Coal versus gas: explaining the CO2 intensity?

Coal provided 25% of the world’s primary energy in the past three years, but 40% of all global CO2 emissions. Gas also provided 25% of the world’s primary energy but just 15% of the CO2 (data below). In other words, gas’s CO2 intensity is 50-60% less than coal’s. The purpose of today’s short note is to explain the different carbon intensities from first principles.

Explanation #1: half the energy in gas is from hydrogen

Burning coal releases energy as carbon is converted into CO2. In other words, substantively all of the energy from coal combustion is associated with CO2 emissions.

Burning gas releases energy as methane (CH4) is converted into CO2 and H2O. In other words, just over half of the energy from gas combustion is associated with innocuous water vapor, and just less than half is associated with CO2 emissions.

This is simple chemistry. For many decision-makers, this chemistry is sufficient to explain why switching all of the world’s future potential coal energy to gas energy can directly underpin one-fifth of the decarbonization on realistic roadmaps to net zero (note below). For others, who want to get into the nerdy details of bond enthalpies, we have written the note below.

Explanation #2: bond enthalpies?

If you wish to delve deeper into the numbers behind gas and coal’s CO2 intensities, then our discussion below will help you understand the thermodynamic calculations. As an ongoing reference, the numbers are also spelled out in our bond enthalpy data-file.

Bond enthalpies. Atoms are bonded together into molecules. ‘Bond Enthalpy’ denotes the total thermodynamic energy that is contained in each of these bonds, as determined by fundamental electromagnetic forces that define the universe (note here). In other words, bond enthalpy is the minimum amount of energy that must be supplied in order to dissociate the atoms on either side of the bond; and the maximum amount of energy that could be harnessed when these atoms bond together.

Bond enthalpies are often quoted in kJ/mol. As a reminder, 1 Joule is the energy transferred when a force of 1 Netwon acts over a distance of 1 meter; or when 1 Watt of power is exerted for 1 second; or when a current of 1 Amp flows through a resistance of 1 ohm. And 1 mol is a standard for counting the numbers of atoms or atomic reactions, described 6.022 × 10²³ units. This precise number, in turn, was chosen so that 1 mol of protons would have a mass of 1g, and all larger molecules would have an atomic mass that effectively matches their atomic number of protons and neutrons.

Thus the thermodynamics of gas can be computed from bond enthalpies in the image below. Breaking the bonds in the methane molecule requires 1,652 kJ/mol of input energy. Breaking the bonds in 2 x O2 molecules requires 996kJ/mol. Total bond-breaking energy is 2,648kJ/mol. On the other side of the equation, forming the bonds in 1 CO2 molecule releases 1,598kJ/mol. And forming the bonds in 2 x H2O molecules releases 1,903kJ/mol. Total bond-making energy is 3,501kJ/mol (of which 54% is from forming water molecules). Subtract 2,648 from 3,501, and the result is 853kJ/mol of total energy being released. 1 kJ = 0.2778 Wh. So with some unit juggling, we arrive at 15kWh/kg of energy generation, or 304kWh/mcf of gas (at 48.7mcf of gas per ton; or 48.7bcf per MTpa for those who prefer LNG units).

The CO2 emissions will include 1 mol of CO2 per mol of methane. That mol of CO2 weighs 44 grams. Hence if you divide 44 grams by 853kJ, the result is 0.05 g of CO2 per kJ. Divide by 0.2778kWh/kg and the result is 0.19kg of CO2 per kWh. Multiply by 304kWh/mcf and the result is 56kg of CO2/mcf.

Likewise the thermodynamics of coal can be computed in the same way. Forming each mol CO2 from C and O releases releasing 1,598kJ/mol. That side of the equation of the easy. Next, if the coal was perfect, pure carbon then the energy that would need to be supplied for bond breaking would be 50% x 4 x C-C bonds at 346kJ/mol (692kJ/mol total), plus 1 x O=O bond (498kJ/mol), for a total bond-breaking energy of 1,190kJ/mol. But in practice, we assume that coal is usually only 80% carbon, while remaining impurities include water (which must be evaporated off), sulphur, nitrogen and other ashy impurities. It will vary grade-by-grade. But on average we think 300kJ/mol is a sensible assumption for the energy release. This yields some important conclusions…

(a) 300kJ of energy is released when 1 mol of coal combustion occurs. This is 65% less than when 1 mol of gas is burned. The main reason, as stated above, is that the coal combustion reaction does not generate any energy from producing water vapor.

(b) 20kJ/gram or 6kWh/kg of energy is released per unit mass of coal consumption. This is c60% less than when an equivalent mass of methane is burned.

