• Steven Bowen

Sustainable Investing weekly blog: 14th Jan 2022 (Issue 21)

 

Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon and a greener/fairer society.

 

Happy New Year, this is our first blog for 2022 and we have made a few changes. As we ramp up our research work,  we are shifting the focus even more to news flow etc that we think should impact company investment cases. Plus our social and legal stories have been shifted to a stand alone blog, along with our views on sustainable investing generally, so they can get the emphasis they deserve. So watch out for these. This weeks top story highlights the accelerating efforts by Deere (& others) to create fully autonomous tractors.  In Alternatives, we highlight the possible IPO by Thyssen of its green hydrogen business,  in Built Environment, its one explanation of why low carbon home heating is taking off much slower than we need, in Grid Management, we highlight the potential in stationary battery storage & in Renewable’s, we cover the recent IEA report on electricity demand. Our “one last thought” highlights a possible breakthrough in developing Li Sulfur batteries (which is more interesting than you may think).


The format of the blog is simple, first our summary of the key points of the story (click on the green link to read the original) and then what we think it means for investors. The focus is on news flow that we think should change the markets perception of the investment case of individual stocks and sub sectors. So not the place to come to for news that has already been well covered in say the FT. Our approach is unashamedly long term, so we ignore short term noise.


Top story : Are we now one step closer to a true automated tractor ?

 
 
 

We’re one step closer to self-farming farms (Vox)

Main points of the story as published

  1. At January’s CES 2022 in Las Vegas, John Deere unveiled its first fully autonomous tractor which it will begin selling later this year. Based on Deere’s existing 8R, the largest in its range of row crop tractors, the tractor once set up it can be controlled remotely by a mobile device while the farmer works elsewhere on the farm. The tractor uses six pairs of stereo cameras and a geofence to detect obstacles and check its position, accurate to within less than 2.5cm.

  2. The price of the new tractor is yet to be announced but existing 8R models can cost over US$600,000. Deere is also yet to announce whether it will be available for outright sale, lease or offered via Farming-as-a-Service (FaaS). Other open points include ownership of the data gathered during operations, a highly contentious issue.

  3. Deere’s two major rivals, CNH and AGCO, have both trialed concept models for some time but are yet to announce a timeline for commercialisation. Indeed last year CNH bought precision ag/autonomy specialist Raven and announced a JV with Monarch Tractors, which makes autonomous electric tractors (see an earlier blog for more detail), suggesting CNH is still someway off being product-ready.

Our take on this

  1. We would not underestimate the importance of this product launch as a catalyst for accelerating the adoption of robotics across farming activities. It is comparable to Tesla’s launch of the Model S, only with more people paying attention as evidenced by the widespread media coverage. As the article noted, “the simple fact that [Deere is] putting an autonomous tractor on the market will change the way farming works”. Other major Ag OEMs (AGCO and CNH) will be forced to accelerate their plans.

  2. By building familiarity and trust among farmers, Deere’s product launch will likely speed up the introduction and adoption of agbots across a range of farming tasks including harvesting top fruits and soft fruits. With Deere having already commercialised its See-and-Spray technology, the era of next gen, hi-tech farming is imminent.

  3. Important questions however need resolving including the economics (cost and finance model e.g. FaaS), liability in event of accidents, and data ownership.

  4. Tractor form is another open point. Deere has chosen to add autonomy to a conventional, high HP, heavy-duty tractor. But such tractors cause compaction while swarms of smaller, lighter agbots also bring greater operational resilience. If a large conventional tractor breaks down, the farmer may well have to stop. But if one out of a fleet of ten agbots breaks down, the other nine can continue the task.

  5. Overall, we regard precision ag and ag robotics as two of the most exciting opportunities in the agtech space. Currently worth less than US$1bn, robotics has the potential to be c. US$30bn p.a. market with a near-term 20-25% CAGR out to 2025. We discussed this in more detail in “Agricultural technology – field of dreams”, published 9th December 2021.

Alternatives : Green hydrogen – will Thyssen IPO  Thyssenkrupp Nucera? 

