Sustainable Investing weekly blog: 6th March 2022 (Issue 28)
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.
Much of the world’s attention is again focused, quite rightly, on the war in the Ukraine. One of the many questions this war has prompted is the future of Europe’s dependence on Russian gas. This week we have taken a slightly different approach to the normal blog format, concentrating primarily on the various moving parts of this debate.
Our top story covers the IEA 10 point plan – from an investment perspective there are three or four big moving parts. In Generation, we examine the potential for adding even more renewable generation & questions about increased nuclear production, in Grid Stability, we look at the increasing role of renewable’s & battery storage, and in Electrification we revisit progress on heat pumps and building energy efficiency. Note that for this blog, as a one off, we are using older stories (many of which we have covered in recent months) to highlight some important issues. In a shift of focus, we finish up in Agtech, where we discuss the apparent lacklustre demand growth for plant based foods. We finish with our “one last thought”, this time on an interactive visualisation tool that models the future German power supply system with bidirectional electric cars as buffer storage (V2G).
We apologise, this weekly is a bit longer than normal, but these are not normal circumstances.
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 : IEA 10 points : a viable plan to minimise Russian gas ?
Main points of the story as published
The European Union could reduce its imports of Russian natural gas by more than one-third within a year through a combination of measures that would be consistent with the European Green Deal and support energy security and affordability, new IEA analysis shows. In 2021, the European Union imported 155 billion cubic metres of natural gas from Russia, accounting for around 45% of EU gas imports and close to 40% of its total gas consumption.
The key actions recommended in the IEA’s 10-Point Plan include not signing any new gas contracts with Russia; maximising gas supplies from other sources; accelerating the deployment of solar and wind; making the most of existing low emissions energy sources, such as nuclear; and ramping up energy efficiency measures in homes and businesses. Taken together, these steps could reduce the European Union’s imports of Russian gas by more than 50 billion cubic metres, or over one-third, within a year, the IEA estimates. This takes into account the need for additional refilling of European gas storage facilities in 2022.
The IEA analysis notes that other avenues are available to the EU if it wishes or needs to reduce reliance on Russian gas even more quickly – but with significant trade-offs. The major near-term option would involve switching away from gas consumption in the power sector via increased use of Europe’s coal-fired fleet or by using alternative fuels, such as oil, within existing gas-fired power plants.
Our take on this
Good plan – not a realistic time scale. Last week we highlighted research from the Bruegel think tank, that argued that while the EU would likely be able to survive large-scale disruption to Russian gas supplies over the summer, if a halt of Russian gas was prolonged into the next winters, it would be more difficult for the EU to cope.
The IEA research takes a slightly different tack – basically asking the question “what can be done in the next year to minimise any exposure to Russian gas”. Overall we think this is a good plan, its just not one that could be implemented in a year. But its still a good start on a template for longer term action.
We are not energy experts, so we dodge having a view on the practicality of some of the suggestions (No 1 – no new gas supply contracts, No 2 – replacing Russian gas with other sources including LNG, and No 3 – introducing minimum gas storage obligations). Similarly, measures to protect consumers from high prices (No 6) & reducing thermostat temperatures (No 9), are political judgments, also outside our scope of competence.
Our focus is therefore on the investment questions – can we really accelerate the deployment of new wind & solar (No 4), increase generation from biofuels and nuclear (No 5), and replace gas boilers with heat pumps (No 7)/accelerate building energy efficiency (no 8). On No 10, a step up of efforts to diversify and decarbonise sources of power system flexibility, we continue to push the importance of this, both as a shorter term tool to assist in reducing demand for Russian gas and more importantly, as an absolutely essential (but often unnoticed) element of the electricity grid decarbonisation.
Overall, while we can see the logic of all of these measures, we really struggle to see how it can be done quickly, no mind before the worst impacts of next winter kick in. Hopefully we are wrong, after all European governments managed to throw vast amounts of spending at COVID, but we argue this problem is harder to fix.
None of this negates the need to take many of these actions anyway. If governments see the risk around Russian gas supplies as a trigger for action, then these are moves we would welcome.
Electricity generation : can Europe accelerate renewable deployment ?
Main points of the story as published (24th Feb 2022)
Complex and slow permitting procedures are stalling the rollout of wind power in Europe, meaning the EU will likely miss its climate goals and be dependent on unreliable gas supplies for longer, the wind industry has warned. The latest report from the industry body WindEurope, published on 24 February, gives a grim picture of a struggling European wind industry – just as EU leaders call for more renewables to alleviate the energy crisis.