(c) Minimal extra mass, as we assume methane weighs 15.6g/mol, versus coal at 15g/mol of combustible carbon (pure carbon is 12g/mol, but we assumed high-grade coal has only 80% carbon). To re-iterate, this means that 1 kg of natural gas is generating 2.5x more energy than 1kg of coal. Again, the reason comes down to hydrogen atoms in methane, which generate 54% of the energy release when they are oxidized to H2O, but in a very dense package of mass. At 1g/mol, hydrogen atoms are much lighter than carbon atoms at 12g/mol and oxygen at 16g/mol. (The hydrogen industry is currently looking for the perfect hydrogen carrier — is it ammonia? is it toluene? — in our view, a near-perfect one already exists, it is called natural gas, and it comes straight out of the ground).

(d) 1 mol of CO2 is released when 1 mol of coal is combusted. This is the same as the amount of CO2 released then 1 mol of gas is combusted. But to re-iterate gas combustion generates around 2.5x more energy.

(e) CO2 intensity is 0.5kg/kWh for coal combustion. Again this is 2.5x higher than gas combustion, and we have derived the result that gas provides the same amount of energy as coal despite emitting 60% less CO2. There is nothing here except maths and science.

Explanation #3: advanced thermodynamic considerations?

We have glossed over some important thermodynamic concepts in our explanation above. For completeness, we address them here. Those who are bored of abstruse academic details can probably skip ahead to the next section.

Strictly, the useful energy that can be obtained from combusting a fuel is not a pure function of bond enthalpies. You must also deduct a small amount for the change in entropy (Gibbs Free Energy = Enthalpy – T-Delta-S). We have not considered entropy changes in our numbers above. Neither coal nor gas combustion increase entropy by increasing the number of molecules in circulation. But both coal and gas combust with a flame temperature around 1,950C, which is going to increase the entropy of their surrounding thermodynamic systems and prevent their full bond enthalpies from being harnessed.

Another issue is higher versus lower heating values. Specifically, our schematic above showed the combustion of methane releasing 54kJ/g of energy, via the formation of CO2 and H2O. However, 5-10% of this ‘gross calorific value’ energy that is released will be lost in the water vapor. Water is a liquid at ambient temperatures and pressures. Vaporizing that water into an exhaust gas will absorb some of the energy from the combustion reaction. The amount depends on the atmospheric conditions. This is why textbooks quote the ‘net calorific value’ of methane closer at 50kJ/g at standard conditions of 0C and 1-bar. Vaporizing water is not an issue for coal combustion as there is effectively no water produced in that reaction. This narrows the ‘energy gap’ between gas and coal in practice.

Another issue is that our bond enthalpies for coal above were not quite right. We used the average bond enthalpies for Carbon-Carbon single bonds. But the carbon in coal may contain ring structures, aromatic compounds, unsaturated bonds, and particles that are not chemically bound together at all. All of this will most likely lower the bond enthalpies within coal. So our numbers for coal combustion enthalpy are imprecise, and probably a little bit too conservative.

Another issue is that ‘coal’ is a broad term, covering a range of different fuels, with different carbon contents and different impurities. These will vary. One useful online resource, suggests that energy content can range from 32.6kJ/g for the highest-grade pure anthracite coals, through to 30kJ/g for bituminous, 24kJ/g for sub-bituminous and 14kJ/k for lignite. In 2020, the average ton of coal produced in the US had a grade of 19.8 mmbtu/ton, equivalent to 5,800kWh/tonne, or 23kJ/g. This is probably a bigger issue for energy density per kg than it is for CO2 emissions per kWh.

Finally, coal may be moderately less likely to combust completely, producing small portions of soot and carbon monoxide, especially when burned in small-scale furnaces. This will detract from both the energy content and has a debatable impact on CO2 credentials.

(1) What about emissions across the supply chain?

One potential issue with the numbers we have presented above is that we also need to consider the CO2-equivalent emissions from the supply chains of producing gas and coal, respectively. If, for example, the emissions of producing natural gas were materially higher than the emissions of producing coal, then we would need to factor this in.

However, our analysis finds that often the total full-cycle emissions footprint of producing and distribution coal (usually 50kg/boe or higher) will be similar or higher than the emissions footprint of producing and distributing gas (10-60kg/boe). The free note below gives a full overview of the data we have reviewed here.

(2) What about efficiency of combustion?

A second potential issue with our analysis could be if it were easier to extract the energy from coal than from gas. For example, capturing 80% of the energy from a 0.52kgCO2/kWh fuel would result in lower emissions than capturing 20% of the energy from a 0.2kgCO2/kWh fuel.

