of coal and equal to 30 years of UK per capita electricity consumption. The fusion process – converting hydrogen to helium – releases about ten million times more energy than what is released when burning the same amount of hydrogen (source: MacroStrategy Partnership LLP).
Assuming we have plenty of seawater (which we do, at least for a few million years), the real question is whether we have enough lithium to justify the significant investment that shall be required to construct fusion power plants all over the world. Estimates of total global lithium reserves vary dramatically, but there is a simple reason for that. Some statistics do not include reserves from countries that haven’t commercialised its lithium reserves yet, whereas others do. Take for example Bolivia. As you can see in Exhibit 4 below, the biggest reserves are in Bolivia, a South American country that holds about one-quarter of already identified reserves worldwide. Statista, on the other hand, doesn’t include Bolivia at all in its statistics, as the lithium industry in the country is still nascent.
Back to the question – for how long can we expect the world’s lithium reserves to last? According to the United States Geological Survey, already identified lithium reserves stand at approx. 80 million tonnes worldwide. Unfortunately, when trying to establish how long those 80 million tonnes will last, it gets a bit more complicated. For example, none of the estimates I have come across assume a gradual conversion to fusion energy, so you need to take what is about to come with a grain of salt.
Having said that, if you assume that the global car fleet (light vehicles only) will grow from about one billion today to three billion by 2050, and you assume that all those vehicles will be EVs fuelled by lithium-ion batteries by then, PV Magazine has calculated that we will run out of lithium in about 100 years, and that is the most pessimistic estimate I have come across.
However, given the huge research effort underway to identify a material that can replace lithium eventually, I wouldn’t be overly concerned about that. Industry specialists have said to me that you should not assume lithium to go into batteries for more than the next 10-15 years.
Why fusion is safer than fission
The word “nuclear” will immediately turn many off the idea of introducing fusion power plants, but that would be a big mistake. We are all aware of the problems associated with fission – the occasional reactor meltdown (e.g. Chernobyl), plenty of nuclear waste, proliferation of nuclear weapons from enriched materials, etc. – but almost all those problems will disappear when we convert to fusion. A fusion reactor cannot melt down, nor will it provide the enriched materials which are required for the manufacturing of nuclear weapons. There is admittedly a limited amount of nuclear waste but, unlike the nuclear waste emanating from a fission reactor, it will degrade relatively quickly and can be recycled and used again within 100 years.
The leading fusion contenders
Lithium is either mined, or it is extracted from brine water with about 87% of global lithium supplies coming from the latter (source: GrabCAD blog). There is a range of companies around the world with significant exposure to lithium. I shall not list them here; suffice to say that there is even a lithium ETF called Global X, which is listed on NYSE (ticker symbol: LIT). It consists of lithium miners and lithium-ion battery manufacturers and was created to provide an easy solution to investors looking to get exposure to the growth in EVs and energy storage solutions.
When commercialisation of fusion energy takes off, assuming lithium will be the fuel in fusion reactors, and that the car industry will continue to base EV batteries on the lithium-ion technology, lithium prices will probably go through the roof. One caveat: if fusion energy is deemed critical for the survival of mankind (which is probably more likely to happen than you would like to think it is), the use of lithium for other purposes may be severely restricted, dramatically changing the storyline. It is impossible for me to quantify that risk but, as I said earlier, new technologies are underway which will make us less dependent on lithium longer term, so I wouldn’t have thought this risk to be significant.
Before I go through the various fusion technologies that exist at present, I should point out that the bull story on lithium is unaffected by the choice of fusion technology. They all use lithium to fuel their fusion reactors.
International Thermonuclear Experimental Reactor (ITER)
ITER is an international fusion project, headquartered in France. ITER is one of only two public-sector fusion research projects of any significance – the other one being NIF (see later). ITER has recently changed the expected completion date of the first phase of its project – the assembly of the first machine – from 2027 to late 2025, and the completion of the first, fully operational reactor to 2035 from 2040 previously, suggesting that momentum is building.
According to ITER (see here), the most efficient fusion reaction is the one between the two hydrogen isotopes, deuterium and tritium. Make those two isotopes collide, and the fusion produces helium and a neutron (Exhibit 5). ITER’s approach is based on so-called magnetic confinement. It is a longer confinement, at least when measured in nanoseconds, which increases the probability of atoms colliding, which is the essence of fusion.