“Land is not the issue. Finance is not the issue. Technology is not the issue. Public opinion is not the issue. It’s the sheer complexity of the permitting procedures,” the CEO of WindEurope Giles Dickson told EURACTIV. According to the report, in 2021, the EU installed 11 gigawatts of wind power and is expected to install an average of 17.6 gigawatts between now and 2026. This falls short of the 32 gigawatts the industry says is needed to reach the EU’s target of 40% of renewables in its energy mix by 2030.
Our take on this
This article, from February 2022, highlights one of the biggest practical problems in accelerating the roll out of more European renewables (in this case wind). Its permitting. And just in case you think its the industry asking for special treatment, their concerns were echoed in the European Parliaments response to the European Commission’s offshore renewable energy strategy.
This was also highlighted as a concern in a 2021 article by lawyer Chris Turner on the challenges faced in hitting the UK target of 40GW of offshore wind by 2030. To quote the article “It is no secret that securing permitting for offshore wind farms is the most problematic aspect of the process. It’s a complicated process that can cause significant delays — or cancellations — to projects as well as hugely increasing the risk for investors.”
And this is not just about the turbines themselves, some of the biggest permitting issues focus on the onshore connection points and communities. A good example of this from the UK is in relation to the onshore infrastructure needed to support two big wind farms (Boreas & Vanguard) off the Norfolk coast. Here, more than 80 Norfolk towns and villages joined forces in a plea to the Energy Secretary to refuse planning consent. Planning was eventually granted, in December for Boreas and in February for Vanguard, but we would be surprised if that is the end of the objections.
Elsewhere, Germany decided that the massive North South inter-connector (SuedLink) will be built underground, after the four year planning process was delayed due to protests from local residents and state governments against new power lines.
The “problem” is that its right & proper that all of the impacts of major renewable projects on the local communities and the environment are properly considered. More than perhaps any other infrastructure, renewable’s need public consent. To short circuit the planning and legal process would put the current level of support at risk.
How much difference could this make ? The IEA argue that a concerted policy effort to fast-track further renewable capacity could deliver an additional 20 TWh of supply over the next year. This is on top of the forecast 100 TWh of projects already expected (already up 15% on 2021). Plus, they could see an extra 15TWh from a faster deployment of roof top solar PV.
The problem is that we really struggle to see how an accelerated roll out of renewables can be made to happen. Yes, the process is cumbersome, and yes, there are ways of streamlining project approvals, but not in enough time to make a difference to next winter. To us, that’s a 6 bcm reduction (the IEA estimate) that just will not happen.
Electricity generation: can more nuclear fill the gap ?
Main points of the story as published (8th February 2022)
In early February French energy giant EDF slashed its nuclear output forecast for 2022 to 295-315 terawatt-hours from a previously expected 300-330 terawatt-hours, saying this was related to nuclear safety controls. The company said its new output forecasts took into account known or suspected corrosion problems on 11 reactors. It said three – Chinon 3, Bugey 4 and Cattenom 3 – faced unscheduled shutdowns. Two reactors had shutdowns extended. Penly 1’s shutdown would run to Oct. 31 and Chooz 1 would stay shut until Dec. 31.
EDF’s forecast shows nuclear output will fall by 2.5 to 3 gigawatts (GW) on average in 2022 and analysts said it raised concerns for 2023, given the risk of outages being extended. The company plans to announce its 2023 forecast “as soon as possible”.
Our take on this
Ten nuclear reactors out of France’s 56-strong fleet (Europe’s largest) are currently out of service for various reasons, accounting for about 20 percent of the country’s nuclear power capacity. Many French plants are coming to the end of their expected lifespans of 40 years, and new additions are facing even more problems.
Earlier this year, EDF announced extra delays and cost overruns for its troubled new-generation nuclear plant in Flamanville in northern France on Wednesday. Projected costs have increased by another E300m to E12.7 bn — around four times more than the initial forecast of E3.3 bn. The Flamanville plant would not be loaded with fuel until the “second quarter of 2023”, meaning it would come on stream only towards the end of next year at the earliest.
Around the same time, Finnish operator Teollisuuden Voima (TVO) announced that the starting of electricity production at Olkiluoto 3 would be further delayed, after they found the plant’s control functions needed to be modified.