 
 

Betting on hydrogen hype Thyssen eyes $687m IPO ? (Reuters)

Main points of the story as published

  1. Thyssenkrupp’s electrolysis business is aiming for proceeds of up to E600 million ($687 million) by selling new shares in a possible initial public offering this year, betting on the $130 billion hydrogen sector it supplies. They plan to keep a majority in the business – which is being rebranded as Thyssenkrupp Nucera – following any IPO and aims to maintain the current shareholding ratio with its Italian co-owner De Nora IPO-DENR.MI.

  2. The E500 million-600 m in potential IPO proceeds would correspond to a stake sale of roughly 10-20% based on a valuation range of E3 billion to 6 bn that analysts have put on the division. The company could be listed in the spring. In the fiscal year to end-September, Thyssenkrupp Nucera posted earnings before interest and tax of E27 m, while sales came in at E319 m, a level expected to triple to E900 m to E1 billion by 2025/26.

  3. Thyssenkrupp, which first floated the idea of an IPO of its hydrogen business in May last year, declined to say how much it would sell as part of a secondary offering in case of an IPO. “The market has enormous potential,” Krude (the operations CEO) said, adding “Nucera would invest 200 million to 300 million by 2024/25, of which 150 million-200 million will be spent on strategic moves including partnerships, production and smaller deals”.

Our take on this

  1.  This possible IPO has been talked about for a while. We don’t have a view on value yet, but we do see this move as being consistent with our thesis on how the sector/theme will develop in the coming years. First, even just replacing existing dirty hydrogen demand with green could create a big end market, if suppliers can get pricing down enough (a big if)

  2. Second, we see a steady stream of “new” entrants into this market, with supply potentially growing faster than demand. Third, and perhaps most important, is the read through from Nucera’s reported operating margins (c. 8.5%). We would be cautious about taking this as a direct read across for some of the sector pure plays. We expect mid term value to be created and retained by the system integrator’s, who can offer customers an end to end solution.

Built environment – is this why low carbon solutions are slow to develop ?

 
 

Innovation sweet spots – spoiler alert, its not low carbon home heating (Nesta)

Main points of the story as published

  1. The UK’s ability to reach its net-zero goal (now enshrined in law) hinges on innovation such as ‘green’ technologies being successfully developed and adopted widely. Nesta has developed a novel horizon-scanning approach for analysing these green innovations and technologies.

  2. The experimental approach tracks the trajectory of innovations for social good and anticipates when they are approaching a ’tipping point’, where we see a promising convergence of signals from the research, investment, news discourse and policy spheres. In this way, its possible to cut through the hype and develop a clearer picture of whether a given innovation can make the leap to large-scale impact.

  3. Research projects funded by UK Research and Innovation (UKRI)  indicate a strong level of support for low-carbon heating and energy efficiency and management. And analysis also suggests that news coverage and parliamentary debates on some low-carbon heating technologies, such as heat pumps and hydrogen, have ramped up.

  4. But – although low-carbon heating appears to be backed by substantial research funding support and increasing public interest,  this is not matched by an equally significant influx of venture capital investment.

Our take on this

  1. Yes, this is only the UK (& its only VC investment), and we are aware that other countries are looking to push ahead faster.  For instance, according to recent reports (Habeck announces heat pump roll out), Germany is looking to increase the step up their roll out of heat pumps to c. 4-6m by 2030. To give this context  the total European market in 2021 was  1.62 million units sold. Assuming a life expectancy of approximately 20 years, the current European heat pump stock amounts to 14.9 million units. With approximately 244 million residential buildings in Europe, the heat pump market share in the building stock is around 6% – so tiny

  2. Our point is simple, until the UK government creates a joined up policy, that ensures that heat pumps are seen by consumers as affordable (maybe via heat as a service), and that addresses the issues around installation and servicing/maintenance, its hard to see the residential built environment in the UK carbonizing to any meaningful degree. This makes it tough to invest in this theme, at least for now and potentially for many years. We really want to be proven wrong but …

Electricity grid resilience: a boom time approaching for battery storage ?

 

Australia opens $100m funding for grid scale battery storage  (Energy Storage)

  1. The Australian Renewable Energy Agency (ARENA) is opening a competitive funding round to provide up to AU$100 million (US$72.16 million) in support for large-scale battery storage projects. Projects of 70MW or larger that use advanced inverter technologies will be eligible. The battery energy storage system (BESS) projects must also operate in either their National Electricity Market (NEM) which covers most of eastern and central Australia, or the Wholesale Electricity Market of Western Australia.