The ultimate objective behind the ITER research project is to drive the Q ratio (a measure of power out vs. power in) to at least 10:1. Researchers have more recently managed to get the Q ratio above 1:1 for the first time – i.e. more power can now be produced than the power it takes to produce it. With the technology now proven, from here on, it is more of an engineering than a scientific challenge, which is probably why ITER management are becoming more optimistic on timing.
One further note on ITER: when preparing for this paper, I noted that virtually all the largest economies (the EU, USA, Russia, China, India and Japan) are contributing financially to this research project, which is an indication that finding a cheaper source of energy is paramount to everybody. You can read more about ITER here.
National Ignition Facility (NIF)
The alternative confinement approach to magnetic confinement is called inertial confinement where the plasma density, through compression, is increased to about 100 billion times that of magnetic confinement, but only for a few hundred nanoseconds. Again, the objective is to make the atoms collide.
NIF, which is based in California, is the leading proponent of this approach. NIF has also managed to drive the Q ratio above 1:1; however, the Q ratio entirely ignores the loss of energy due to inefficiencies in the laser and in converting the laser light to x-rays. This has been a significant challenge for NIF, and you get the feeling when reading about NIF that this approach to fusion may not contain the winning formula.
That said, only a few months ago, NIF said that, after a decade of challenges, it’s finally homing in on the right range to reach productive nuclear fusion (you can read about that here), so I should probably not write them off yet. You can read more about NIF here.
Founded in 1998, California-based TAE Technologies is the best-funded of all private fusion projects. It has attracted capital from the likes of Paul Allen’s VC firm Vulcan Capital, Goldman Sachs and Venrock.
In 2019, when the researchers at TAE Technologies heated a ball of hydrogen plasma to 10 million degrees Celsius, they managed to hold it steady for 5 milliseconds with no decay. In the world of fusion energy, that is an incredible feat. Having said that, in order to get more energy out than you put in, you need to hold it steady for about one second (source: Nanalyze), which is a good indication that commercialisation of TAE’s technology is still some way away.
Having said that, the CEO of TAE Technologies, Michl Binderbauer, remains adamant that TAE Technologies can begin commercialisation within the next three years. You can read more about the company here.
Founded in 2002, the Canadian company, General Fusion, is the second best-funded of all the private fusion projects. It is backed by the likes of Jeff Bezos of Amazon, Braemar Energy and Chrysalix Energy.
General Fusion uses a technology called Magnetised Target Fusion (MTF), which uses shock waves to compress hydrogen plasma to reach fusion temperatures – an approach to fusion which, according to General Fusion, is both more cost-effective and faster to develop than the laser technology used by other fusion technology companies. The two approaches to confinement discussed earlier, which are used by ITER and NIF respectively, are both extreme in nature, driving costs up, so General Fusion’s claim could be a very valid one.
The next stage for General Fusion is to complete the construction and implementation of a full-scale prototype, and the aim is to use this prototype to prove that commercialisation of fusion is doable (Exhibit 7). If it works, and early signs are good, General Fusion will most likely be the first to show the world that commercial fusion is feasible.
The company has set aside until 2025 to do that. If everything goes to plan, commercialisation will happen within 3-5 years following that. In other words, General Fusion aims to deliver fusion energy to the grid by 2030 or thereabout. You can read more about the company here.
The British entry into the race for global fusion energy supremacy is called Tokamak Energy. Although established in 2009, Tokamak has only been actively involved in fusion since 2012. In 2019, Tokamak announced that it had reached 15 million degrees Celsius for the first time – about as hot as the core of the sun.
Using a technique known as merging compression, the fusion reactor used by Tokamak Energy releases energy in a process known as magnetic reconnection. Merging compression requires for electric currents to run through the internal coils of the fusion reactor, requiring the power supplier to deliver thousands of amps in seconds (source: The Engineer).
The main difference between the technology applied by Tokomak Energy and the others is the size of the superconductors involved. Tokamak’s superconductors are much more powerful, but the company’s approach to fusion continues to suffer from some critical elements not having been developed yet. Therefore, I don’t think one can come to any reasonable conclusions yet as to whether Tokomak’s approach is commercially feasible or not.
