• Steven Bowen

Sustainable Investing weekly blog: 17th June 2022 (issue 36)


Story tags for this blog

electricity market regulation, renewable electricity cannibalisation, green cement, food choices and airships in the aviation sector

Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider climate related transitions and a greener/fairer society.

Just a quick thank you to all of you who have given feedback on the blogs, its much appreciated. Over the next few weeks we will be gradually changing the format, and moving some of the content to substack. More on that later.

This week our top story looks at what went wrong with the Australian electricity market regulation and what other countries/markets can learn. Next up, in Distributed Energy we cover an interesting report on renewable electricity cannibalisation, and how it could impact future investment returns. Then in Built Environment, we cover the challenges facing the dream of green cement & concrete. Finally, in Agriculture, with a look at how the "yuk factor" (yes, its a phrase) might drive the food choices. In our One Last Thought, we cover what might be an early step in the revival of airships in the aviation sector.

Before we start on the stories, we have also started our Thinking Differently blog series. Sustainable investing is not just about finance and technology. We in the investing world can learn a lot from different ways of thinking about how we make the wider climate related transitions successful, both from a values perspective, and for our investment returns. As with the The Bigger Picture blogs, they are a longer read (no apologies for that - they are big topics). This week we start with one of the big psychological questions - how can we align values and purpose with our investments. This is not just about more data. We argue that sorting this out - getting everyone on the same page (so asset owners, asset managers, companies, and the wider society), will be one of the issues that will define the success or failure of sustainable investing over the coming decades. You can read the blog here. A big thank you to Sharath Jeevan OBE for his assistance with this - as usual any errors or mistakes are entirely my fault. And being mercenary, we are looking for a sponsor for a trial project in this area, if you want to know more get in touch, either through the website or on LinkedIn

Important - this blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”). See the end of this blog for important terms of use.

Top story : What went wrong in Australia


Australia's electricity crisis explained (Guardian Australia)

Main points of the story as published

  • An energy crisis (actually an electricity crisis) in Australia has seen prices spike and supply issues plague much of the country’s east. The (new) federal energy minister, Chris Bowen, claims the previous Coalition government left behind a “bin fire” that meant Australia was “ill-prepared … for the challenges we are facing today”. But the Coalition has tried to blame the new and “inexperienced” Labor government.

  • There are four factors contributing to the “perfect storm” facing Australia’s energy market right now: the general rise of energy costs, the impact of the invasion of the Ukraine, coal outages, and the weather. The question is whether this is just going to be a short-lived storm or one that rolls through the winter and potentially beyond.

  • The factor that finally caused the system to fall over was the regulatory price cap. This kicks in if wholesale prices are too high for too long. In this case, they were and the regulator imposed a $300/MWh price. That started in Queensland on 12 June, with the cap imposed on the other four states in the market within days.

  • One consequence, though, was a bunch of generators would arguably lose money at that price. Depending on the efficiency of the gas plant, for instance, it can take $400-$440 worth of gas to generate the 1MWh that it could only sell for $300. These high-cost generators then withdrew their bids, creating the rolling shortfalls in the days afterwards.

  • In response, the Australian Energy Market Operator (Aemo) effectively pulled the plug on the wholesale market serving the eastern states because the “ring-a-generator” process to order output had become unsustainable. To the extent the problems are based on the reduced availability of coal plants and high demand because of winter weather, it may be a while – perhaps months – before the market resumes normal operations.

Our take on this

  • This is a pretty good description of what happened over the last week in the Australian electricity market. We argue though that you need to go back in history to understand why Australia ended up in this position. And what lessons other markets can learn.

  • Regular readers will know that we cover the Australian electricity market fairly often. This is because its a country blessed with potentially abundant solar and wind, and in some States (especially South Australia) it has a material rooftop solar installed base. Plus it has good potential for pumped storage hydro. Given all of these factors, how it transitions from a heavy reliance on coal (51% of electricity production - 2021) and gas (another 18%) to renewables, could have important read throughs for other countries.

  • So what went so wrong so quickly. We want to draw together three strands. First, to be fair, a lot went wrong very quickly. Some people, including Sarah McNamara Chief Executive at the industry body the Australian Energy Council seem relatively relaxed, at least on a long term perspective. Others are less so. There is a great post here from LinkedIn by the BNEF head of Australia. In it he runs through the issues, starting with the fact that roughly 85% of the countries thermal coal and 75% of its gas gets exported.