Yet again, the data we have reviewed points to higher combustion efficiencies on gas. Our models for a coal-fired power plant assume c40% efficiencies, while our models of combined cycle gas plants average 57% efficiencies, and we are particularly excited about emerging gas-fired CHP systems that can reach 80-90% total thermal efficiencies (note below).

(3) What about ease of carbon capture and offset?

A third factor that is worth considering is the ease of capturing the carbon from combusting coal and gas. We think there is nothing wrong with continued fossil energy use in a fully decarbonized global energy system, as long as the CO2 emissions from that fossil energy is fully captured or offset.

Across our work, we find there are mixed opportunities and challenges for integrating CCS with coal and gas, but it is 2.5x easier to integrate gas with nature-based carbon removals, because there is 60% less CO2 that needs to be offset in the first place.

CCS momentum has also stepped up impressively in the past year (notes below). Coal combustion might seem to have a natural advantage, as its CO2 exhaust stream tends to be c10% concentrated, versus 4% for gas combustion. However, we also find gas’s exhaust CO2 can be concentrated towards 10% by combustion technologies such as exhaust gas re-circulation, gas benefits from fewer impurities that can poison amine cocktails, emerging technologies such as blue hydrogen can decarbonize gas at source, and there are also practical ways of blending gas back-ups with renewables in fully decarbonized power grids (notes below).

(4) What about the costs?

The dimension that has most kept coal burning in the world’s energy mix is its absurdly lost cost. A new mine requires $60/ton for a 10% IRR, equivalent to producing thermal energy for 1c/kWh (model below). Natural gas can actually beat this cost, as the best gas fields are economical below $1/mcf (0.3c/kWh), and we estimate that $2/mcf pricing can support passable IRRs in the shale industry (model also below). But on top of this, global gas value chains can bring delivered cost to $6-8/mcf (2-3c/kWh). The biggest challenge, we find, is that starving gas value chains of capital may have re-inflated marginal costs to $12-16/mcf (4-5c/kWh) (third note below).

Conclusion: coal to gas switching cuts CO2 by 50-60%

The conclusion across our analysis above is that each TWH of energy that is generated from gas rather than coal will result in 50-60% less CO2, which will lower the burden that is placed on other decarbonisation technologies in our roadmap to net zero. Stated another way, each MTpa of LNG that is developed will likely go on to obviate 5MTpa of CO2 emissions.

So far in the energy transition, however, our depressed observation is that ideological fantasies may have delayed the implementation of real, low-cost and practical CO2 reductions, such as coal-to-gas switching. We think this may change in 2022, as energy shortages deepen (note below), and the world needs more pragmatic options, to accelerate its path towards net zero. Our lowest-cost roadmap to net zero by 2050 requires global gas output to rise by 2.5x.

Decarbonized supply chains: first invent the universe?

“If you wish to make an apple pie from scratch, first you must invent the universe”. This Carl Sagan quote also applies to the decarbonization of complex supply chains. If you truly want to decarbonize an end product, you must decarbonize every single component and input, which may be constellated across hundreds of underlying suppliers. Hence this note argues that each company in a supply chain should aim to drive its own Scope 1&2 CO2 emissions towards ‘net zero’. The resulting products can be described as “clear”, “transparent” or “translucent”.

The complexity of global supply chains

A key focus of our recent research has been materials that are needed in the energy transition. Examples are carbon fiber (used in wind turbine blades and hydrogen storage tanks), photovoltaic silicon (used in solar panels), lithium (used in batteries), neodymium magnets (used in wind turbines and EVs), dielectric gases (used in electricity distribution) or even something as simple as cleaning up 2GTpa of global steel production.

What has stood out is how complex different supply chains are. It would be nice if there was a button you could press, somewhere in a steel mill, with a big shiny label that said “decarbonize steel”. The reality in our model (below) is that CO2 emissions originate from around a dozen processes and inputs, each of which would need to be decarbonized in turn.

The value chain is also shown below for producing another material, carbon fiber. It is unbelievably complex. Our “simplification” only contains 25 different stages. The most energy intensive is rejecting the nitrogen groups from poly-acrylonitrile (23 tons of CO2 per ton of carbon fiber) at 1,000-3,000°C, in atmospheres composed of pure industrial gases, such as argon and nitrogen. But again, every single material in the schematic has an increasing CO2 footprint, as it is made from whatever preceded it.

So if you wanted to make a truly zero-carbon wind turbine, how on Earth would you do it? A rule of thumb is that each MW of turbine capacity uses 150 tons of steel (discussed above, an annoyingly complex value chain). And the blades of a cutting-edge 11MW wind turbine are apt to weigh about 50 tons each, of which 5% is carbon fiber (discussed above, with an even more complex value chain). The remainder of the blades are also made up of 20 other input materials (chart below, data-file here), which will all have their own complex supply chains. And this is just one product, out of millions of products that needs to be decarbonized.

