Sustainable Investing weekly blog: 29th October 2021 (Issue 13)
Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon .
Our headline image is a chart from a BBC story (polls shows rising demand for government action) that covers a global poll that shows increasing support for climate action. We are not naïve enough to believe that showing support in a poll means the public will necessarily totally follow though – especially if change hits their wallets or the convenience of their lives. Polls, such as this one from KPMG and Fashion Summit in 2019 (sustainable fashion – a survey of global perspectives) showed high levels of support for sustainable fashion, yet consumers still buy fast fashion. The point is more the trend. If this continues, as we believe it will, the pressure for action grows, and the negative impacts on the laggard companies gets greater. Something to ponder – from a mid term perspective rather than what might happen at COP 26 next week.
This week our top story examines the recent NREL/DoE report that shows the positive value of joining the two big US grids via new interconnectors; then we look at the move by Tesla into a greater use of LFP batteries, we examine another report that looks at hydrogen vs heat pumps & district heating for our homes, we review the surge in IPO’s for plant based foods, before finishing with the recent Norwegian “wind farm vs reindeer case” (a win, at least for now, for the reindeer).
The format 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.
If you would like to subscribe, please contact Dan at email@example.com. For the next few weeks, we will focus on just four key stories, and then we will ramp up coverage. For now, the blog will be freely available but at some point we will shift to a public blog and a more detailed client ie subscription version.
This week’s top story : growing evidence that interconnector’s have positive NPV’s
Main points of the story as published
Uniting the Eastern and Western U.S. electric grids could offer significant value in strengthening the power system’s ability to share generation resources and flexibility across regions, according to the Interconnections Seam Study. Results of the multiyear analysis were recently published in the journal IEEE Transactions on Power Systems. With variable renewable resources like wind and solar contributing an increasing share of the nation’s electricity supply, the ability to transfer those resources across regions could be incredibly valuable—whether that’s in periods of power system stress, like extreme weather, or during a typical day when we want to take advantage of the best available resource.
Results show that increasing the transmission capacity between the Eastern and Western Interconnections could enable more economically efficient and flexible exchange of power throughout the United States—with scenarios showing up to $2.50 in benefits for every $1 of cost. Notably, the cost-to-benefit ratios do not reflect additional potential benefits, like increased resilience of the electric system to continue supplying low-cost energy during catastrophes such as large hurricanes and widespread wildfires,
The importance of being able to shift power where it is needed most can be seen in action, thanks to a series of animations available on the NREL Learning YouTube Channel. Created by NREL’s data visualization experts, these videos show modelled hourly system-wide generation and transmission flows across the United States under different scenarios and system conditions.
Our take on this
The economics of renewable electricity generation continue to get stronger, as shown by recent competitive bids (Saudi Arabia’s second PV tender draws world record low bid) and the recently published Lazard levelized cost of energy (LCOE) report (levelized cost of energy storage and hydrogen 2021). We should be planning for an increasing percentage of renewables in our electricity generation mix.
In the spirit of our view that the future will look very different from the past, in thinking about the future electricity grid we need to stop using the old structure of electricity supply being generated close to demand, and accept that cheap renewables need to be where the wind and sun (& hydro) resources are. Which means more battery storage and more interconnectors (plus smarter demand and grid management).
For those who have travelled across the US for business know, its a country of multiple time zones (as is Europe – but that is a discussion for another day). Connecting the sources of cheap renewable electricity (including wind in the mid west and solar in the south and west) to the big demand centres will require new interconnectors. In the future power system, extra solar generated in the Southwest could be used to meet peak electricity demand in the East. Then, as the sun sets in the West, the strong wind resources in the Midwest and Great Plains could be dispatched in the other direction. While the politics of building these are messy, we are seeing real signs that this logjam could be close to being broken (we have written on this recently – contact Dan to discuss receiving our research).
This is the latest in a series of reports that highlight the positive economics, both for grid operators and the wider society. A recent report from the Lawrence Berkeley National Laboratory (record amounts of renewables & storage in the connection queue) highlighted that at the end of 2020 a new record of over 750 GW of generation and an estimated 200 GW of storage capacity were waiting in the connection queue.
Electricity applications – the rise & continued rise of LFP batteries ?
Main points of the story as published
Tesla confirmed that it is moving Model 3 Standard Range production to Lithium Iron Phosphate (LFP) battery cells at it’s Fremont factory. The company also wants the production of the cell, which has to date been only produced in China, to be closer. Iron phosphate (LFP) batteries are traditionally cheaper and safer, but they offer less energy density, which means less efficient and shorter range for electric vehicles.
However, they have improved enough recently that it now makes sense to use the cobalt-free batteries in lower-end and shorter-range vehicles. Tesla already moved its Standard Range Model 3 and Model Y produced in China to LFP cells.