Having said that. Tokamak’s management team share the optimistic views expressed by General Fusion and believe the first power station will be fuelled by fusion energy by 2030. The British government shares that confidence and have, as the first government in the world, started the search for an appropriate site for the first fusion power station. You can read more about Tokamak Energy here.
Commonwealth Fusion Systems (CFS)
CFS, in collaboration with MIT, deploy a technology very similar to that of Tokamak Energy and believe it can deliver fusion energy to the grid within 12-13 years (Exhibit 8). In addition to MIT being involved, CFS has also engaged with the Italian energy company Eni, which has invested $50 million in CFS, underlining the serious nature of this approach (source: oilprice.com).
CFS have managed to sustain fusion for about two seconds, yielding about 300 trillion fusion reactions per second, which is close to the threshold needed for fusion energy to be viable commercially. A fusion reactor, the size of the one used by CFS (about one cubic metre), would generate enough power to support three small cities.
CFS has run into the same problem as Tokamak Energy, though. A large, superconducting magnet must be developed before commercialisation is viable. $30 million has been set aside for research into that. Talking about research into superconductors, a new superconducting material – a steel tape coated with a compound called yttrium-barium-copper oxide – has been developed. It allows scientists to produce smaller, more powerful magnets, which reduces the amount of energy that needs to be put in to get the fusion reaction off the ground (source: The Guardian). You can read more about Commonwealth Fusion Systems here.
About three years ago, the US defence manufacturer, Lockheed Martin, obtained a patent on a compact fusion rector, which is small enough to be fitted onboard a fighter aircraft or a drone. If the system works as expected, the power generated would keep the aircraft flying for about a year without having to refuel (source: siliconrepublic.com).
Another option open to Lockheed Martin would be to use the technology to power homes in communities that are not big enough to justify a conventional fusion power plant. Researchers at Lockheed Martin reckon that up to 100,000 homes could be powered for a year by one of its compact fusion reactors. You can read more about Lockheed Martin’s technology here.
A list of the world’s leading contenders for fusion supremacy wouldn’t be complete without a mention of China. Late last year, the Chinese successfully powered up its largest and most advanced experimental fusion reactor, called HL-2M Tokamak, which is located in the Sichuan province in central China.
This particular reactor uses a powerful magnetic field to fuse hot plasma and can reach temperatures of 150 million degrees Celsius – about ten times hotter than the core of the sun. The Chinese claim to have held the fusion process steady for about 20 seconds. If true, they are miles ahead of anything we have achieved in the West. That said, informed sources tell me that the Chinese tests were conducted under extremely low pressure and are therefore not as convincing as they appear to be. You can read more about the latest developments in China here.
How to invest in fusion energy
First and foremost, we have to remind ourselves that private companies which are engaged in fusion energy are very dependent on further funding, i.e. they are inclined to be overly optimistic in order to attract more capital. Having said that, it is difficult not to get just a little bit excited about the progress made over the past couple of years.
With the exception of Lockheed Martin (more on that company below), none of the companies mentioned above are yet publicly listed, i.e. investing in fusion energy is not that simple and typically requires that you can invest in venture capital (VC) funds. Until a few years ago, private fusion companies struggled to attract capital, which suggests that most investors were of the opinion that fusion energy was still 30 years away. Likewise, the fact that private capital is now plentiful is an indication that investors have become much more optimistic on the expected time horizon.
There is admittedly an alternative to VC investing. EquityZen has created a market place for pre-IPO companies and has been active in both TAE Technologies, General Fusion as well as Commonwealth Fusion Systems in the recent past. Having said that, I cannot vouch for the quality and integrity of EquityZen, as I know next to nothing about them.
The simplest way to seek exposure to fusion energy at this early stage is to invest in Lockheed Martin on NYSE (ticker symbol: LMT). You obviously get exposure to all the company’s other activities if you invest in LMT, but I would have thought that the fusion opportunity is big enough to have a rather dramatic impact on the stock price, if (and I am tempted to say “when”) the company manages to commercialise its compact fusion technology, almost irrespective of how the rest of the company is doing.
