Sustainable Investing weekly blog: 27th May 2022 (issue 34)
Story tags for this blog
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.
This week our top story picks up a major report from a team at MIT that shows that battery storage can make low carbon electricity grids possible and affordable. Next up, in Food & Agriculture, we look at increasing challenges in the food delivery space then in Built Environment, we report on a proposal to kick start building refurbishment in Spain, saving the equivalent of all of the Russian gas imported last year. Finally, in Transport, we pick up on the latest IEA Global EV Outlook report, and what it might mean for Lithium. In our One Last Thought, we cover a report that analyses who might bear the cost of fossil fuel stranded assets. And we start to think about, is it that simple or is coal a good leading indicator.
Finally, a regular question we get is do you have a blog that pulls together all the different themes in each climate related transition ...... the answer is yes, we will do soon. First up will be renewables & distributed energy. That should help work out how each piece of weekly blog news fits in with the bigger picture of the theme.
Top story : Yes, energy storage can enable affordable low carbon electricity
Main points of the story as published
In deeply decarbonised energy systems utilising high penetrations of variable renewable energy (VRE), energy storage is needed to keep the lights on and the electricity flowing when the sun isn’t shining and the wind isn’t blowing—when generation from these VRE resources is low or demand is high.
The report shows that energy storage makes deep decarbonization of reliable electric power systems affordable. MITEI Director Robert Armstrong, the Chevron Professor of Chemical Engineering and chair of the Future of Energy Storage study said “VRE resources such as wind and solar depend on daily and seasonal variations as well as weather fluctuations; they aren’t always available to be dispatched to follow electricity demand. Our study finds that energy storage can help VRE-dominated electricity systems balance electricity supply and demand while maintaining reliability in a cost-effective manner—that in turn can support the electrification of many end-use activities beyond the electricity sector.”
The study team also looked at the application of energy storage for emerging market and developing economy (EMDE) countries, These countries are expected to see massive growth in electricity demand over the next 30 years, due to rapid overall economic expansion and to increasing adoption of electricity-consuming technologies such as air conditioning. The study highlights the pivotal role battery storage can play in decarbonising grids in EMDE countries that lack access to low-cost gas and currently rely on coal generation.
Our take on this
Regular readers will know that this is a topic we keep coming back to, and yes, we are doing it again. Why is this. Put simply, the biggest pushback we hear from investors when we discuss wind and solar (the main VRE sources) is that they are seen as just too unreliable to support our modern electricity system. The risks (and costs) of relying on them, when they get to high market shares, are just too great.
And this argument has a lot of emotional appeal. The weather, especially in Europe, can be very unpredictable. There are sometimes long periods of low wind and we all know it can rain a lot. So to borrow the latest industry catch phrase, security of supply looks like it will be a problem. But our emotions can lead us astray. This very detailed report shows that the pushback is simply not true.
This is a big topic, with lots of moving parts, so this week we set out the structure of the solution (or rather solutions), and in future blogs we will dig down into the individual topics. We think that part of the challenge with this theme is that people generally like simple solutions. In this case we have multiple solutions, and they kick in at different points in the low carbon electricity transition. Plus the transition is likely to take years or even decades. And it can get quite technical quite quickly. All of these factors make the discussion complex.
So first, the big picture. Yes, we can have electricity grids that operate reliably and in a cost efficient way, with high levels of wind and solar. It will not be simple, there will be costs and adaptions, plus new ways of thinking about how our grid needs to work. And yes, wind and solar are variable, sometimes very variable. But technical solutions already exist to overcome the challenges.
We think it's important to remember the time dimension to the debate. No-one is talking about switching off all fossil fuels now, and totally relying on wind and solar. The process will be gradual, taking at least one and probably two decades. Many of the challenges that get talked about now will not become real for most countries for many years.
What solutions do we have already, the ones that will get us though much of the current decade. The obvious one is Li Ion batteries. They traditionally get thought of as short term storage (1-2 hours), but the economic model is being pushed out to 4-8 hours (we explored this in earlier blogs). This technology looks it will hit the cost wall at about 8-12 hours of storage. So great for balancing within a day (the bulk of our current challenge), but problematic for longer periods.
For longer duration storage we already have redox flow and metal air batteries, plus pumped hydro storage. The higher upfront cost of these means the economics work best when we need 12 hours plus of storage. So, these are the tools we start to apply at scale when we get to higher market share for VRE, c. 30-50% wind and solar or around 50-70% for total low carbon generation (which includes hydro, bio and nuclear).