Our take on this
This is something we have been flagging as a possibility for a while now. As this article says (cheap & abundant LFP batteries will power mass market EV’s), while LFP batteries have historically been seen as having too short a range, the newer technologies are making this a thing of the past. As Tesla says “we think that getting a range that is in the high 200s — almost 300 miles — with an iron phosphate ie LFP pack, taking into account a whole bunch of of powertrain and other vehicle efficiencies, is possible”. This range is more than enough for the typical mass market EV.
LFP’s basic advantage is that, relative to the conventionally used nickel-based (NCA etc) cathode chemistries, its key constituent minerals — iron, phosphates, and more recently, trace amounts of manganese, are highly abundant, and relatively inexpensive. Unlike the longer range NCA batteries, there is no expensive nickel and they avoid the ethical issues around the mining of cobalt.
Plus, while LFP cells do not have quite as high energy density as nickel-based cells, the difference is minimised by their not needing as complex (and heavy) packaging in EV battery packs. So, while the energy density at cell level is roughly 190–200 Wh/kg for LFP compared to 275–300 Wh/kg for nickel-based cells, energy density at the pack level (the combination of battery cells and control/cooling equipment etc) is a much closer 160 Wh/kg vs. 200 Wh/kg. And its the “in car” pack level that really counts.
We expect that as EV’s increasingly move into the mass market, the use of LFP batteries will rise. This follows the story we highlighted last week about the expected increasing use of LFP batteries in stationary storage. Maybe the 2020’s will be the decade of the LFP battery !
Electricity applications – why are we still talking about hydrogen for home heating ?
Main points of the story (soon to be published)
With over a third of the United Kingdom’s greenhouse gas emissions, decarbonising heat is key to achieving the Government’s net-zero target by 2050. Heating accounted for about 37% of the UK’s carbon emissions in 2017 but this is now approaching 50% as electricity, but not gas, is being decarbonised. Our results show that systems with heat supply based on consumer or district heat pumps require about four times less electricity per unit of heat, with a heat cost about half of that from electrolytic hydrogen boilers.
Moreover, as heat pumps require less electricity than hydrogen, the requisite primary supply could be developed faster and, therefore potentially facilitate a more rapid achievement of the net-zero target and of reduced cumulative emissions. Furthermore, we compare trade-offs between investment in different infrastructure components. For example, we find that, compared to the reference scenario, increasing renewable capacity by 33%, or interconnections by 200%, can lower system storage capacity requirements by up to 50%.
Our take on this
It feels a bit like a “stuck record” on our part but as the UK government continues to push hydrogen as a potential fuel for home heating (Carbon Brief UK budget review), yet another piece of research supports the conclusion that there are other, better (cheaper) alternatives. We get the fact that politically, saying that homeowners could simply shift to hydrogen boilers with some “small” modifications to existing gas boilers. Lower cost and less hassle is a great message. Its just from a financial perspective we really struggle to see why companies should invest – unless of course you think the government will foot all of the bill ?
Linking back to our interconnector theme, this report also backs a greater use of interconnectors (in this case the UK to Europe) as a cost effective way of coping with the combination of higher electricity demand and a greater use of renewables in the generation mix.
Agriculture & Natural Capital – too many plant based food IPO’s ?
Main points of the story as published
Veganz, which launched in 2011 and pioneered the plant-based food segment in Germany, is planning to IPO later this year. It sells over 100 plant-based products through major food retailers as well as its own supermarkets in Berlin. Other imminent IPOs of plant-based food companies include Eat Just and Impossible Foods
Our take on this
Ahead of our planned coverage of the foodtech theme within our broader agtech framework, the proposed Veganz IPO highlights several important trends and themes in the alt-protein space (defined by the Good Food Institute as “meat, egg, or dairy products that are plant-based, cultivated, or fermentation-derived”). We note very strongly – we have not analysed this specific company and so nothing in these comments should be taken as either a positive or negative comment on the prospects for Veganz. Our “take” is very much on trends we are seeing in the general theme. We hope that is really clear !
Foodtech is the hottest theme within agtech accounting for 39% of all VC funding in the space in the last 18 months, triggered by Beyond Meat’s hugely successful May 2019 IPO and reinforced by the success of Oatly’s IPO in May this year. At their peaks, they had market caps of US$14.9bn and US$17.2bn respectively although enthusiasm has cooled since with share prices more than halving.
At the same time, consumer demand is growing strongly with US retail sales of plant-based foods up 27% in 2020 helped in part by a reappraisal of people’s diets and lifestyles post Covid. Plant-based foods are expected to sustain a CAGR of 19% globally over the next 10 years. Not surprisingly, new entrants and major manufacturers and retailers have responded with a slew of product launches including from Nestle and Tesco, while suppliers are targeting the ‘novel food’ segment e.g. Novozymes and GEA.