  • So, despite its large supply base, its massively exposed to the surge in international prices. Add to that unseasonably low temperatures across the East Coast, led to a surge in electricity and gas demand. The big lesson here: which we also saw in Texas, electricity security is about a whole lot more than having the cheapest electricity. Expect to see Federal Government mandated gas and coal storage levels, and longer term supply and offtake agreements, fairly soon ?

  • The second strand is about policy, or rather a lack of. This article from Roger Dargaville, senior lecturer & deputy director at the Monash Energy Institute covers a lot of ground. We would highlight two points, first the absence of a sustained policy on renewables. Big solar and wind projects take c. five to seven years to get up and running, and then they rely on covering the upfront construction costs over c. 20 years plus. So project promotors need stability in policy, and Australia has not provided that.

  • The other point is is around infrastructure. Regular readers will know we bash on endlessly about this. Why ? Because to have more renewables on the grid we need massive grid investment, in grid stability, in grid strengthening, in battery storage and in interconnectors. These also take years to plan and implement. This seems to still be poorly understood. A renewables based electricity grid is different, and if we want low carbon electricity, we also need to invest in the grid.

  • This neatly leads into the third point - planning ahead. The other country we follow closely on the renewables front is Denmark. They already have very high levels of wind and solar generation (mostly wind - 48% of electricity production). So a high renewables grid already. But they are a bit different from Australia, having good interconnectors into the rest of Europe, including the hydro rich Nordics. The point that is often missed when people talk about Denmark is planning.

  • Their regulator started a couple of decades ago on building resilience into their grid and generation resources. Without this, they could be facing similar issues now. So if we start now on the grid, its regulation and renewables, we have a fighting chance of having a working low carbon grid by 2030. If we don't, expect electricity security to be a running theme through the rest of this decade, with repeated calls for "going back" to fossil fuels.

  • Finally, this article argues that energy security is going to be the next big thing this decade. Maybe, just maybe, energy security will get the attention of politicians in a way that climate risk really hasn't, at least in most countries. Fingers crossed. If so, the clean energy sector needs to change tack a bit, and make sure they explain exactly how they can "fix the problem" once and for all.

Distributed Energy – will more renewables end up cannibalising themselves


The Cannibalization effect - renewables silent risk (Pexapark)

Main points of the story as published

  • To understand the potential cannibalization effect, we need to understand how electricity prices are set in the spot market. The European electricity market design is based on the ‘marginal pricing method’, also known as ‘pay-as-cleared. The market operator announces the forecasted needed capacity for the following operating day. Generators of all technologies bid what volumes they can commit to, and at what price.

  • Producers are incentivised to bid according to their operating costs. The operator will start accepting bids starting from the lowest to the highest until it meets the required demand for every period, usually broken-down into half-hourly slots. The last technology that will be needed will be setting the wholesale price.

  • Generators bid according to their marginal operating costs. Renewables are considered low-marginal technologies, mainly because they have no fuel costs. This means that renewable energy sources are normally the lowest bidders and so usually enjoy priority dispatch (except in cases of network constraints, when wind or solar production is being curtailed).

  • Because of the marginal pricing method, when renewable energy injects to the grid, the spot prices tend to go down. If a low-marginal cost technology such as wind and solar is available, the system operator will (normally) give priority dispatch to them. over a more expensive energy generated by other (typically fossil-fuel based) technologies such as gas. Therefore, the average price for this particular slot will fall.

  • In the long-run this poses a threat to the viability of renewables operating on the free market. When a lot of renewable energy is injected at the same time, which is particularly material for solar energy because there’s a known generation profile shape, the realised price they will get will fall.

  • At the beginning of the energy transition, renewable energy was a fraction of the electricity mix, and most renewables operated exclusively on a government-led fixed-remuneration basis (gaining a fixed amount for every MWh they produced, at any time of the day). So this wasn't a problem.

  • But, the amount of renewables in the grid is set to tremendously increase, and its likely that over time government guaranteed returns will roll off. So more solar, all producing at the same time, with more and more being bid into the free market (merchant) system. This poses a significant risk for their long-term remuneration. In short, the phenomenon is called ‘cannibalization’ because renewables are cannibalizing their own profits.

Our take on this

  • We normally don't use reports from corporate entities. For very reasonable reasons they have an angle, they are trying to sell something. But since I listened to episode 66 of the Redefining Energy podcast, which featured the 24/7 carbon free generation challenge, I have been looking for a good written description of this potential problem. And this is a good one. Not too short and not too technical.