The challenge, we think, is that producing ‘carbon neutral’ wind turbines does not just require the turbine manufacturer to drive down the emissions in its manufacturing facilities to net zero. If they are purchasing CO2-emitting steel from one supplier, CO2-emitting carbon fiber from another supplier, and CO2-emitting Xs from dozens of other suppliers, then the end product will embed that CO2 as a consequence. The same goes for any manufactured product you might care to consider in detail.

It might be tempting to shy away from the challenge of decarbonizing complex supply chains. “Who needs to decarbonize wind turbines, they are already green?”. However, this logic is dangerous. Net zero means net zero. Globally. Universally. I.e., every single supply chain needs to get to net zero. That is the definition of net zero. It would be fair to adapt the Carl Sagan quote as follows. “If you wish to decarbonize an apple pie from scratch, first you must decarbonize the universe”.

A Roadmap for Decarbonizing Complex Supply Chains?

In order to simplify the complexity, let us move away from any specific example and consider the schematic below, which builds up the total life-cycle emissions of a generic product. The first step is producing primary materials, which are grown on land or extracted from the Earth. These will be upgraded or refined into usable materials. This materials will be formed or combined into components. The components will be manufactured into an end product. The end production will consume energy, in various forms, over its useful life.

In addition, at every step along this chain, the different components need to be transported from one location to another. And all of this supervenes on an infrastructure network of roads, rails, ports, electricity distribution networks and computer servers.

The total life-cycle CO2 emissions of a product is the sum of every single component step in the value chain. If the product uses 1kg of Material A, and Material A has a CO2 intensity of 2 kg/kg, then the product will embed 2kg of CO2, simply due to Material A. And so on, for all of the other component steps. Of course, the exact numbers will vary product-by-product.

The challenge that we noted above, is that a typical product will gather tens-hundreds of inputs from tens-hundreds of suppliers. However, in the chart below we consider what happens if one of the input-producing companies in this value chain aims to become ‘carbon neutral’, possibly using the mixture of options available to them on Thunder Said Energy’s roadmap to net zero. Their product will have no embedded CO2. This means there will be less CO2 embedded in the materials made from that product, and in turn less CO2 embedded in the components made from that material, and so on, cascading up the chain.

It is not difficult to imagine that more and more companies across the chain might also make progress with net zero ambitions, lowering (lighter color) or removing all of the net CO2 from their production process (clear blocks). Again, this can cascade up the chain and lower the net CO2 emissions embedded in the final product.

The end goal, we might hope, is that every single supplier across the value chain reaches net zero, and thus the entire value chain combines to produce a completely carbon-neutral product (chart below).

Implications and conclusions?

If we use the simple schematics above as a roadmap for decarbonizing complex value chains, then several conclusions are likely to leap out…

For companies, you have direct control over your facilities and processes. Your primary objective should be to drive down net CO2 emissions from your facilities and processes, ideally towards zero; as this will cascade constructively through overall supply chains. We are currently working with dozens of companies to help them evaluate the most economical and practical route to do this.

For procurement teams, you have control over where your components, materials and inputs come from. Your objective should be to procure lower-CO2 products and services, where that is practical. Again, this will cascade constructively through overall supply chains.

For consumers, you have control over your purchasing and your emissions. You can act to minimize and offset both if you want to (screen of options below).

For critics, it may be unfair to ‘bash’ companies for emissions that are downstream of their facilities and processes. For example, an oil and gas company might aim to remove all of the net Scope 1&2 CO2 from their operations, but then get criticized by environmental groups for not tackling their Scope 3 emissions too. In some cases, this criticism may be fair: for example when the words in company marketing materials have been poorly chosen (more on this topic below). But more broadly, we think the approach is right. Global supply chains are complex. They are so complex that the only way to decarbonize them is if each company takes responsibility for their own link in the chain. In our own schematics for decarbonizing complex supply chains, oil and gas companies’ Scope 3 emissions are the responsibility of energy consumers further down the value chain, to displace, reduce, capture and offset.

For policy-makers, it would be helpful to impose an economy-wide carbon price, which in our view, should be set in the range of $50-100/ton. Its goal is to incentivize any and all actions that can lower net CO2 intensity at a cost below $50-100/ton. Ideally it should be combined with tax breaks elsewhere, so that the overall tax burden across the economy does not rise, as this would be inflationary. Ideally it should tax CO2 on a net basis, after deducting the impacts of CCS and high-quality nature-based CO2 removals, otherwise the total costs of reaching net zero are around 10x higher (15% of global GDP vs 1.5% of global GDP). Ideally it should promote carbon-labelling, as products that do not report transparent CO2 intensities would be assumed to have higher CO2 intensities than products that do report it. And ideally it would include a border-adjustment mechanism, to prevent carbon leakage. These are views based on all of our research to-date.