At the risk of being cynical, there is an element of the emperor’s new clothes. While Impossible Foods uses innovative new technology (heme, derived from GM yeast, recreates the bloody appearance and flavour of a meat burger), others are using existing technologies (textured vegetable protein was invented by Archer Daniels Midland in the 1960s) but repackaged under the ‘plant-based’ label. Plant-based milks have been around for a long time as well, with soya milk sold in Europe and the US for over 100 years while Oatly pioneered oat milk in the mid 1990s.
Regardless of the newness of the technologies, incumbents have two dominant advantages over new entrants: the ability to produce at scale and massive distribution power of what is essentially a commodity product. Unless new entrants have unique and defendable IP or can quickly leverage a first mover advantage, they will likely struggle to compete and will exit unless they can carve out a niche or licence their technology.
Social and Legal factors
Photo by Mahosadha Ong on Unsplash
This week our good friend Kristina Touzenis, who has many years experience in the human rights field (LinkedIn profile here), has 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.
Main points of the story as published
Norway’s top court has ruled that two wind farms in the country’s west have violated the rights of Sámi reindeer herders. Wind turbines on Norway’s Fosen peninsula have illegally encroached on the herders grazing land, the court ruled. Judges at the Norwegian Supreme Court declared that the license for wind power development at Fosen was, therefore “invalid”.
Construction at the two sites by the Norwegian Water Resources and Energy Directorate (NVE) was completed in 2020. But the project received a backlash as the wind turbines were located within the Fosen reindeer grazing district.
The Court based its decision on Article 27 of the International Covenant on Civil and Political Rights (ICCPR) which states that minority ethnic people “shall not be denied the right, in community with the other members of their group, to enjoy their own culture, to profess and practise their own religion, or to use their own language”.
Kristina’s take on this case
A minority group may be defined as a group with “linguistic, ethnic or cultural characteristics, which distinguish it from the majority.” This is distinguishable from the identity of the majority group, which is generally not considered to be a specific identity, other than that of, for example, a nation, and the identity of the minority group is “always experienced as particular and a specific to them”, with this identity being based on their membership as a group, and the fact that “race, ethnicity and culture are central” to human identity. In this way, international law recognised the importance of legal protection and measures to improve the participation of members of minority groups in society.
Human Right are in essence about protecting people with less power against arbitrary or unlawful actions by people or entities with more power – that can be the State which is the “direct duty bearer” under a convention such as the ICCPR as well as other entities such as big firms, a landlord vis-à-vis renters (unlawful eviction, rent control), or actions of the majority against a minority. In this case the specific protection is of a minority population and the rights of that minority to live according to customs – including nomadic grazing. The protection is against the actions of a private entity – horizontal protection which we have mentioned before.
Apart from Art 27 of the ICCPR there are also a number of other other provisions in international law which address the issue of the protection of minorities; these include the Declaration on the Rights of Persons belonging to National or Ethnic Religious and Linguistic Minorities of 1992 and the International Convention on the Elimination of All Forms of Racial Discrimination of 1965, specifically Articles 1(1) and 1(4) , although thus does not provide specifically for the rights of minorities. Nonetheless, this does require states to “prohibit and bring to an end, by all appropriate means, including legislation as required by circumstances, racial discrimination by any persons, group or organization.” The UN Declaration on the Rights of Indigenous Peoples, adopted by the General Assembly in 2007, states that indigenous peoples have the right, without discrimination, to the improvement of their economic and social conditions.
Indigenous peoples constitute a disproportionate 15 per cent of the world’s poor whereas they are an estimated five per cent of the world’s population and it is crucial to address this in order to realise the SDGs. This is a landmark case because it shows that the rights guaranteed to indigenous peoples cannot be overridden by other concerns willy-nilly. A fundamental human rights principle is the principles (and right) to participation which requires actual and meaningful engagement of rights-holders (also knows as “stakeholders”). This case shows what is at risk if such engagement is lacking when a company plans a seemingly good and green activity and does not do a proper do-no harm holistic assessment of impacts on peoples’ rights.
One last thought
On 2nd November, the good citizens of the state of Maine will be asked to vote on a ballot initiative that “seeks to kill the New England Clean Energy Connect (NECEC) project, a power line designed to provide Massachusetts utilities with carbon-free electricity from Canada”. We have flagged this project, and its challenges, before. The ballot initiative centres on the roughly $1 billion NECEC transmission project, which is designed to deliver 9.45 million MWh a year from Hydro-Québec to utilities in Massachusetts. It’s enough electricity to power about 1.2 million homes. Besides killing the NECEC line, the measure would also bring the Maine legislature into the transmission process by requiring a vote on “high-impact” power lines. Those are defined in the ballot question as power lines that are at least 50 miles long, are direct current lines or at least 345-kV, and not mainly being built for grid reliability. Transmission lines and pipelines that cross public land would need a two-thirds vote by both chambers of the legislature per the initiative.
Five power companies — Avangrid, Hydro-Québec, NextEra Energy Resources, Calpine and Vistra — have apparently spent $96.3 million trying to convince Mainers how to vote. Its a big deal. We will watch the result with interest.