Hormuz and the Accelerated Rise of Electrotech, with Daan Walter

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

How emerging markets went electric

Paul Chapman: Looking through that developing-world lens, can you give us a sense of what has happened in power generation at that decadal level?

Daan Walter: It was, in fact, the trends we've been spotting in the emerging markets that drove us to write this report on these deeper drivers. Many emerging economies don't have much money to spend, can't afford to be frivolous with new technology like playing around with EVs, and don't have strong climate policies. Yet we've seen, across the board, these emerging economies rapidly moving toward this new electrotech.

These are exponential curves. Take the Pakistan solar story. When people noticed that their central, fossil-run grid was getting more and more expensive, they very rapidly moved towards solar power, going on the market themselves and buying their own solar panels, from Alibaba and the like, to put on their roofs. Or Indonesia, where we have lately seen a very rapid uptake of electric vehicles.

Of course, much of this is driven by China's industrial policy. China has built a tremendous amount of manufacturing capacity in electrotech and, over the past five or six years, has been looking for markets around the world to deploy it. Europe and the United States were, of course, target markets for China, but in this era of a new Red Scare towards China from the West, that has turned out harder than China thought. So now they're pivoting all of that capacity into emerging markets, selling into markets from Brazil to South Africa to Indonesia.

The moment solar beat gas and coal

Paul Chapman: I've got a couple of questions there. The first is on batteries: is that the technology that unlocked this as a no-brainer system to have, and are home-scale batteries available and getting ever cheaper? The second is that I imagine it's quite hard for governments to get statistics on households using this kind of electrotech ecosystem. Might we actually be undercounting the prevalence and relevance of the green electron in emerging markets?

Daan Walter: On the statistics, this is very challenging, and it's exactly what we see at Ember, where we do a lot of data analysis and bring a lot of different data sources together. In many emerging economies, for instance, there is quite a large discrepancy between registered imported solar panels and utility-scale solar panels installed. National governments in Nigeria or Kenya don't track decentralised installed solar as well, so the reported numbers there are much smaller: mostly utility-scale, with some rough estimation of decentralised solar on top.

But the import statistics don't lie. You see gigawatts entering Africa, gigawatts entering Southeast Asia. So you know those solar panels must be going somewhere, and you can very easily infer that they're probably going on people's roofs without anyone ever knowing.

On batteries being the breakthrough: yes, but I think the foundational breakthrough is cheap solar power, because that's where the electrons come from. And in the months leading up to the closing of the Strait of Hormuz, we hit a very exciting moment in the transition: solar power hit capex parity with fossil generation. By that I mean looking just at upfront costs, not the running cost of burning gas, but megawatt-hours per dollar invested. Solar is now a better investment than gas or coal.

That's a huge deal in emerging economies, where borrowing costs are high, and people have a small purse. They need to pick whatever is most cost-efficient right now. We spotted this moment somewhere towards the end of 2025, when panel costs and the rest of the solar kit kept falling to the point where we hit capex parity. Combine that with those cheap batteries, and you have this revolution.

Is China's solar price real?

Paul Chapman: Out of interest, and I know this is probably a difficult question, how much of getting to that parity is subsidised by China, and therefore artificially low? Or is this now the real-world economics of how cheap it is to produce a solar panel?

Daan Walter: There's some really good analysis on this, for instance by the International Energy Agency, and we have looked into the work of DNV GL and BNEF as well. What you can roughly see is that China is indeed selling its solar panels effectively at cost: maybe 2 or 3% below, maybe 2 or 3% above, but roughly at cost. You can definitely call that a subsidy, because it means they're not making money and are still investing. Where does that money come from? In part, of course, state support.

But it also shows that even if you started to make a margin on this, we're not talking about solar panels being twice as expensive, or 50% more expensive. If you take those subsidies away, you add a few per cent to your solar cost, and it would still be incredibly competitive.

The $100 battery

Paul Chapman: Let's put a pin in that and go back to batteries. This might sound naive, but is a home-scale battery, one that can last you through the night, now readily available and cheap enough to make it an easy hook-up in the developing world?

Daan Walter: Increasingly so, and stunningly so. More so than we see in the West, where our own tariff structures and other things make us a little blind to how cheap batteries from China have truly become. A few years ago, we were talking about a few hundred dollars per kWh to install stationary storage at utility scale, and even more in your home: maybe even thousands of dollars per kWh.

Over the past couple of years, costs have absolutely plummeted. We're seeing credible records from China at utility scale of some $50 to $75 per kWh, and credible home storage solutions, such as plug-in batteries you simply plug into your system, coming in at around $100 per kWh. That is a transformational cost. If you have a smaller budget, you can buy one or two of those batteries and at least power your TV, your phone and your lights in the evening. As your budget grows, you can buy more on top.

