• Steven Bowen

Sustainable Investing weekly blog: 28th Jan 2022 (Issue 23)


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 weeks top story highlights the (as yet largely unrealised) potential for pumped storage hydro as a tool for improving electricity grid stability.  In Alternatives, we cover the decision by the fertiliser giant Yara to replace a small amount of its existing hydrogen production with green, in Renewables we highlight the progress that Europe is making in growing the share of renewables in its electricity generation mix, in Built Environment we highlight (yet again) the slow progress being made in improving European building emissions, and in Agtech, we discuss the potential impact of climate disruption on the massive global coffee industry. Finally, in Demographics, we explore the implications of the slowing in Chinese population growth, and in Human Rights our good friend Kristina Touzenis flags the upcoming EU draft regulation on deforestation as something investors need to watch. We finish with our “one last thought” which highlights the apparent willingness of European consumers to pay more for greener cars.

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 : pumped hydro can make renewable grids more stable 


Pumped hydro could be poised for a comeback (Canary Media)

Main points of the story as published

  1. While venture capitalists are pouring buckets of cash into novel ways to store clean energy, one already proven technology has so far been left behind. That technology is pumped-storage hydropower, which simply lifts water to an elevated reservoir for storage, and then releases it to spin turbines and generate electricity when needed.

  2. The problem is, nobody’s built a major new pumped-hydro project in the U.S. since the Clinton presidency (though newer projects have been built elsewhere). Modern environmental laws make it much harder to devastate rivers than it was in the dam-building frenzy of the New Deal era. And while much of the innovation in energy storage targets modular and mass-produced products such as long duration batteries, pumped hydro is big, old-school infrastructure, with high upfront costs and that pesky need to pour concrete competently.

  3. “There’s a need for just insane amounts of storage,” said Paul Jacob, CEO of Rye Development, a company that just might break the decades-long streak of inaction on new U.S. pumped hydro. The grid will need many technologies, he noted, but this one has a key advantage: ​“pumped storage works — it’s proven, it’s dependable.” Rye has developed one of the three pumped storage projects in the U.S. that could now be considered shovel-ready, in that they have completed all necessary federal permitting and environmental reviews. Another 75 or so new proposed projects are wending their way through permitting, amounting to more than 50 gigawatts of storage that could someday get built.

Our take on this

  1. It might be the civil engineer in me, but (cost aside), this seems to be a viable solution to what will become one of the most pressing challenges that will face the electricity grid over the coming decades – how do we manage the grid to cope with very high levels of (variable) renewable electricity generation? To be clear, this is not really a now problem, its one for 2030 and maybe even 2040. But building these projects will take years, so surely its best to start sooner rather than later.

  2. We already have the technologies to cope with moderate levels of renewables (see the story below on renewable electricity penetration in Europe). But, as things stand, when we get to c. 75% and above, some form of long duration storage will be needed (& yes, other solutions such as hydrogen gas turbines and new battery technologies could also work).

  3. One important point – this is very different from the more controversial “run of river” type hydro  most people will be familiar with. As the article sets out … “The Swan Lake Energy Storage Project would have no connection to surrounding rivers. Rye plans to excavate two 60-acre holes and fill them with water. The water would cycle up and down the closed system as the plant charges and discharges electricity. The total surface area of the ponds would be about the same as the Tidal Basin near the National Mall in Washington, D.C.”

  4. Pumped storage hydro  projects are being developed elsewhere in the world. China has just switched on the worlds largest (3.6GW) facility in Hebei province. Plus in the UK the Coire Glas project in Scotland has secured all necessary approvals and has construction procurement underway. But the $1.3-billion project is currently stalled while its developer awaits a better financial incentive approach. Elsewhere in the US, Rye Development announced plans to use a former coal mine site in Kentucky.

  5. The big challenge to pumped storage hydro becoming a material investible asset class is the high up front capital cost, but then it is a long duration, long life asset after all.

Alternatives : Is Yara’s move to green hydrogen the beginning of a trend ?


Yara & Linde to build 24MW green hydrogen demonstration plant (Yara)

Main points of the story as published

  1. Yara announces the signing of a contract with Linde Engineering for the construction and delivery of a green hydrogen demonstration plant at Yara’s ammonia production facility at Herøya Industripark in Porsgrunn, Norway. The project, which is supported by a NOK 283 million grant from Enova (announced in December 2021), will demonstrate that ammonia produced using renewable energy can reduce the impact of carbon dioxide in fertilizer production.

