Christmas Special Number 1: Energy Transition and Why We Should Not Panic..

Blain’s Morning Porridge, 21^st December 2021 – Christmas Special Number 1: Energy Transition and Why We Should Not Panic..

“Now is the solstice of the year, winter is the glad song that you hear..”

This morning: Climate Change and Energy Transition is one of the great challenges to capitalism and market economies – but there is no reason to fear it. Its complex, but infinitely solvable. The technologies exist to achieve carbon neutrality by 2050 at a cost far less than doomsters fear.

I suppose you might consider this my Christmas Lecture for 2021.

This morning is not only the Winter Solstice (check out Jethro Tull’s Solstice Bells as perhaps the most underappreciated Christmas song..), but it’s also the 30^th anniversary of “switching on” the first UK wind farm in Delabole, Cornwall. Since them we’ve seen the creation of a whole new renewables industry. Whatever you believe about climate change there is an outpouring of invention and innovation of exciting new renewable tech and solutions around the globe, which at worst will improve our environment immeasurably, and at best mitigate climate change.

It’s an exciting time to be involved in Climate Change and Investment. There is nothing to fear except fear itself.

Energy transition is one of the key themes that wakes me up each morning. I want to make sure we get it right – which is why I so often find myself ranting against the distortions of ESG (Environment, Social and Governance) investment wokery, and warning how overly zealous green politics could make things a thousand times worse.

The thing is – I might be one of oldest environmentalists active in finance! 40 years ago I was studying environmental economics. I care about our environment, but also how we cater for a still growing global population in terms of global growth. The two are not mutually exclusive.

One of the aims of the Morning Porridge is to identify the critical long-term themes likely to unsettle markets: Geopolitics? Inflation? Economic Growth? These are all issues markets are used to pricing – they are understood, and in the immortal phrase are “known unknowns.”

Energy Transition – transforming global energy supply to improve the environment and avoid the consequences of climate change – is now front and centre for most major investment firms. Analysts, commentators and investors believe they fully grasp it. I disagree. It’s a new concept, incredibly complex, yet still dimly understood. The risks of getting it wrong are huge, and as usual.. mankind is doing it in a distorted unplanned rush.

To my way of thinking Energy Transition is still definitionally a “unknown unknown”. To make it work, we need governments and finance to think about it, and properly plan it. Many people believe it’s too late, it’s impossible and the only solutions are radical destruction of capitalism.

But!… What if I was also to tell you the right mix of already existing Energy Transition strategies could mean we successfully decarbonise and reach carbon neutrality easily by 2050?

And, let me add to your confusion by stating we can achieve carbon neutrality without destroying the global economy through either impossibly damaging costs, or by sinking it though ill-considered ESG Environmental Talibanism?

You are probably confused; a) wondering what an arch-pessimist like myself has been smoking, b) thinking it impossible, or c) perhaps you are intrigued as to how?

It won’t be easy. Energy Transition is going to be a challenge – by 2050 we will need to remove or have abated 80 Gigatonnes of CO2 per annum from the atmosphere. That’s up from 50GT in 2020 – the result of economic growth and the global population growing from 7.7 billion to 9.2 billion people in the next 30 years. Depressingly, the largest source of CO2 emissions (11%) comes as a result of deforestation – the equivalent of cutting our lungs out even as we struggle to breathe.

It will not be easy. If Governments aren’t seen to be getting it right, then the ground will shift beneath us. The increasingly strident climate protest lobby will likely to cause even greater political destabilisation – making climate-change mitigation even less likely. We have to shift the subsidy culture that still supports fossil fuels, but, as the current gas supply crisis highlights, we can’t wean the economy off oil overnight without making the current energy crisis worse!

Long-term there is still a bright future for the oil business – not producing fuel, but all the other oil derivatives that keep their carbon sequestered, but are vital for global growth. We won’t grow the global economy without plastics (recyclable of course), adhesives, rubbers, and a host of other oil based products.

Stop fearing climate change. Energy Transition is an enormous opportunity… for everyone! It all depends on how we go about it.

I was asked during an interview last week to name my biggest threat to markets in 2022 and replied Energy Costs. I remember the 1970’s oil shock and that’s why I recently bought a home generator.

I’ve been watching China – it’s facing a desperate gas shortage through this decade. (That partially explains it’s rush to introduce new renewable energy sources.) Energy bottlenecks mean China is now burning more coal for power than ever before, resulting in a quadrupling of coal costs this year. Energy costs have gone through the roof. The economic threat to China is immense – no wonder the CCP has told industry to secure its power and energy sources at any cost!