And these batteries continue to fall in cost. We've seen an order of magnitude cost reduction over the last decade alone, and we shouldn't be surprised by another 30, 40, 50, maybe even 60% reduction over the next five years.

Pakistan's stranded utility problem

Paul Chapman: Are we seeing utilities in the developing world struggling? Are we seeing bluer skies in Jakarta? Can you give us some sense of how this rapid uptake is shaping the societies where we're seeing it?

Daan Walter: To a large extent, the fact that these technologies are small and modular, so you can buy a small solar panel first, then a second one, then a battery and then an EV on top, is much more in line with the way people in emerging economies live anyway.

On utilities specifically, we see two models. In countries that have not yet developed much centralised utility infrastructure, this might be a pure leapfrogging moment: in the same way these countries leapfrogged directly to mobile phones and skipped landlines, they can now skip directly to a more decentralised electricity system.

But in countries that made the leap into a more centralised, fossil-powered system over the past decade, Pakistan for example, we see real issues. About a decade ago, Pakistan started a huge build-out of new power plants, LNG, Chinese coal and so on, which raised power prices for people. Normally that would have been the end of the story, because that was the only way you could get electricity. But now people have an alternative. They can go on Alibaba, order a solar panel, pick it up at the port, take it home, install it, and there you are.

That's a big turnaround for these countries, and a big problem for the centralised utilities that have put billions of dollars down and are now finding that people might not need or want their service, especially not at the price they are charging.

Blue skies over China

Paul Chapman: Are there fewer smog days in Beijing, in Jakarta, in Mumbai? Are we seeing those emissions drop?

Daan Walter: Yes. Famously, if you go to China now, you get pretty nice blue skies in many cities, which was unthinkable as little as 10 years ago. That is also a huge point of attraction for other Asian countries. They see it as a point of pride, something they also want to achieve. It's a sign of wealth to achieve that.

Many countries are still early in their EV transition. China, of course, is further along: well over 50% of car sales are EVs right now, and a fair bit of the stock. China is already avoiding about one to one and a half million barrels of oil per day through its own EV fleet alone, and has been at significant numbers for a couple of years. This is exactly the direction of travel we see taking place in other countries, primarily in Southeast Asia, maybe even more because of the smog than because of CO2 emissions.

Hormuz as the second oil shock

Paul Chapman: When the war began, the world was upended. In the short term, it has reminded the world how fragile the just-in-time hydrocarbon system we've built is. Generally speaking, the oil has flowed surprisingly well, but the products haven't, and hydrocarbon-poor and refining-poor countries have borne the brunt of it. What short-term impacts did you see over the following months, into the early summer? I'm thinking of that New York Times article on electric scooter sales in June.

Daan Walter: I think there are two important things to talk about with Hormuz: the numbers and the narrative. On the numbers, in the immediate term we saw emerging economies, particularly in Asia, affected very quickly. Asia, with Europe, is the largest importer of fossil fuels, and most of the fuels coming through the Strait of Hormuz were supposed to go to Asia. So we saw massive curtailment of industrial capacity and four-day working weeks, as the rest of the world priced Asia out. In response, we're now seeing an acceleration of anything electric, anything solar and wind, across these economies. Some of it is government-organised, but it is also individually organised, with companies, people, and households organising their energy, electricity, and transport with electrotech themselves.

The second thing, which I think is underappreciated, is the longer-term narrative change that Hormuz has brought to the energy sector. It is akin to the twin oil shocks of the 1970s. 1973 was a big shock, but it could still be passed off as a one-off that would never happen again if we handled our diplomacy in a smarter way and diversified. 1979 showed that it can happen again, and even in a worse way.

Hormuz is also a 1979. It is the second part of a twin shock, after Russia's invasion of Ukraine cut Europe off from its gas. Europe went to the open market and spent enough to price Asia out and get its gas in. Now the second shock is doing something similar, but more directly: Asia is again getting priced out of the market and left in the cold.

Ten years ago in Asia, you could credibly say that you could rely on fossil fuels, that they would always be there. After Ukraine, you could say this was maybe a one-off, and that better diplomacy and more diversified imports would manage it. Today that narrative has fundamentally changed. Fossil fuels turn out to be the more intermittent fuel than solar and wind, intermittent on a yearly scale. Who knows what war might start on the other side of the world? Others start pricing each other out of the market, prices rise for us, and we catch the brunt of it. Beyond the numbers, that narrative change, and its impact on consumers, companies and countries, specifically in Asia, is almost the biggest impact.