  2. The project will be realized by water electrolysis which will produce green hydrogen to partially replace the hydrocarbon-based hydrogen production in Yara’s plant, using proton exchange membrane (PEM) technology. This will be the second 24 MW PEM electrolysis plant designed and constructed by Linde Engineering; the first is now being built at the Leuna Chemical Complex in Germany.

  3. The project aims to supply the first green ammonia products to the market as early as mid-2023. The plant will have an annual capacity of around 10,000 kg/day of hydrogen. It will replace ethane as the raw material in production. The electricity will be delivered from renewable energy sources and will provide enough hydrogen to produce 20,500 tonnes of ammonia per year.

Our take on this

  1. Let’s get the notes of caution out of the way first. Yes the plant is small (20,500 tonnes). To give this context, Yara has the capacity to produce c. 8.5 million tonnes of ammonia per year worldwide, with 4.9 million tonnes of that coming from Europe. And yes, funding is effectively coming from the Norwegian state (Enova is owned by the Norwegian Ministry of Climate and Environment).

  2. Despite this, we think this is a more significant project than its relatively small size would suggest. First, we think that replacing existing dirty hydrogen (produced using fossil fuels) with green hydrogen is likely to be the big driver of theme growth over the next decade and maybe longer. Most of the current 70m tonnes of hydrogen currently produced worldwide is used in either fertilizer production or oil refining. This is a big market to aim for (& to green). While we don’t expect green hydrogen to reach consistent cost competitiveness with the fossil fuel based version quickly (ex any spikes in gas prices such as we have seen recently), if the costs of renewable electricity keep falling & electrolysers keep getting cheaper, we could see a better situation come c. 2030.

  3. Second, this market (producing hydrogen for large industrial customers) is dominated by either the industrial gases giants  or by the large project & engineering companies. We expect this factor to dominate the dynamics of who will grab the bulk of the value in the sector. We expect its going to be tough for equipment suppliers to create pricing power, especially as we are already seeing surge of new entrants. 

Renewables – Europe generated 37% of its electricity from renewables 


European electricity generation trends (Eurostat)

Main points of the story as published 

  1. In 2020, renewable energy sources made up 37% of gross electricity consumption in the EU, up from 34% in 2019. Wind and hydropower accounted for over two-thirds of the total electricity generated from renewable sources (36% and 33%, respectively). The remaining one-third of electricity came from solar power (14%), solid biofuels (8%) and other renewable sources (8%). Solar power is the fastest-growing source: in 2008, it only accounted for 1% of the electricity consumed in the EU. For this measure nuclear does not count as renewable.

  2. Among the EU Member States, more than 70% of electricity consumed in 2020 was generated from renewable sources in Austria (78%) and Sweden (75%). The generation of electricity from renewable sources was also high in Denmark (65%), Portugal (58%), Croatia and Latvia (both 53%). At the other end of the scale, the share of electricity from renewable sources was 15% or less in Malta (10%), Hungary and Cyprus (both 12%), Luxembourg (14%) and Czechia (15%). The other stand outs were Norway and Iceland, which both generated more renewable electricity than they consumed domestically.

Our take on this

  1. Yes, we know the data is from 2020, but Eurostat published it on the 26th Jan, and we felt it was worth highlighting, especially given the debate around what percentage of renewables can be achieved before grid stability is compromised. 

  2. Recent research now suggests that most grids can get to 75-80% renewable generation before they face material grid stability and long duration storage issues, although weaker grids could start to face issues as low as 50%. Note that this is average renewables, not peak. Some grids, such as South Australia, have hit 100% renewables already for short periods, with the longest period being in Oct 2021, when wind & solar met local demand on all but two days. 

  3. Looking at the European data we can see that a number of European countries are already at the renewable level that will mean they need to start adding grid stability measures at scale – so battery storage, interconnections, demand management, and sophisticated grid management software. And many more are getting close, likely hitting this level in the next few years.

  4. According to data published in July by Ember clean energy provided 36.5%  of electricity production in the EU-27 in H1-2021, up by 3 percentage points (+24 TWh) from H1-2019.  This rises to 63% if you include nuclear. Wind made up 14.5%, hydro 13.9% & solar 5.8%.

  5. Ember also highlighted that year-on-year progress must double throughout the next decade for the EU to reach its new 2030 climate targets (-55% GHG), and accelerate even further to reach 100% clean power by 2035.