The knock-on effects of Chinese demand partly underlie the spiralling cost of Energy in Europe. The reality is that gas shortages (largely caused by ESG enforced underinvestment), will result in the global economy burning 2 extra giga-tonnes of coal every year this decade more than we expected. Far from cutting emissions, the ESG impact on fossil-energy financing has resulted in an increase in the burning of coal – which is still the primary fossil energy source. Doh!

The price and source of energy is just one aspect of Energy Transition.

If you were to push me on the most critical thing to understand in current markets – it’s the consequences of Energy Transition. Even the smartest fund managers I speak with tend to regard it as some kind of trade-off between Coal yesterday, oil and gas today, and Electric Vehicles (EVs), Wind, Solar and Hydrogen tomorrow. They understand the costs of that transition will be huge, but also they have to happen.

What many don’t seem to grasp is that’s an incredibly simplistic, almost binary, view of the future global energy economy. Transition choice is an incredibly complex, evolving, multi-connected and interrelated beast. The consequences of doing one thing impact everything else. If you change the cost of steel by making metallurgical coal insanely scarce and expensive by denying investment in coal, then it pushes up the price of everything else including solar, wind and nuclear.

EV’s are another good example of limited consequential thinking. To put as many EVs on the road as the markets expect (based on the insane EV stock valuations) we will need to mine literally every atom of lithium on the planet, creating enormous social and environmental damage, let alone the cost of retrofitting national grids to enable more charging stations. Somewhere there is an optimal solution – and a technological path to a cleaner solution. (Which long-term will probably be hydrogen based.)

Watching the recent COP26 dialog I saw few signs the global regulators and authorities really grasp the degree of complexity. Certain former central bankers urging an end to all fossil funding look worryingly ill-informed about the realities of energy transition.

If I have one recommendation for 2022 it’s that you take time to inform yourself on how Energy Transition is going to affect absolutely everything you understand about markets.

Fortunately – there is a really simple way to learn about Energy Transition.

Every so often something extraordinary comes across my desk. Often, it’s a dire warning about some facet of economic mayhem about to destroy us all. But, on occasion it’s a piece of in-depth research that gives me hope for future. One such moment occurred earlier last week when my chum and energy grandmaster Rob West of Thunder Said Energy sent me his latest “roadmap” update on “Decarbonising Global Energy: The Route to Net Zero?”

If you want to learn about transition, then subscribe to Thunder Said Energy. Rob gets the complexity of Energy Transition and is one of the foremost analysts covering renewable energy and carbon emissions. (I’ve written about Rob and Thunder Said Energy many times in the Morning Porridge.) He is pretty much a one-man band, and I think that’s vastly preferrable to being part of a large analyst team tied to whatever client relationships the bank they work for is trying to milk.

In his new updated roadmap to Net Zero, Rob concludes we can successfully abate the 2050 CO2 zero target, and even exceed its targets!

He’s come to that conclusion by digging through more than 120 different economic models, 750 research papers, while updating and re-examining the costs and returns of every single Carbon Abatement approach. He sees Energy Transition as a game of chess – his trick is to take time to understand the “whole-board” – and to understand how the enormously complex transition machine ticks.

Far from Energy transmission being a choice between wind, solar, hydrogen and EVs, Rob has broken out of small silos, and identified not 4, but some 70 different technologies that could contribute towards net zero. His conclusions are startling: the right mix of CO2 mitigation strategies and tech approaches could achieve carbon neutrality faster, and at a lower than expected cost, placing an entirely manageable 1.5% drag of Global GDP at around $40-$120 per tonne of saved CO2. That’s massively cheaper than many expect – many other estimates are between $400-800 per tonne of mitigation.

Year-by-year Rob’s numbers are getting better – and that’s because the technology is improving, exactly as we’d expect as the world wakes up to Climate Change. To cut carbon emissions to zero we still need to transition to non-fossil renewable energy in the long-term, but accept for the next few decades that will involve a mid-term transition from coal to gas before we go wholly renewable.

However, the really exciting developments are other areas; how much more efficient new tech is becoming, improvements and rising innovation within Carbon Capture, Utilisation and Storage (“CCUS”) technologies, and a growing realisation that nature-based CO2 removals through approaches like soil-improvement could remove massive amounts of the CO2 overload.