  • To be clear, we are not endorsing Pexapark or Quinbrook Infrastructure Partners (who speak in the blog). And we also want to point out that many renewables projects have very secure and long term take or pay/power purchase agreements (PPA's) underpinning their financing. . So, this is an issue for the future, but maybe not as distant a future as you may think.

  • In the report, they talk about how most PPA's use baseload prices as a reference. But, this might change as more renewables generating at the same time and in the same place push spot prices down. So future projects might get less than baseload pricing. Lots of "might's" in these sentences we appreciate, but you get the point, its something to watch and be aware of.

  • What can be done to offset this risk ? The easy one is battery storage, moving supply out from the peak generation times into the shoulders. The stylised chart on page 12 of the report illustrates how just a short time shift, say four hours, can push solar from the over supplied midday period into the afternoon/early evening peak period.

  • This is a fairly easy to solve challenge, if we plan for it. So a lot more storage linked to renewable generation, what they call in the US hybrid systems. This NREL report (or more strictly series of reports), from June last year, sets out some of the opportunities (and some of the questions we need to ask. This topic deserves a blog of its own. feels like a new blog on its own, its going to be that important.

Built environment - green concrete is still a tough ask

Credit - Evan Demicoli: Unsplash

Can we recycle our way to green cement (University of Cambridge)

Main points of the story as published

  • Replacing today’s cement is one of the hardest challenges on the journey to a safe climate with zero emissions. There are many existing options to make cement with reduced emissions, mainly based on mixing new reactive cement (clinker) with other supplementary materials. However, until now, it has not been possible to make the reactive component of cement without emissions.

  • The inspiration for Cambridge Electric Cement struck inventor Cyrille Dunant, when he noticed that the chemistry of used cement is virtually identical to that of the lime-flux used in conventional steel recycling processes. The new cement is made in a virtuous recycling loop, that not only eliminates the emissions of cement production, but also saves raw materials, and even reduces the emissions required in making lime-flux.

  • The new process begins with concrete waste from demolition of old buildings. This is crushed, to separate the stones and sand that form concrete from the mixture of cement powder and water that bind them together. The old cement powder is then used instead of lime-flux in steel recycling. As the steel melts, the flux forms a slag that floats on the liquid steel, to protect it from oxygen in the air. After the recycled steel is tapped off, the liquid slag is cooled rapidly in air, and ground up into a powder which is virtually identical to the clinker which is the basis of new Portland cement.

  • Invention of the cement has been rewarded with a new research grant of £1.7m from EPSRC, to allow the inventors to collaborate with Dr Zushu Li at Warwick University and Dr Rupert Myers at Imperial College, to reveal the underlying science behind the new process. The new grant will fund an additional team of researchers, to probe the range of concrete wastes that can be processed into Cambridge Electric Cement, evaluate how the process interacts with steel making, and confirm the performance of the resulting material.

Our take on this

  • As a civil engineer who spent much of my on-site and design time working with concrete, this challenge fascinates me. But I am also very aware of how difficult it is to achieve. The Cambridge project is at a very early stage, and while it shows a lot of promise, especially in its use of recycled material, it could be many years before it reaches commercial production.

  • Why is this a challenge worth fixing. According to the International Energy Agency, the cement sector is the third-largest industrial energy consumer in the world, consuming seven percent of industrial energy use. It is also the second-largest industrial emitter of carbon dioxide, responsible for seven percent of global emissions.

  • This recent article looks at the range of alternatives, including some slightly left field approaches. My favourite is the one that compresses food waste with water, heated to 350 degrees F ! The article also covers some of the issues we need to bear in mind when evaluating the potential impact of these new approaches, including cost (a big one), the ability to make a consistent material (building standards are really tough on this point) and the materials ability to safely contain steel reinforcement bar. This last point is important as while concrete on its own is great in compression, its rubbish in tension (so bending and torsion, such as you would get in an earthquake -basically what I did for a living when I started as an engineer.

  • If you want to understand just how challenging green cement really is - one of the best articles I have read (and I have seen a lot) is this one from Michael Barnard. He makes the point that a combination of carbon pricing and cheap (sub $20/MWh) electricity, could make electric kilns potentially viable. But even then, this would not make zero carbon cement. Roughly half of the emission produced in making cement comes from the CO2 baked off when we process the limestone (tighter with sand and clay) to make quicklime. This is a harder challenge to solve, especially in the absence of carbon capture.

