• Steven Bowen

Sustainable Investing weekly blog: 25th March 2022 (issue 31)

 

Story tags for this blog

Russian gas, EV charging, building refurbishment, grid stability & unlisted renewables


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.


This week we go back to  our traditional format, starting in Alternatives, where never has the quote “there are decades where nothing happens; and there are weeks where decades happen” (Vladimir Ilyich Lenin), seemed so appropriate. A month ago, green hydrogen was pottering along & then suddenly, it was one of the favored solutions to reduce Europe’s dependence on Russian gas. But how much have the fundamentals really changed ? Next up, in Electrification, we look at the increasingly important question of how will we charge EV’s in the future, including asking “will the current petrol/gas station model remain valid”. Then, in Built Environment, we revisit the decarbonisation of buildings. Its a tough challenge & progress is slow, but maybe (in the same way green hydrogen got a boost), its due more focus from society and the politicians, after all its a big consumer of gas.  Finally, in Electricity Grids, we flag another Australian grid forming investor project.  In the interests of brevity, we have held back on our Agtech story on fertiliser prices and what they may mean for alternatives, such as precision ag. It will be in next week’s issue (unless by some miracle gas prices fall).  In our One Last Thought, we cover an Imperial College London report on the financial performance of unlisted renewable assets.


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 : Has Russia changed the European future for green hydrogen?

 
 

OGE & RWE propose H2ercules concept plan (Hydrogen Central)

Main points of the story as published

  • OGE and RWE have presented a national infrastructure concept “H2ercules”, comprising up to 1 GW of new electrolyser capacity and 1,500 kilometres of pipeline. The infrastructure is set to connect electrolysers as well as storage and import facilities in the north of the country with industrial consumers in the west and south of Germany. Additional import routes from the south and east that are currently under development are to be connected by 2030.

  • It is estimated that investments of about €3.5 billion will be needed to implement the project. However, as most of H2ercules can use converted existing natural gas pipelines, it is claimed that the proposal can be implemented significantly more quickly and more cost-effectively overall than infrastructure that is constructed from scratch.

  • RWE wants to construct new electrolysers with a combined capacity of up to 1 GW by 2030 to produce green hydrogen. In addition, the company plans to import large volumes of hydrogen. RWE also intends to build H2 ready gas-fired power stations with a capacity of at least 2 gigawatts close to the planned H2ercules route, and for its gas storage systems near the Dutch border to also connect into the hydrogen pipeline. OGE will ensure that the green hydrogen can reach customers by converting existing natural gas pipelines for hydrogen transport and building new pipelines.

Our take on this

  • There are a whole stack of complexities this press release glosses over but it highlights how the debate in Europe has shifted. Green hydrogen was partly promoted on the basis that it supported Europe’s heavy industry and created material export markets. Now the focus has shifted to energy security. The economy and climate minister Robert Habeck, recently said that Germany can do without Russian gas by 2024, highlighting the contributions of a significant expansion of renewables, reduction of consumption in all sectors, diversification and the ramp-up of hydrogen.

  • Denmark is also looking to move in a similar direction, with a broad majority in the Danish Parliament agreeing on a new national strategy for Power-to-X. 1.25 bn DKK is set aside to speed up the conversion of electricity into green hydrogen and other e-fuels. Of course, these are not projects that have been whistled up out of nothing, work in this area has been going on for some time, but the energy security debate is going to give them fresh momentum.

  • The electrolyser companies are also raising capital. Nel ASA recently raised more capital & Copenhagen Infrastructure Partners was a participant  in the Sunfire capital raise, additionally agreeing to enter into an agreement for up to 640MW of electrolysis offtake.

  • Do we think this makes a real difference to the prospects for green hydrogen, well yes & no. Yes, we expect a surge in announcements of hydrogen projects, plus increasing levels of government support. But no, the economics still remain challenged, with the Platts hydrogen price wall still showing a big gap between green and grey hydrogen.  As recently as February, the Aurora energy consultancy estimated that a green hydrogen price of E3/kg looks the most realistic scenario over the next two decades, with the benchmark target of E2/kg only being reached around 2050. While the recent increases in gas prices will push up the cost of grey hydrogen, when you add in transport etc green hydrogen is still more expensive. And we don’t expect companies to make long term investments based on short term gas prices.

  • We broadly agree with the PWC analysis, which forecasts hydrogen demand growth at only a moderate pace until c. 2030, accelerating post 2035. The energy security push might bring these dates forward by a year or two, but even then, demand is most likely to be for replacing grey hydrogen in fertiliser plants and oil refineries, rather than new applications such as electricity generation. This could be a really interesting theme on a 10 year view, but its not clear to us who the long term winners will be.

EV charging – tools to manage the impact on the grid

 
 

How to predict & manage EV charging growth (Stanford Energy)

Main points of the story as published

  • A team of researchers at Stanford University have created a scalable probabilistic model for charging demand that can be applied to a flexible array of populations and account for a wide range of factors. Within California, the model found that by 2030 – in a scenario where most EV owners opt to charge their vehicles when they get home every evening – peak charging demand would be over twice as high as the scenario where they were encouraged to charge throughout the day, at home, work and public stations.

  • Today’s 7 million EVs globally are expected to swell to 400 million by 2040. In order to support that almost 60 fold increase, the world must make substantial updates to EV supporting infrastructure, including generating capacity, transmission and distribution, smart grid technologies and an estimated 300 million readily-accessible charging stations.