For the tech industry, we are sure that there is a clever, billion-dollar solution to indexing the embedded CO2 across entire value chains; so that one day, a consumer could pick up a product from a shelf, and instantly get a reading of its precise, embedded CO2 content, and its exact breakdown, along a complex value chain. The process might use a blockchain technology, or a simple set of relational databases, although the CO2 intensity of the blockchain should be minimized (note below).

For the global economy, adding a cost of decarbonization to every step of a value chain is going to inflate the overall costs across that value chain. This is inflationary. It is why we think low cost decarbonization is crucially important, and we have now conducted over 750 pieces of analysis to find the lowest cost options to reach net zero.

New Terminology: Lost for Words?

A constructive conclusion from our ongoing discussions with dozens of companies is the growing appetite to reach ‘net zero’. Genuinely, measurably, in the most practical and cost-effective way.

A major hindrance, however, is that the terminology does not yet exist to describe the kind of supply chains we have outlined above, where each company strives to ensure that its own individual link of the chain is carbon-neutral.

For example, imagine you are a producer, and you have worked to drive the net Scope 1 & 2 emissions of your product down to zero. You have integrated renewables into your operations as best you can, sought as many efficiency gains as possible, you may be sequestering CO2 back into the sub-surface, and/or you may be offsetting residual CO2 emissions using nature-based carbon removals. What should you call the resultant product?

“Zero carbon” or “Carbon Neutral”. Our view is that this is not the right terminology for such a product, because there could still be CO2 embedded in input materials, and associated with the use of the product. For example, if an auto-maker had removed all of the Scope 1&2 emissions from its auto plant, it would be misleading to call this a “carbon neutral car”, because there would still be CO2 associated with fueling the car, and CO2 embedded in the materials and components arriving at the auto plant.

“Lower-carbon”, “Clean” or “Green”. Our view is that this is not the right terminology, because it is imprecise. It does not capture the absolute nature of having driven Scope 1 & 2 emissions down to zero, but suggests something that is a matter of degrees. Moreover, if a coal-producer had removed all of the Scope 1&2 emissions from their coal production process (50kg/boe), then it might also be misleading to label the product as “clean coal”, because it would still contains 750kg/boe of Scope 3 emissions, which would be 2.3x more than “non-clean” natural gas, confusingly.

“Clear”. There has been a recent trend towards describing energy products with colors, especially in the hydrogen industry. At the risk of exacerbating this colorful trend, we think the best terminology is to describe a product with zero net Scope 1 & 2 emissions embedded within it as “clear”. Clear means that the product is “clear” from embedded CO2 emissions. For example, “clear steel” means steel whose production has not emitted any net Scope 1 & 2 emissions (and the same goes for “clear carbon fiber” or “clear natural gas”). In other words, labelling a product as “clear” advertises to its purchaser that there is no Scope 1 & 2 CO2 embedded in the product. The purchaser may emit CO2 via their use or processing of the product. But if they can capture or offset this CO2, in turn, then their own end product can also be described as “clear”. This is the only way we can see to create carbon-neutral products across the complex value chains we described above.

Transparent”. It would also be useful to have a word for production processes that have not added any net Scope 1 & 2 CO2, but where the products still embed whatever CO2 was already embedded in their own input materials. For example, a manufacturing facility might be run entirely off of renewable electricity as its sole electricity source. This means it has not added any net CO2 into its product. Although there may have been CO2 embedded in the components and input materials that were brought into the manufacturing facility. The manufacturing process is “transparent” in the sense that whatever CO2 was embedded in the input materials still shows through.

“Translucent” might be used to connote a process that is almost transparent, but has still added some small amount of CO2. Ideally, this CO2 can be quantified. For example, a manufacturer might have lowered its CO2 intensity by over 80%, compared to some baseline; but wish to honestly reflect that there are still some residual CO2 emissions that cannot be quantified or have not been entirely offset yet.

“Opaque” might be used for a product or process where there is clearly CO2 embedded, but it cannot even be quantified. One of the biggest present challenges in complex global supply chains is that almost all of the products are opaque.

Our conclusion is that using these terms, consistently, across hundreds of decarbonizing companies, would be helpful for avoiding misunderstandings and building trust in the decarbonization of complex supply chains. Our own work in 2022 will start using the three terms — “clear”, “transparent” and “translucent” — in line with the definitions above.