The IEA 10 point plan had penciled in gas usage reductions of c. 13 bcm’s from extra capacity from nuclear (c. 1/3) and more use of biofuels (c. 2/3). This includes almost 1 bcm of savings from not closing the four nuclear reactors due to close this year and the 1 due in 2023.
Grid Stability : how can we make the grid more flexible
Main points of the story as published (14th February 2022)
National Grid ESO, the UK grid operator, will for the first time be able to procure grid stability services from renewable generators, in a move seen as crucial to decarbonising the power system and enabling net zero. This follows the approval of the new rules (GC0137) by Ofgem on January 31st 2022 following a lengthy development process. The code change was formally implemented on February 14th 2022.From this date wind, wave and solar generators will be able to offer the kind of stability services which have traditionally been delivered by conventional generators.
The move is a result of a game changing modification to the GB Grid Code – the rulebook that sets the specification for everything that connects to the grid. This Grid Code change sets a specification for ‘grid forming’ or virtual synchronous machine capability which will enable renewable generators across Britain and interconnectors to compete to provide stability services alongside operators of synchronous (ie fossil fuel etc) generation.
Our take on this
Regular readers will know that we bash on endlessly about the importance of electricity grid flexibility and stability. Building more renewables often gets the publicity, as it has with the IEA 10 points, but its the grid investment that will make this extra generation possible. As the IEA statement highlights in No 10, a portfolio of options will be required, including enhanced grids, energy efficiency, increased electrification and demand-side response, dispatchable low emissions generation, and various large-scale and long-term energy storage technologies alongside short-term sources of flexibility such as batteries. To this list we would also add interconnectors.
One aspect of this we want to focus on this week is battery storage. Recent reports from California (CCA selects Li Ion battery for 8 hour storage), suggest that that Li Ion batteries are increasingly offering longer duration storage. This is a big change from only a few years ago, when their main use was 1 hour or maybe 2 hour duration.
In Europe, it is claimed that batteries could take 1/3 of new frequency response market. This follows a major piece of work down for the European PICASSO project. The project has triggered a review of market rules, which historically excluded battery storage from participating in the main European secondary reserve market in most countries.
For the non tech people reading this primary reserve stops extreme frequency drift when there is an imbalance event with a big and rapid-response (<30 seconds) power output. Secondary reserve returns the frequency to its nominal value and requires longer activation periods, sometimes up to 2-4 hours.
The exclusion of battery storage is expected to change with the new automatic frequency restoration reserve (aFRR) scheme’s launch and rollout. France and Germany will be leading the way with the implementation of the platform around the middle of this year. They will be followed within a few months by a large group of countries including Italy, Belgium, Switzerland or Slovenia. And then more countries like Spain, Portugal, Poland or Sweden will join around 2024.
The good news is that these measures are underway. The bad news is that the planning for these takes time. In the case of just this one project, its the result of years of work, starting with a stakeholder conference in Berlin in 2017. Implementation should be done by 2024, so seven years in total. That is just how long these things take.
Electrification: can we really add heat pumps & building upgrades in 1 yr
Main points of the story as published (1st March 2022)
Experts see heat pumps as one of the main solutions for tackling the carbon emissions associated with keeping buildings warm, both in the UK and internationally. Yet sales of the technology, often likened to a fridge running in reverse, have remained stubbornly low in many countries. The latest figures, collated in this article for Carbon Brief, shows the tide is beginning to turn, with sales in 2021 seeing double-digit growth in countries ranging from Austria to China.
The International Energy Agency’s (IEA) pathway to net-zero by 2050, includes 1.8bn heat pumps in buildings in 2050 providing 55% of energy demand for heating globally. This compares with just 180m units installed today, providing 7% of heating.
Until recently, the heat pump market has been growing far more slowly than required in the IEA scenarios. This is evident from the IEA’s global heat pump stock figures , which shows that at current trends only 253m heat pumps would be installed globally by 2030, compared with the 600m units needed by that year in the IEA’s net-zero scenario – a shortfall of 58%.
However, following the 2020 slowdown, initial data suggests the heat pump market saw a strong recovery in 2021, with double-digit growth in some of the countries where figures are available. Across Europe, for example, the European Heat Pump Association (EHPA) expects market growth to have exceeded 25% in 2021, hitting 2m units sold per year for the first time.