Built Environment : will Europe continue to fail on its building stock ?


Ready for carbon neutral by 2050 – EU building standards (BPIE)

  1. From the beginning of 2021, all new buildings in the EU should be nearly zero-energy buildings (NZEBs), meaning a building with a very high energy performance, and for which the remaining low energy needs are sourced primarily from renewable energy sources (RES). For new buildings owned and occupied by public authorities, this requirement has been in place from the beginning of 2019.

  2. This milestone is important for EU decarbonisation efforts, as the buildings sector accounts for 36% of the EU’s carbon emissions and 40% of its energy use. Given this sizeable footprint, it is critical to ensure that new buildings are NZEBs so that their energy and carbon impact is reduced as much as possible.

  3. The findings contained in this report suggest that decarbonisation in new buildings in the EU is happening too slowly and inconsistently. A reasonable conclusion to draw from this is that Europe’s 2050 decarbonisation objectives will be at high risk unless building policies can be made to provide stronger support. Government policies differ in several important ways when it comes to “moving the needle” on new building standards, both in terms of being consistent with the NZEB definition as laid out in the EPBD, and in terms of ambition levels on building-sector decarbonisation.

Our take on this 

  1. We appreciate that we are starting to sound like a scratched record on this topic. In the absence of sensible, practical and tougher building regulations its likely that progress on this key pillar of EU decarbonisation is likely to be insufficient. And this is just for new buildings, progress is even weaker for our existing building stock. A BPIE report at the end of last year highlighted that the current annual deep renovation rate stands at only 0.2% on average in the EU. If the EU is to achieve both its 2030 climate target and climate neutrality by 2050, this figure must drastically (by a factor of 15) increase to reach 3% by 2030 and be maintained up to 2050.

  2. Yes, we appreciate that measures are underway, with an Aug 2021 report from Eurac Research highlighting various standard solutions that could be rolled out. Our problem is that until real policies are put in place, its hard to see this theme being investible at scale.

Agtech: not a great future for coffee ?


Challenges to sustainability of coffee, cashews & avocados (PLOS ONE)

  1. Coffee, cashew and avocado are of high socio-economic importance in many tropical smallholder farming systems around the globe. As plantation crops with a long lifespan, their cultivation requires long-term planning. The evaluation of climate change impacts on their biophysical suitability is therefore essential for developing adaptation measures and selecting appropriate varieties or crops.

  2. We found shifts in suitable growing regions due to climate change with both regions of future expansion and contraction for all crops investigated. Coffee proved to be most vulnerable, with negative climate impacts dominating in all main producing regions. For both cashew and avocado, areas suitable for cultivation are expected to expand globally while in most main producing countries, the areas of highest suitability may decrease.

Our take on this 

  1. Just in case you think this is a first world problem, coffee on its own is a $465 billion industry world wide, driven by Europe with higher per capita consumption and a move towards the culture of premium coffee.

  2. While its mostly large scale production, the online segment can be really important to small growers targeting the premium segment – as a way of keeping the value they create, giving them a viable way out of poverty.

  3. Those who know me well know I love my coffee, and I have found a way to combine this & sustainability by buying my beans from a local UK roaster who shares my objectives (sorry about the shameless plug – but they sell good coffee).

Demographics : China’s population stalls


Chinese population growth stalls (FT)

Main points of the story as published

  1. The number of births in China fell to a record low in 2021, the fifth consecutive decline following a brief uptick in 2016 when the one-child policy was scrapped. At 10.6m, annual births are now only slightly more than deaths of 10.1m leading some to predict a peak in China’s population in 2021. As well as being close to decline, the Chinese population is ageing rapidly with 18.9% now aged over 60.

  2. With a fertility rate of 1.3, below Japan’s 1.34 and the replacement rate of 2.1, the Chinese government is now actively trying to encourage births, permitting three children per couple as well as offering various financial incentives and increased maternity leave.

  3. On the subject of aging, last week also saw the launch of Altos Labs, a biotech focused on cellular rejuvenation, which also announced the hire of Glaxo’s CSO as its new CEO. Despite being billed in the media as an anti-ageing company, its founder claims to be focused on healthspan not lifespan.

Our take on this

  1. In a quiet week for news as corporate’s hunker down for 4Q21 earnings season, it’s a good chance to revisit demographics which in our view rivals the race to Net Zero as one of the most important sustainability trends shaping investment returns over the next few decades.