When is this most likely, Our best estimate is around 2030 for most countries, although some will get there quicker. In analysing how this mid term electricity grid might work, there are some interesting lessons from those countries that are most advanced (such as Denmark). More on this in a later blog.
This section is already getting long, but before we leave the topic, we want to highlight that storage is not the only solution. Other tools include flexible system design, software, demand management and interconnectors. Plus a future role for hydrogen. Lots to think and talk about. And lots of really exciting opportunities for investors who have a longer term perspective.
Food and Agriculture – Is home delivery becoming a luxury?
Main points of the story as published
It’s crunch time (again) in the world of instant grocery delivery. Berlin-based Gorillas, which raised nearly $1 billion dollars at around a $3 billion post-money valuation only seven months ago — announced that it would be laying off some 300 employees and exiting four markets — Italy, Spain, Denmark and Belgium — as it seeks to shift from “hyper growth” (read: burning tons of cash to win new customers and expand its operations) to “a clear path to profitability.”
One source said that it was estimated that in recent weeks the company had about $300 million left in the bank, but it had been (prior to the cuts announced today) operating on a monthly burn rate of between $50 million and $75 million.
Those who have been looking at the instant grocery market for a while will know that it was long seen as over-inflated and due a correction. There has been too much money swimming around too many start-ups, looking to ride what seemed like a wave of opportunity for fast delivery on the back of changing consumer habits during COVID-19.
Our take on this
First up its important to clarify, all of the views etc expressed above are those of the publisher/writer of the article. We have no view on the financial prospects or otherwise of Gorilla's, or any other food delivery company. Having got that out of the way.
We have followed food delivery for a long time, actually a very long time, back to when it was a new and exciting concept that food retailers (supermarkets to you and me) were all over. Its always felt a bit of a "nice to have" for the consumer and a "we only do this to avoid losing share" for the retailer. Yes, home delivery can be really convenient, and that can be a key factor if you live in a densely populated city where you rely on public transport.
While the companies were fighting for market share by keeping charges low (ie burning cash to build a customer base), and consumers felt well off, you could understand the appeal for customers.
Wearing my long term investor hat - one challenge for the companies has always been differentiation. By and large the product that gets delivered is not unique, its just the same as the one that the other delivery company offers. Yes, we know there are exceptions, but you get the point. This means it comes down to service (do you deliver on time) and cost. And given that service is really about cost, its all about cost.
That starting us thinking about what happens when we have massive food price rises and general inflation is spiking, so consumers start to really feel under pressure. Are we looking at the flip side of the COVID lockdowns. When consumers need to cut costs, the luxuries go first. But then to be fair, this is not going to be the only part of the food supply chain where that is going to be an issue..
Built environment - will the gas crisis kickstart our interest in decarbonising buildings ?
Main points of the story as published
Spain’s buildings use around 30% of its final energy, and just over 20% of Spain’s gas. Furthermore, over a third of Spaniards are dissatisfied with their home’s insulation. At its core is the fact that 51% of Spanish primary residences were built before basic thermal insulation requirements were included in construction standards.
In 2014, a national renovation plan was delivered by the Spanish authorities to the European Commission. If they had followed through on this plan, the annual energy savings would have been close to the caloric equivalent of the 3.3 million toe of Russian gas that Spain imported in 2021.
Since 2014, and until 2019, Spain’s real home renovation rate actually slowed down, and at just 0.08% it significantly lags other EU countries like France (1.75%) and Italy (0.77%), none of which reach the 3% target required to deliver the EU’s Renovation Wave.
The article then goes on to propose what the author calls a Marshall Plan for buildings, including create and maintain a transparent network of accredited, well compensated and trustworthy renovation agents, ensure easy access to long-term, low cost finance and funding packages, and a focus on the easier wins in terms of the work to be done.
Our take on this
Lots of this article makes sense to us. Our worry is that we have seen it all before. The problem and the solutions have been known for years. Organisations such as Bankers without Boundaries have published some excellent proposals. And yet progress remains disturbingly slow. And the focus has generally been on standards for new houses - important but such a small part of the building stock.
We guess some of it is human nature. The payback is a long way out into the future and the cost (often expensive) and disruption is now. Plus, for renters and those on low incomes, the choices are limited. So maybe, just maybe, the current gas price crisis gives the sector a kick start.