Our take on this
Heat pumps are one part of the solution if we want to decarbonise our buildings, one of the big consumers of gas and generators of greenhouse gas emissions. And they serve as a useful reminder of just how difficult it can be to drive change. The barriers to their increased adoption (cited by a number of UK studies) include cost, disruption (linked to installation), noise (as generated by air-source heat pumps), thermal comfort (slower to reach room temperature vs traditional gas boilers), space constraints and aesthetics. To this we would add a lack of consumer education. In those countries, such as the Nordics, where heat pump use is common, the supportive programmes started years, and in some cases, not decades ago.
Yes, we agree with the IEA that heat pumps (plus building upgrading, an even more challenging task) can make a massive difference. But again, we really struggle to see any pick up in their installation being able to make a real difference to Europe’s gas demand as soon as next winter. This is another aspect of decarbonisation that needs a lot more attention, but again we should not expect this to be a quick fix.
Agtech: has the excitement gone out of plant based foods
Main points of the story as published
German Federal Health Minister has called for incentives to cut meat consumption in Germany by 80%. These would include taxing meat and subsidising alternative proteins such as plant-based. Prof. Dr. Karl Lauterbach argued this was essential for three reasons, Net Zero targets, animal welfare, and human health.
This week also saw the Netherland’s largest supermarket, Albert Heijn, announce a target of 60% of all proteins it sells to be plant-based by 2030. As part of this goal, it launched 150 new plant-based products to add to its existing 1000+ range.
The latest IPCC report (‘Climate Change 2022: Impacts, Adaptation and Vulnerability’), published this week, also highlighted the need to transform food systems, including increased production of cultivated meat and plant-based foods and, echoing the German Health Minister, proposed shifting subsidies from animal sourced foods to plant-based foods.
Our take on this
In contrast to bullish governmental and supply headlines, the demand for plant-based foods appears lacklustre. Last week, Beyond Meat and Maple Leaf Foods reported 4Q21 sales declines of 1.2% and 3.7% respectively versus the prior year. Beyond Meat CEO was asked on the quarterly earnings call “whether this reduced growth rate is an aberration or a harbinger of things to come” while Maple Leaf’s COO was more forthright: “After years of spectacular growth, the category has in fact stalled”.
As with many themes linked to sustainability, plant-based foods saw spectacular growth in 2020 as the Covid pandemic saw people reassess their views on health and the environment. In the US, for example, plant-based meat grew by 45% versus 2019. Germany saw a 4% decline in meat sales as consumers embraced animal alternatives.
For alternative proteins and plant-based foods to materially take share from their animal product equivalents, they must clear four hurdles: taste, texture, health/nutrition and price. All four hurdles are becoming more challenging in the short term. While the products of leading players such as Impossible Foods are matching the taste and texture of meat, many recently launched products do not (supermarket own label being prime examples). This damages the category. Many plant-based foods are also highly processed and lack the micro nutrients of animal products.
Price is the immediate challenge. With the recent increase in general inflation rates and higher food prices specifically (wheat prices have risen by a third since Russia invaded Ukraine), consumers are becoming more sensitive to food prices as their budgets are squeezed. Alt-proteins are yet to reach price parity with their animal equivalent and are unlikely to do so for another 1 to 3 years, according to BCG-Blue Horizon.
The real challenge is the industry economics. Ultimately, we think there will be enormous growth over the next decade; alt-proteins global market share of meat and dairy is a mere 1% today. The critical question is the likely return on investment and who is best placed to capture market share. The alt protein market fundamentally delivers a commodity product and will likely be characterised by increasing competition as the food majors enter. The plant-based segment is already a crowded space with a myriad of start-ups. While new brands that tell a story which resonates with consumers may gain a foothold, the incumbent food brands, with their distribution power and routes to market, will likely dominate.
One last thought
“Imagine that on a beautiful sunny day (especially with further increasing solar expansion) significantly more electricity is generated than we need. Instead of curtailing the excess electricity, as is often the case today, it is charged into the batteries of EV’s and then made available to the power grid again at night. LADE ‘s V2G simulator (above) shows exactly what this looks like. It visualizes the power grid of the future and shows the potential of bidirectional charging. At the moment, we are still a long way from widespread use of V2G. Only a few electric vehicles allow electricity to be drawn from the batteries, there is no political framework conditions or common standards for communication between the charging point and the car. So there is still work to be done for V2G to reach its full potential. ” But, change is happening slowly, its a topic worth tracking.