Fuel dependence versus technology dependence

Paul Chapman: This is why it's interesting to split out the developed West and the developing world. For the West, there's the narrative, and the reality, that you're swapping one insecurity for another. Europe is stuck in the middle of this, swapping hydrocarbon dependence and scarcity for critical minerals and technology dependence and scarcity. Firstly, is that a valid narrative? And secondly, presumably that doesn't worry the developing world too much. For the most part, they're not in the geopolitical game of aligning with one or other of the dominant powers, they don't face the same concerns over critical minerals suddenly being shut off, and they're not trying to manufacture weapons, technology and chips themselves. Are they free of that worry, so that hydrocarbon scarcity, and the massive capex and infrastructure build it requires, simply accelerates the trend towards the electrotech world?

Daan Walter: They're also worried, but I think we need to be precise with our dependence terminology. Simply put, there are two types of dependency: technology dependence and fuel dependence. In the fossil system, most countries in the world are technology dependent, importing cars and gas turbines from other parts of the world, and they are fuel dependent too. In the electrotech world, you can be technology dependent, because you still need to import your solar panels and electric vehicles, but you cannot be fuel dependent, because the fuel literally falls from the sky.

The dependence people mostly worry about right now is not technology dependence. Indonesia has not long worried about cars coming from China, Germany or Mexico. What they worry about is someone cutting off their fuel supply. Then the game is up very quickly, especially if you don't have much in reserve: within a few weeks to months, you are cut off. That's much scarier than being cut off from technology. If I am Vietnam and someone stops selling electric vehicles or solar panels to us, the existing ones still run perfectly well as long as the sun shines and the wind blows. The only thing I should worry about is that I cannot expand my energy system. All the technology I have today, I can still run. It's a very different type of dependency.

That's not to say technology dependency isn't a worry. It always has been, including for fossil technology: being too dependent on a couple of countries that produce fossil technology is also very risky. But it's on a different timescale. These are risks that affect your economy over a decade, not over a couple of months. Fuel dependency is what most people are focused on at the moment.

The straw that broke the camel's back

Paul Chapman: Do you think we'll look back on this as a profound event in the direction of the energy transition?

Daan Walter: Yes. What's interesting is what will happen over the next couple of years. We were seeing a clean forecast line, if you will, from fossil growth to a plateau to a decline in fossil fuels, and with that, global emissions. With all the chaos in global markets, this might actually accelerate that trend, but we might not be able to see it in the data, because the data will become increasingly chaotic. In oil or energy crises, energy data shoots up and down and left and right. So this is probably something we can only start calling significant in the data five or six years from now, once it is all behind us.

But yes, I very much suspect this is the straw that broke the camel's back for the fossil industry. There was already so much speaking against it on economics, on geopolitics, even on the raw physics and efficiency of these technologies, and now the geopolitical argument becomes even stronger. That's why we see major outfits like DNV GL, which I think released its new energy outlook on the day we recorded, saying that fossil fuels peaked in 2025: from 2026 they are going down, and they are never coming back to 2025 levels. Major outfits are starting to call a peak in the fossil system because of Hormuz.

AI, sold-out gas turbines and the age of power

Paul Chapman: AI has arrived on the scene, and across the developed world in particular we're seeing a hockey stick in power demand from the amount of compute every human is going to want access to. We keep hearing about an all-of-the-above approach: that we need all of these fuels and technologies, and there's a massive distinction between the two, to meet that demand. Does that prolong the fossil fuel world, or has it been woven into your analysis?

Daan Walter: We've just written a report on exactly this topic, called The Age of Power, looking at the interplay between infotech in general, now in its latest iteration of artificial intelligence, and electrotech. These two technology groups are deeply intertwined. They're built on the same components, with the same minerals and the same technology and software mindset. And AI is now running into energy bottlenecks all over the place: supply that cannot scale fast enough, and grids running into bottlenecks.

Across the board, AI needs electrotech to scale, on the demand side, the connection side and the supply side. Gas is already sold out: gas turbines are sold out for almost a decade. The rapid scaling of AI has shown that we cannot rely on the old guard of technologies to supply this new technology, which is exactly why more and more tech companies are getting very interested in solar and wind, first as a supplement and otherwise as a full 24/7 set-up with batteries to power their data centres.

It works the other way round too: electrotech needs AI and infotech to scale. Highly decentralised systems, where we all have our own battery and solar panel but still want to share energy with each other, are far too complex for a central control room. Only software, and only AI, has the flexibility to respond to random and weather events and run those systems in a smarter way.

So we see the AI revolution very much as an acceleration of the electrotech revolution. It might postpone the phase-out of a few fossil fuel plants, mainly in the United States, but in the scope of the whole world it is hardly significant for fossil fuel demand. We do not expect the current plateau in fossil fuel demand to extend by much more than a couple of months, or a year or so, because of it. In the end, this will also be mostly renewable powered.