Many analysts expect gas prices to remain high for some time. This winter could be hard. For investors, this is a tougher theme than many of the others to find good opportunities in. But despite this, there are some really interesting ways of getting involved, from heat as a service, through expanding installation and service operations, to the more obvious areas of insulation. The key will be finding the funding sources.
EV demand growth leads to supply chain challenges
Main points of the story as published
In their recently published annual review of the global EV market, the IEA reported that sales of electric vehicles (EVs) doubled in 2021 from the previous year, to a new record of 6.6 million. Global sales of electric cars have kept rising strongly in 2022, with 2 million sold in the first quarter, up 75% from the same period in 2021. The success of EVs is being driven by multiple factors. Sustained policy support is the main pillar. Public spending on subsidies and incentives for EVs nearly doubled in 2021 to c. USD 30 billion.
The increase in EV sales in 2021 was primarily led by the People’s Republic of China (“China”), which accounted for half of the growth. In China, electric cars are typically smaller than in other markets. This, alongside lower development and manufacturing costs, has contributed to decreasing the price gap with conventional cars.
Our take on this
There is a lot of detail in this report, so we will be gradually unpacking some useful colour over the coming weeks. While we initially wanted to talk about charging, we felt we had to lead with raw materials. As the IEA says, with a degree of understatement, "the rapid increase in EV sales during the pandemic has tested the resilience of battery supply chains, and Russia’s war in Ukraine has further exacerbated the challenge". Net net this means the historic trend of EV battery pack costs falling gets halted, maybe for a couple of years.
We talked last week about nickel, this week its lithium. This has always been a volatile industry when it comes to the supply/demand balance. We can broadly understand the long term trends for demand, with BNEF estimating global demand will increase 5x by the end of the decade. Its the supply side that has been tougher to predict.
Today’s battery supply chains are concentrated around China, which produces three-quarters of all lithium-ion batteries. Over half of lithium processing and refining capacity is in China. A recent Bloomberg article highlighted both the current shortage of lithium, and the historic lack of investment, at least relative to other parts of the EV value chain.
On the shortage, Benchmark Mineral Intelligence, who track Lithium prices, estimates that at current spot prices lithium could add up to $1,000 to the cost of an EV. Of course, hardly anyone buys at spot, and so the read through is not that simple, but the direction of travel on cost shown by the charts will be a worry.
On supply, while ramping up production in existing facilities will help, the long term solution is opening up new deposits. These can generate material local opposition, as shown by the protests against the Rio Tinto Group’s proposed $2.4 billion Jadar mine on farmland in western Serbia, Plus, as with cobalt from parts of the Democratic Republic of Congo, end customers are starting to ask questions about the industries "supply chain greenness".
This is a theme where investors need to think really hard about the trade offs. If we want to reduce carbon emissions, we need EV's and battery storage. If we need EV's, we need a lot more supply of raw materials, so more mining. We might not like it, but that is the reality. This is probably a good point to plug what we think is a great initiative. The Church of England Pensions Board (CEPB) has launched ‘Mining 2030’, a year-long global initiative aimed at defining an investor agenda to be achieved by the mining sector by 2030.
Finally, we cannot leave this theme without at least touching on battery recycling. This is a topic in its own right, but for those who want to get up to speed, this is a good introduction to some of the issues. Spoiler alert, its not as easy as it sounds.
One last thought
We found this article thought provoking on two levels. Its the first detailed review we have seen of who owns what oil and gas assets. But equally, it raises some interesting questions on who pays the cost. The general assumption is that stranded assets are a financial risk for who ever owns them when the crisis hits. As the article says, its a game of musical chairs. When the music stops, someone will be left with the stranded asset.
But there is a different perspective, one prompted by the European experience with coal. As highlighted in this article from Clean Energy Wire, the German government paid compensation when they forced the closure of coal mines. And part of the reason this might apply to oil & gas assets is the Energy Charter Treaty, a legally-binding plurilateral agreement for the energy industry, which entered into force way back in 1998. More recently, the anti expropriation clause of this treaty has been interpreted as including any measure that significantly affects an investment, such as a regulation that causes the company’s market share to substantially decrease. Claims of expropriation under the treaty have recently been made by Vattenfall after Germany decided to phase out nuclear power more quickly than planned following the Fukushima disaster.
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.
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”).