Agriculture - how the yuk factors drives what we will try eating


The politics of disgust and the future of protein. (Table)

Main points of the story as published

  • Several recent studies have probed consumer perceptions of novel or alternative proteins, painting a mixed picture of public appetite. While most people say they have heard of lab-grown meat and products such as edible insects, attitudes towards their consumption vary.

  • One of the primary barriers appears to be the ‘yuck’ factor – these foods are perceived by many to be unappetising or disgusting. The language that we use to describe these foods is hugely important. Would you rather eat “clean meat” or “franken-flesh”? While in-vitro cheese confected from bacterial slop might sound unappealing, so might milk and honey if described as “mammary secretions and insect vomit”.

  • As new products arrive on restaurant menus and supermarket shelves, their social acceptance will be shaped by those who manage to wrest control of the narrative, exploiting or ameliorating these underlying trepidations. In the coming ‘protein wars’ – as the meat lobby goes head-to-head with meat alternatives – the battle for our dinner will be fought, in part, via the politics of disgust.

Our take on this

  • This is one of a long line of stories we have seen that talk about how the success or failure of new greener products will be driven as much by public opinion as it is by technology or cost. Parking for a moment the cost and underlying green credentials, we need to think really hard how a product will play with real world consumers, and what weapons will the incumbents use to reinforce the negative yuk factor.

  • Growing up in New Zealand, I remember double page spreads in the press (when people still read newspapers) showing how the industrial process used to make margarine, compared with the "simple and wholesome process" used to make butter. You have to remember, New Zealand is a major exporter of diary products, mostly milk powder, cheese and butter, so there was a lot at stake in this debate.

  • More recently, the meat lobby has sought to secure legal restrictions on the terminology permitted to market plant-based products, amplifying concerns (and perhaps disgust) over the ingredients used in their manufacture. A recent full-page ad in the New York Times, funded by The Centre for Consumer Freedom, warned that “fake meats are ultra-processed imitations with dozens of ingredients including methylcellulose, titanium dioxide, tertiary butylhydroquinone, disodium inosinate.”

  • As the Table article says, "at issue is not whether these statements are factually accurate, but their psychological and social consequences. Disgust is emotionally potent, and in its capacity to generate the fear of contamination and the desire for purity, it is intrinsically polarising." The green industry needs more psychologists - helping to make sure that the message is communicated in a way that reaches the masses.


One last thought

Air Nostrum becomes Airlander 10 launch customer (company release)

I thought long and hard this week about what story to use here. I was going to use a LinkedIn article from Rosemary Barnes (one of my "go to" specialists) on how we need to reflect on criticism of our much loved green technologies, rather than attack the writer.

But in the end I went for this one about airships, or as they are known now hybrid air vehicles. I have followed this topic with interest ever since I read Slide Rule, the autobiography of Nevil Shute. As a young engineer in the 1920's he worked on the R100 airship, the private sector rival to the ill fated R101.

Hybrid Air Vehicles, a UK based start up, has announced that Air Nostrum is to be the launch customer for its 100 seat Airlander 10. The airline, who are one of Europe's largest regional operators (including as an Iberia regional franchisee), carried 4.7m passengers annually (pre covid), so a credible operator. They have reserved 10 aircraft. Note: in aircraft ordering terms, reserved can be quite a few steps away from actually paying for.

Why might airships have a role in a greener transport system ? After all, other than a handful of operations, they have totally disappeared from our skies, replaced by faster and more efficient aircraft. Part of the answer lies in emissions, with claims of only 1/10 of the emissions of a similar fixed wing plane (I haven't found an independent source for this). The other part lies in a possible role serving remote mining and other facilities ie as cargo aircraft. This report examines their possible use in the artic, but the same argument could equally apply to other hard to access locations. And as we regularly argue, the shift to greener technologies is going to need a lot of new mines.


Some process and semi legal stuff . 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 (asset owners, asset managers and companies). We are really keen that you read the original report or article. Lots of people out there are doing some really interesting and valuable work and part of purpose of these blogs is to bring this to your attention, while at the same time giving it context.

The focus is on news flow that we think should change the markets perception of the investment risks and opportunities coming from the big themes around the climate transitions and ESG. So not the place to come to for news about the latest ESG or net zero promise, or that has already been well covered in say the FT. Our approach is unashamedly long term, this is a multi decade investment theme. So we ignore short term noise.

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Finally, and very importantly, nothing in this blog should be construed as providing investment advice. For company and/or fund specific investing advice and recommendations, you need to look elsewhere. In more formal language, this blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”).