Our take on this

  • There is no doubting the imperative to switch transport to EV’s. A recent International Council on Clean Transport study estimated that by 2050, transport could be “burning up” the majority of Europe’s carbon budget, if we don’t make changes fast. One of the big concerns, as highlighted by the Stanford study, is that if everyone drives their EV home at night and puts it on to charge, the electricity grid could be overwhelmed. We think this is unlikely. 

  • First, smart charging will become more common, allowing demand to be spread. Second, don’t expect the EV charging model to look like the current petrol station one. Put simply, we nearly all fill our petrol or diesel cars up when we get close to empty. But for EV’s, its looking increasingly likely that drivers will follow a “charge up when possible” approach. In practice this means whenever they park up, they plug in. So, at work, when they shop, when they stop for coffee and at leisure facilities. This suggests lots of low level loads spread across the day, reducing pressure on the grid and lowering the required capex. This is before we start to think about using EV batteries as storage devices ie V2G.

  • Yes, we will need a network of fast chargers along the motorways for long distance travel, but with average car journeys being much shorter than we expect, such charging is only really required for our holidays, and for those who drive long distances for work (remembering that lorry drivers, at least in Europe, have to have breaks).  A recent Australian study highlighted the need to put users first when EV charging systems are designed, this should include thinking about new charging models.

  • Even BP seems to recognise this. In their press release on their planned £1bn investment in UK EV charging infrastructure, while they talk about high speed charging at dedicated hubs and on existing fuel sites, they also talk about tripling the number of public charging points in their UK network.

Achieving net zero carbon for building heating & cooling

 
 

Decarbonising buildings (Climate Action Tracker)

Main points of the story as published

  • The urgency of addressing emissions from buildings is clear; greenhouse gas (GHG) emissions from this sector make up roughly a fifth of total global emissions. Despite the rapidly diminishing global carbon budget and need for all sectors to decarbonise, buildings sector emissions have remained stubbornly high. While there is positive movement in some sectors – renewable energy, light-duty vehicles – decarbonising the buildings sector has been slow-moving. Why is there so little progress, and what would it take to initiate the kind of transformative change required ?

  • A key reason behind the sector’s persistently high emissions is its diversity and complexity. Buildings come in all shapes and sizes, are used as residences or for commercial operations, and vary across a wide range of climate zones. The decarbonisation measures required for existing buildings also differ dramatically for those appropriate for ensuring new buildings are zero carbon. Nonetheless, the range of technologies needed to achieve building sector decarbonisation are mature and widely available, it is their widespread adoption that is proving elusive.

Our take on this

  • If the number of studies was a measure of progress, we would have solved this problem long ago. This excellent report is the latest. It highlights (among other issues) what we see as the key sticking point – finance, or more strictly the high upfront cost. As the report highlights, in some cases, new or retrofitted zero carbon buildings are cheaper than more carbon-intensive alternatives, at least when considered over the lifetime of the building. Easy access to low-cost finance can reduce the perceived risk of high up-front costs and overcome financial barriers. BREEAM give awards every year for the best examples of sustainable building design, so we don’t lack real world examples. We would love to see the emergence of heating (& cooling) as a service, allowing building owners to spread the cost over the building life (plus dodge the technological mine field of working out what applications to use when). District heating helps in some cases, but it can not be the only tool in the box.

Another grid forming project in Australia

 
 

Fluence selected for Broken Hill grid forming project (Company release)

Main points of the story as published

  • Fluence announced yesterday that it has been chosen by AGL to deliver a 50 MW / 50 MWh energy storage system with advanced grid-forming capabilities for the Broken Hill Battery Energy Storage System, an ARENA-funded battery project. The project will use Fluence’s Gridstack product and contribute to AGL’s planned 850 MW national battery rollout and demonstrate the capability of latest inverter technology to support stable operation in areas of low system strength. The effective partnership between AGL, ARENA, UNSW and Fluence has enabled the first system of this level of complexity, which will provide a range of system security and reliability services to the grid at Broken Hill.

  • Unlike grid-following or other grid-forming energy storage systems in Australia’s National Electricity Market (NEM), AGL’s Broken Hill energy storage system will start and remain in grid-forming mode, with all inverters operating as a voltage source. The system will inherently resist changes in voltage and frequency on the grid and provide synthetic inertia, also known as Virtual Synchronous Machine (VSM) mode, and fault current contribution, along with standard energy storage services like FCAS, FFR and PFR. The project will also provide storage and firming capacity to the NEM and may assist AEMO to connect other inverter-based renewables nearby, supporting the West Murray region.

Our take on this

  • Regular readers will know that we bash on about how important this technology may become. One of the big drawbacks of wind and solar (& most battery storage systems) is that they operate in what is called grid following mode. So when the grid becomes unstable, they cannot help get it back into balance. Traditionally this balancing task is carried out by fossil fuel powered stations, which have big heavy machinery (with inertia). If the various trials in Australia (& elsewhere) work as expected, renewables can begin to take on this role, enabling grid resilience and supporting weak grids. Watch this space. 

 

One last thought

Risks & opportunities for unlisted renewables  (Imperial College)

This paper aims to establish greater transparency for institutional investors by analyzing the financial performance of unlisted renewables and infrastructure assets globally, including emerging economies. The team examines their risks and returns, coming to the conclusion that unlisted renewable assets outperform the broader unlisted infrastructure assets, as well as the listed market benchmark, MSCI ACWI, over the past ten years at a diversified index level. Another boost for the case for clean energy investment trusts ?

 

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.


Click Here for Important Information and Disclaimers

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”).