For instance; many years ago I was looking at financing a number of waste-treatment projects that relied on pyrolysis – the business of burning waste without oxygen. The by-products were gas and “carbon char”. These projects attempted to create high quality carbon-char to be used in tyre manufacture – so called Carbon Black. The problem was they all worked fine in theory, but in practice the equipment couldn’t produce the required quality. I used to joke that anyone seeking funding for pyrolysis projects would immediately be shown the door. Yet…. Now that carbon char has been shown to be a great way of sequestering the carbon from waste and plastics, and it’s a great soil improver – it’s an old technology that anyone involved in cutting-edge new tech in other areas might have missed.

The technologies Rob has concluded will be able to mitigate climate change without crushing the global economy are generally the cheaper ones – between $40- $120 dollars per tonne. That will disappoint the legions of “disruptive tech” investors who think its all about embracing expensive new concepts like electro fuels, floating windfarms, hydrogen trucks and power – they are likely to prove prohibitively expensive at over $800 dollars per tonne of carbon abatement, and they are still a long way from commercial feasibility. (They may all happen – but are not necessary for carbon neutrality.)

The Tech that will work include the simple cheap solutions like:

• Renewable Timber
• Bio Char
• Working from home
• Improving Existing Renewable Tech
• New Nuclear Solutions
• Soil Improvement
• Manufacturing improvements and carbon efficiency
• Reforestation
• Hybrid and super capacitors
• Reducing methane leaks
• Fuel Cells
• Insulation
• Carbon Capture
• Coal to Gas (Coal is the worst polluter, but the most energy dense power source. Gas is 50% less dirty, and was similarly priced.)
• Decarbonising Gas
• Geothermal

Once you get into more sophisticated higher tech solutions like offshore floating wind, green steel, renewable diesel, and electro-fuels, the costs vastly outweigh any environmental gains. These cost may change, but at the moment some technologies are distractions.

The future of energy transition will be about a planned transition to:

• Nature based offsets – could cut 21 GTpa of carbon emissions
• Simple Carbon Capture technology – could cut 8 GTpa of carbon emissions
• Reducing Energy Demand and Industrial Efficiency – could cut 22 GTpa of carbon emissions
• Coal to Gas switching – could cut 16 GTpa of carbon emissions
• Renewables – could cut 15 GTpa of carbon emissions

According to Rob at TSE, the beauty is that 87% of the technologies necessary to achieve carbon neutrality already exist! They could be innovated now. If they could be funded.

The problem is carbon neutrality by 2050 is a very long-term target. Markets tend to focus on the here-and-now, which because they are short-termist, and they tend to listen to the deals that should loudest. (Which is probably the prime reason Elon Musk has been so successful.) Hydrogen and EVs are sexy – so they are attractive to the speculative money. Wind and solar attracts money because they are easy and relatively risk free.

Even before writing this note, the first thing I looked at this morning was a very interesting new tech proposal from a UK firm. They’ve come up with simple omi-directional water generator proposal, (a technological evolution of the mill-wheel), which could be placed in rivers and estuaries to capture river and tidal flow. Its not only good for the UK, but could be used in developing nations.

They’ve also developed a “wrap-around” version that could be clamped under the surface of existing offshore windfarms, using the same power cable infrastructure. That’s a fantastic idea – while wind farms spend much of their time unproductive, tidal energy is 100% reliable 24/7!

Solar and Wind power work (not very efficiently), and have no problem attracting more money – making their yields look most unattractive. But, financing gas to allow the global economy to move on from coal is proving almost impossible – investors have been programmed to scream “No!” the moment fossil fuels are mentioned. The evidence is there; because of gas shortages, coal emissions have increased. A shift from coal to gas is critical to get us to the Net Zero 2050 target.

If you are working in an investment fund that considers itself an investor in renewables, or prides itself on it’s zero-carbon investment strategy – then if you aren’t talking with Rob… what are you thinking…? (Happy to put people in touch..)

There really is so much more I could write about Energy Transition – but I’d be really interested to hear what readers think. I expect to be writing about it a lot in 2022.

Five Things To Read This Morning

Dialogo – What is Regenerative Agriculture?

SciTech – Earth’s most important biological reaction: increasing CO2 absorption in plants

Forbes – How AI and Machine Learning is Transforming the Future of Renewable Energy

FT – Italy’s Wind Turbine Refuseniks given Blunt Warning

BBerg – The World Promises Change After Another Year of Extreme Climate Disasters

Today’s Christmas Present:

Greg Lake and Ian Anderson – I Believe in Father Christmas

Out of time, and back to the day job…

Bill Blain

Strategist and Head of Alternative Assets, Shard Capital