  2. ARENA wants to promote the way that advanced inverters can help batteries provide synchronous inertia to stabilise electricity grids, a service traditionally provided by centralised thermal generation plants. ARENA CEO Darren Miller said “This funding round will demonstrate the role of advanced inverters in grid scale batteries to provide system stability, facilitating a more efficient transition and accelerate the uptake of renewable generation.” But, he went on to say that while there are “promising signs” advanced inverters could be used to support electricity system stability, there is still a clear need for public sector investment to prove the technology can work at scale.

Our take on this 

  1. At the risk of over hyping this, our view is that the use of grid forming inverters being tested here, combined with renewables and battery storage, could quickly become a major tool that will allow countries to add low cost renewable generation quickly and cheaply to their grids. In turn this could lead to a surge in renewable capacity installation.

  2. The funding round’s aims to build on projects such as the Energy Storage for Commercial Renewable Integration (ESCRI) demonstration in South Australia which was commissioned in 2018 and is Australia’s first ‘virtual synchronous generator’ using a 30MW / 8MWh BESS to integrate growing shares of renewables and support system stability at the far end of the state’s transmission line network. Neoen-Tesla’s Hornsdale Power Reserve energy storage system, also in South Australia, is already being retrofitted to an advanced inverter upgrade, while ARENA also pointed to a study by electricity network company Powerlink Queensland which highlighted the strong potential of advanced inverters.

  3. Australia is not the only country to be working on this, although they have (to the best of our knowledge) the first operating utility scale system (that is not designed to be a stand alone micro grid). The NREL in the US is leading a major programme (NREL To Lead Grid-Forming Inverter Consortium)  to build common standards to allow system interoperability. To quote the NREL “these inverter-based resources are fundamentally changing the physics of the power system by substituting fast-response digital devices for traditional physical generators”. 

Electricity generation: we need more renewable generation !

 

Electricity market report – we need more renewables (IEA)

  1. Record breaking renewables growth (up 8% per year on average) is set to serve more than 90% of net demand growth during 2022-2024. As a consequence of slowing electricity demand growth (c. 2.7% pa) and significant additions of renewable power capacity, fossil fuel-based generation is seen broadly flat in the coming years. The IEA expects coal fired generation to fall slightly as phase-outs and declining competitiveness relative to natural gas in markets like the United States and Europe are offset by growth in China and India. Gas-fired generation is forecast to grow annually by around 1%.

  2. Today’s policy settings are insufficient to cut emissions. In the IEA forecast, power sector emissions remain around the same level from 2021 to 2024, whereas they need to start declining sharply to meet the IEA’s Net Zero Emissions by 2050 Scenario. This underlines the massive changes needed in terms of energy efficiency and low-carbon supply for the electricity sector to fulfil its critical role in decarbonising the broader energy system.

Our take on this 

  1. While 8% pa forecast growth in renewables sounds impressive, as the IEA says, its not enough for most countries to hit their net zero targets. We expect greater efforts by governments  to accelerate the building of renewable electricity generation (German coalition plans for 480-540 TWh renewables by 2030). This is not just an environmental issue any more, in most regions renewable’s are cheaper than new fossil fuel powered generation.

  2. For this to acceleration to happen, we also need materially more investment in our electricity grids, ranging from more interconnections, through increased battery storage (global storage market to hit 1 terawatt hour by 2030 – BNEF), and grid resilience,  to smarter grids and demand management. These are going to be among the big investment opportunities of the coming decade – this is a topic we are going to bash away at as we think its potential is underappreciated.

 

One last thought

Are we getting closer to lithium sulfur batteries (Independent)

This is a topic we used to write on in our old jobs. One of the big longer term technological hopes for batteries is that at some stage we can get Lithium Sulfur batteries to work. Why … because they are theoretically capable of holding up to five times as much charge as the industry standard lithium-ion batteries, and the raw materials are abundant and less environmentally damaging. However, because of their chemistry (they undergo a 78 per cent change in size each charge cycle), they degrade really really quickly or putting it more politely, they are unstable. This work by the University of Michigan suggests a possible solution. It may be still 10 years away from possible commercialisation, but it does make you think about how to model the long term demand for the raw materials that go into traditional Li Ion batteries !