Energy transition: grand masters?

Energy transition is like a game of chess: impossible to get right, unless you are looking at the entire board. Rigid coverage models do not work. This video explores the emergence of energy strategist roles at firms that care about energy transition, and how to become a ‘grand master’ in 2022.

Our latest roadmap to net zero, looking across the entire chess board, is linked below.

Established technologies: hiding in plain sight?

Across three years of research into the energy transition, one of our most unexpected findings has been that game-changing, new technologies are less needed than we had originally thought. For example, in our latest roadmap to ‘net zero’ (below), 87% of the heavy-lifting is done by technologies that are already commercial. Our roadmap’s reliance on earlier-stage technologies has fallen by two-thirds since 2019 (chart above).

This has led us to wonder whether decision-makers are possibly over-indexing their attention on game-changing new technologies, at the expense of over-looking pre-existing ones. Hence the purpose of this short note will be to re-cap our ‘top ten’ most overlooked, mature technologies that can cost-effectively help the world reach net zero.

Are mature technologies overlooked in the energy transition?

This note is not meant to downplay the importance of new technologies, improving technologies, or companies having a technical edge. Screening patents has become a major focus of our research (below), as Thunder Said Energy is primarily a research firm focused on energy technologies. So to be clear, amazing new technologies are emerging, definitively interesting, and helping the world towards net zero.

However, established technologies are prone to being overlooked amidst the excitement and novelty. This has been a finding across our recent research, as our latest roadmaps to reaching ‘net zero’ rely much more heavily on established technologies than we had expected.

There are practical implications here for decision makers, because established technologies are lower-risk than new technologies. Indeed one definition of a technology is “something that does not work yet”. This should matter for valuations.

It also matters for the global economy, which will be subjected to some major surgery as the world transitions to net zero. If you were going under the knife yourself, would you prefer a procedure that had been tried-and-tested hundreds of times; or a new procedure, that the surgeons had never actually practiced beforehand?

It also matters for reaching ‘net zero’, where it would be helpful to avoid over-optimism that will ultimately be disappointed as fantasies give way to realities; as the promise of infinite, cheap, clean energy gives way to devastating energy shortages and political bickering. Which is captured in another Old Soviet joke

“When the revolution comes, everything will be glorious. When the revolution comes, we will all live like kings. When the revolution comes, we will all eat strawberries”. “But I don’t like strawberries”. “When the revolution comes, you will like strawberries”.

Our Top Ten Technically-Ready Themes

The list below is intended to capture ten fully mature technologies, that feature in our roadmap to net zero, present interesting opportunities, and may be overlooked.

(1) Renewables mainly need investment. Across our research, it is relatively trivial to ramp renewables to 20-30% of most power grids, near the bottom of the cost curve, and without having to deal with power quality degradation or expensive back-ups. The first electric wind turbine was built in Scotland in 1887 and the first PV silicon was produced at Bell Laboratories in 1954. Today wind and solar comprise 9% of global electricity and 3% of all global energy. But the biggest bottleneck on our roadmap to net zero is not the technology. It is simply trebling capital investment, so conventional wind and solar can abate 11GTpa of CO2e by 2050.

(2) Reforestation abates 13GTpa of CO2 in our updated roadmap to net zero, across 3bn acres of land, 5 tons of CO2 uptake per acre per year, and a c15% reserve buffer for reversals. Photosynthesis is a 3.4 billion year old technology, and the first vascular plants originated over 420M years ago. But since pre-industrial times, 5bn acres of land have been deforested, releasing almost one-third of all anthropogenic CO2. Reforestation is not hard and we are even undertaking our own reforestation projects. Changing dietary choices would also help. None of this strictly requires new technology.

(3) Substituting coal with gas could abate 14GTpa of CO2e by 2050 in our roadmap to net zero, as gas is 60% lower-carbon per MWH. The best gas power plants can achieve 80-90% thermal efficiency when running gas through a combined heat and power unit, note here, using heat-recuperation technology that goes back to 1882. But unfortunately the world is not building enough gas, perpetuating the use of coal and causing us to revise our 2025 CO2 expectations upwards by 2GTpa versus last year. This might be the clearest example where the fantasy of “perfect technology” has de-railed the implementation of “good technology”. Especially if the gas is combined with nature-based CO2 removals, rendering it fully CO2-neutral, then our view is that ultimately, if you build it, they will come.

(4) Insulation. For two years in 2019-20, living in the US, my wife and I rented a house with uninsulated brick walls and single-pane sash windows (I had just started TSE, and budget was a major consideration). No amount of heating would make this property warm in the winter! For this reason, I have retained some skepticism about converting residential heat to run off of green hydrogen or electro-fuels. First, please, add some insulation. Residential heat comprises one-third of Europe’s gas demand. The potential energy savings are enormous, and the theme is now accelerating, also including industrial insulation and heat exchangers.