Another simple way to seek exposure to fusion energy is to invest in lithium. One can do that through the ETF mentioned earlier (Global X), or one can invest in a lithium mining company. If going for the latter, my preferred option would probably be SQM – a Chilean company listed both in Santiago and on NYSE. Without knowing too much about SQM, I do know that it is the world’s largest lithium mining company, operating in a business-friendly country (Chile) and benefitting from robust corporate management. As lithium-mining countries become the new OPEC with South America becoming the new Middle East, SQM will most likely become the ultimate price-setter on lithium. In any industry, price-setters have one or two advantages others don’t, which is why they tend to be more profitable, hence my inclination to favour SQM.
Whether you go for the ETF option or pick a lithium mining company like SQM, the long-term outlook for lithium prices looks very robust. Supply and demand are (roughly) in balance today but, within a few years, demand will begin to meaningfully outstrip supply (Exhibit 9), and this can only be good for lithium prices longer term.
Finally, before wrapping up this paper, I should point out that, in addition to all the investment opportunities listed above, there is also a long list of shorting opportunities associated with the fusion energy story. If fossil fuel prices eventually go to zero (which they most likely will), those fossil fuel-producing companies who are not embracing a greener future are obvious shorting candidates – and I think Exxon in particular when saying that.
Having said that, you need to think very long term if you get engaged in shorting fossil fuel producers. It is not unthinkable that, long before oil prices go to zero, a crisis of some sort will drive oil prices to new all-time highs and, suddenly, the shorts in your portfolio will be seriously underwater, so be careful. Shorting is a dangerous game.
We have reached a point where science has been largely proven. From this point onwards, it is an engineering rather than a scientific challenge. As I am sure you will have noted from reading this paper, fusion energy is not a one trick pony, though, with many avenues opening up. One can choose the VC route, or one can take the more sedate corporate route and invest in companies like Eni and/or Lockheed Martin. Alternatively, one can choose not to invest directly in the fusion technology but seek exposure through lithium instead.
Whatever way one chooses to invest in fusion energy, the fact that serious private-sector capital is now entering the frame alongside the public-sector capital that has been around for decades is a testament to how far the industry has come. Private sector money of this magnitude would not be made available if commercialisation was still decades away.
Having said that, many questions continue to rumble in the back of my head, and answers to those questions must be found before an investment can be made. For example, think about lithium for a second. At first glance, and as already pointed out, an investment in lithium would make the investment less dependent on picking the winning technology.
That said, as you can see in Exhibit 10 below, an investment in lithium hasn’t always been as enjoyable an investment as one might have thought, if one only reads the headlines. 2018 and 2019 both delivered negative returns and 2020 was only marginally positive. In plain English, it is not demand that drives prices – it is the balance between demand and supply, and markets worldwide have been oversupplied in recent years.
That said, if you flip back to Exhibit 9 for a second, as you can see, the balance between demand and supply suggests quite high lithium prices in the years to come, but one should never underestimate how volatile lithium markets are.
Earlier, I raised the question – how likely is it that lithium at some point will be replaced by another fuel? That would obviously be the ultimate bear signal for lithium investors, and the answer to the question can only be a very firm “most definitely yes”. As I see things lining up in front of me, it is not a question of “if” but “when”, but I take great comfort from the fact that lithium appears to have a very solid, 10-15 year run lined up before any new technology will push it aside.
One more point on the winning technology: I said earlier that, by investing in lithium, you detach yourself from the difficult choice of picking the winning technology but, quite frankly, I would be enormously surprised if only one technology will prevail. Given the different approach to fusion energy in different parts of the world, and the substantial amounts of capital already sunk in all those projects, I would expect different technologies to be deployed in different parts of the world, but this is a very important question to be addressed before investing.
I will now pass the baton to my research team now. One final point before I do so, though. At this stage, I believe we are beyond the point of questioning whether the technology will work at all. Once the science has been proven, and it has, the engineers always find a solution. In other words, somebody will win this race. It is only a question of who that somebody is (are). And the rewards are immense, most likely the biggest you will see in your lifetime, making exposure to fusion energy a must in all portfolios.
Niels C. Jensen
8 April 2021