  2. China’s adverse demographics are well known but the ageing and the peak of the population are happening faster than expected (in its 2019 projections, the UN expected China’s population to peak in 2030). China is not alone, however, with most other major developed economies experiencing similar demographic trends.

  3. Investors tend to dismiss demographic trends as too slow and too distant. Ageing and (working) population declines however have huge macroeconomic and fiscal implications. There is compelling long-term evidence that such dynamics are associated with deflation, downwards pressure on real interest rates and weaker economic growth, as well as sharply squeezing government finances. The latter is likely to force a shift in the tax base from income and consumption to wealth/capital. To replace the missing workers, governments must choose between raising retirement ages, encouraging immigration or embracing robotics.

  4. The implications for consumption are more nuanced. Yes, health and social care will continue to grow but the outlook for the so-called silver economy (for example cruise lines) may be more complicated with clear evidence that most workers have not saved enough for retirement to fund such discretionary purchases. Education may see rapid growth in lifelong learning offset declining demand for school and university places. One clear winner will likely be the automation/robotic space. Geographically, demographic trends favour the US, France and the UK over the rest of Europe and east Asia.

Human Rights : Deforestation free products coming soon ?


Deforestation enters regulatory crosshairs (3BL)

Main points of the story as published

  1. The EU’s draft regulation on deforestation-free products proposes to restrict imports of key agricultural commodities – cattle, cocoa, coffee, oil palm, soy, and wood – grown on land that was deforested after 2020, but it does not place restrictions on commodities linked to rights violations as defined under international standards. In the coming months, the European Parliament and EU member states will amend and vote on the regulation on deforestation-free products.

The take on this

  1. This week our good friend Kristina Touzenis, who has many years experience in the human rights field (LinkedIn profile here), has again kindly guest written the social & legal section of the weekly. Thank you Kristina. Just a reminder, this section is not written and prepared by Sustainable Investing LLP. Quite frankly, we are not experts in this field, so we leave the topic to those that are.

  2. Key measures in the proposal include –

  3. an explicit focus on environmental sustainability of products on the EU market, which doesn’t rely on varying national definitions of “legal” or “illegal” deforestation and instead includes all deforestation.

  4. due diligence requirement: businesses would be required to show that the risks of deforestation and forest degradation have been mitigated prior to placing a product or commodity on to the EU market.

  5. mandatory traceability requirements including geo-localisation of the point of origin of the product, thus allowing identification of where commodities were harvested and produced.

  6. enforcement mechanisms, including sanctions to ensure that those responsible for not complying with the law are held accountable.

  7. However, many are arguing the proposal does not go far enough. “The crucial flaw in the EU’s proposal is it doesn’t compel businesses to uphold international standards in regard to our land rights,” said Puyr Tembé, Executive Coordinator of the Pará State Federation of Indigenous Peoples (FEPIPA). “The world knows that the lack of protection for our rights has been a disaster for the Amazon and exposed Indigenous leaders to violence from cattle ranchers, loggers, and other invaders.”

  8. The link between protecting the environment and human rights cannot be overlooked without detrimental impact on both. Environmental destruction is often entangled with rights abuses against forest-dependent communities. Many of the most influential companies driving deforestation have yet to adopt policies to root it out from their supply chains, and those that have, have not enforced them.


One last thought

Apparently we are willing to pay more for greener cars (Transport & Environment)

We are skeptical but apparently a large majority of people support stronger EU air pollution rules for carmakers to make vehicles as clean as possible, a new YouGov survey shows. More than three-quarters (76%) of those polled said, when asked, that manufacturers should be legally obliged to reduce emissions from new cars as much as technically feasible. YouGov, commissioned by Transport & Environment (T&E), surveyed more than 8,000 people in seven EU countries: Germany, France, Italy, Spain, Poland, Romania and Czechia. Almost two-thirds (65%) of those surveyed who would buy a new car are willing to pay up to €500 extra – the maximum cost to manufacturers of significantly reducing car pollution. The EU Commission is weighing up proposals for new rules on car emissions that would help improve the appalling air quality in many European cities, which causes tens of thousands of premature deaths annually. The Commission estimates the cost would range from €100-€500 per car, but the car industry fears cleaner vehicles will hit their profit margins and are lobbying to weaken the new rules.[1]