(5) Digitization. My other personal vendetta from 2021 was with a particular US government agency, as I moved from the United States to Estonia in the summer. It is a legal requirement to update your address in this government database. And the legally mandated process is to cut down a tree, make it into paper, print a PDF form onto that paper, fill it in, and “sign it”; then drive it to a post office, and pay to have the envelope trucked to an airport, then flown half-way around the world on a series of planes, until it reaches a mail processing facility in Middle America. Yes, you could lower the CO2 intensity of all of these transport technologies, via electrification, hydrogen and electro-fuels. Or you could build a web-form, using technology that goes back to the 1990s…

(6) Electric motors. Almost 50% of all global electricity is consumed by 50bn AC induction motors. But most are over-sized. Their power consumption is determined by their nameplate capacity and the frequency of the grid. If you want to run them at lower speeds, you apply a damper or choke (like pedaling a bicycle at constant intensity, and varying your speed by braking harder. While emerging electric vehicle technology is amazing, there are motor drivers in power-electronics, which have been technically ready since the 1980s, and are also stepping-up, especially in renewable-heavy grids.

(7) Wood-based construction materials. All of the world’s land plants pull 440GTpa of CO2 out of the sky each year, which is about 10x more than manmade carbon emissions. However, as part of the carbon cycle, the vast majority of photosynthesis returns to the atmosphere via respiration or decomposition. Small tilts in these large numbers can have a large impact, using sustainable forestry to lock up more wood in structures with multi-decade or multi-century half-lives. Wooden houses go back millennia, but the first Cross Laminated Timber was developed in Austria in the 1990s. Even offcuts and waste can effectively be sequestered from these wood-processing mills. Additional benefits are reducing the risks of forest fires and substituting higher-carbon materials such as steel and cement, which are much harder to decarbonize directly. It is reminiscent of the old cliché that NASA spent millions of dollars developing a pen that would write in space, while the Russians used a pencil.

(8) Carbon capture and storage. The best, long-standing case study of CCS that has crossed our screen is Equinor’s Sleipner project off of Norway, which reliably sequestered 1MTpa of CO2, for twenty years, starting in 1996. Other case studies are reviewed in our database here. In 2020, we were optimistic over novel and next-generation CCS technology, but in 2021 it is plain, vanilla CCS that has trebled in activity, and most caught our attention. Our note below estimates how much potential exists in the US, with can be expanded to 3GTpa of potential for plain, vanilla CCS de-risked globally in our numbers. There is further upside in small-scale CCS, blue hydrogen and even putting CCS stacks on ships, with moderate modifications of otherwise mature technology.

(9) Compressors. Moving more gas molecules rather than coal molecules, moving more CO2 molecules for sequestration, mining materials to build energy transition infrastructure, and possibly even using hydrogen will all require compressors. Which scores as another hidden enabler for energy transition, that is also a mature technology. The first compressor was built by Viktor Popp in Paris in 1888, and the first commercial (mobile) reciprocating compressor was developed by Ingersoll Rand in 1902.

(10) If nuclear fission had been invented in 2021, it would probably be cited as the savior of all humanity, a limitless supply of high-quality baseload power, with no CO2e emissions. But the world’s first full-scale nuclear power station opened at Calder Hall, in the UK, in 1956. Our updated roadmap to net zero has upgraded the growth rate for nuclear from 2% per year, to 2.5% per year, due to gas shortages, potential to backstop renewables, and cost-effective new SMR designs, such as this one.

Finally, and not on our list above is the need for materials to build whatever combination of technologies ultimately delivers the energy transition. Again, these technologies already exist, and are mature, but some require a vast scale-up, and hopefully also some process innovations…

Reforestation in Estonia: six months in?

This short note is a progress update, including videos and drone footage, on our aspirations to undertake a series of reforestation projects in Estonia. It covers considerations for selecting land; and our first small investment, which has been to clear out the dense thickets from a 5-acre parcel, to plant some spruce in 2022 and improve the carbon density.

Those who follow Thunder Said Energy research will know that nature-based carbon removals play a large role in our roadmap to net zero (below, around 20GTpa, or one-quarter of all global decarbonization). This is so important that I am trying to learn and stress-test the thesis. Including by undertaking my own reforestation projects in Estonia.

In the research note below from July, the strategy was laid out, to ‘crawl, walk, then run’. The ‘crawl’ phase mainly involves learning, and reducing my family’s net, lifetime CO2 emissions. The ‘walk’ phase involves undertaking what I would consider to be a proper reforestation project, that is undeniably incremental, measurable, trustable, long-lasting and bio-diverse (again, mainly for learning, and to offset my family’s entire lifetime CO2 emissions, multiple times over). The ‘run’; phase might involve replicating this at larger scale, and possibly even commercializing the CO2 removal ‘credits’.

Hence 2H21 has been constellated with trips to learn about Northern European forestry. This is not challenging in Estonia. Forests are part of the culture. In Western Europe, the forest is a dark place where bad things happen (think ‘Red Riding Hood’). In Estonia, the forest is where you go to hide from bad things happening. There are sacred forests, where you are forbidden from swearing or using a mobile phone (photo below). And there is even a national pastime here, picking mushrooms in the autumn. Many Estonians can somehow tell the difference between two near-identical fungi — one translating as “delicious wood champignon” and the other translating, more ominously, as “the angel of death”.

The purpose of this short note is a progress-update on our Estonian forestry ambitions. Acquiring thousands of dollars-worth of land, for a 40-year project, is not something you want to rush. My land acquisition spreadsheet is trying to optimize for about a dozen different variables. But I am pleased to be starting a first project in 2022, and have at least made some inroads towards buying a reforestation plot (video below).

To be clear, it is not a good goal to turn all of the land in the world into forests. Estonia is already about c50% forested, which is one of the highest shares in Europe (our land screen across 170 different countries is linked below). Again, selectivity is important.

Moreover, there are amazing bogs around the country, also known as “Raba”, accumulating peat in their anoxic waters, at around 1mm per annum for the past 10,000 years. So these mossy accumulations actually seem to bulge upwards and rise above the surrounding forests (video below). Step off the boardwalk, and you literally sink into the bog (you are discouraged from stepping off of the boardwalk).

These bogs are categorized alongside other blue carbon eco-systems in our data-file below. But at 1,500 tons of CO2 storage per acre, they will likely contain about 5x more CO2 than boreal forests. If you re-forest them, you actually lower carbon storage and increase the risk of forest fires (especially in South-Western Canada, although this is generally not a huge concern up here on the outskirts of Europe’s Arctic circle).

Nevertheless, Estonia’s somewhat dark history means there is also a relatively large number of abandoned properties. The video example below is on a public footpath, whereas some of the former Soviet structures we have visited or inquired on are still technically in private hands (and thus not appropriate to post on our website). Abandoned farms are the prime target for reforestation. Out of 2.5 bn hectares of degraded land globally, about 400-500M hectares is farmland that has simply been abandoned (note here). This is what I am most set on buying in the ‘walk’ phase of my reforestation ambition.

Just lower down the merit order are marginal grazing lands, which make up 70% of our recent case studies into UK reforestation projects (data below). Some of these have also been interesting to explore in our own land search.

What has seriously helped the process of appraising land for reforestation in Estonia is an amazing government data-portal. This is not a huge surprise in the world-leading country for digitization of government services. You can look up every single plot of land across the entire country, in the digitized map function here. Including their size, basic eco-system type, tax status, history and current owner details. In addition, there are the usual commercial portals online for buying and selling properties.

Thus has started the process of finding potentially appropriate tracts and visiting them. The example below scored well on natural reforestation potential, and is clearly not ‘in use’ as arable land. It is a 30-minute drive away. It is covered in grasses, which preclude trees from establishing. But we also discovered that it lacked road access, had been clear-felled in 2012 (which under Estonian law means it should technically have been re-planted already) and the asking price was excessively high in our view.

Meanwhile the example below was interesting, because it could join up two adjacent patches of forests on the outskirts of a Raba. But upon visiting, those forests were mainly Juniper and low-lying pine varieties, i.e., very slow-growing species, not the mixtures of Pinus sylvestris, spruce, et al that are most appropriate for carbon storage in this climate. And, unfortunately, after discussions with the owner, they were not willing to sell.

We also looked at existing forests and bio-diversity, which was not without its perils…

For the ‘crawl’ phase of exploring reforestation, however, we have already acquired 5-acres of land in Suurupi, on which we will primarily be building a house to live in. This is another reason that some TSE research has recently made forays into carbon negative construction materials, insulation, small-scale wind turbines or who makes the best heat pumps. Surrounding us is a protected forest, with 35m tall pine and spruce (video below).

However we believe that our own plot was cleared and grazed during the time of the first Estonian Republic, then abandoned during Soviet times. This is why it is constellated with a few scattered birch (a pioneer species), and otherwise human-height bushes, in a landscape that is known in Estonian as ‘võsa‘. This is dense thicket, that precludes the establishment of larger trees. The video below is taken in winter. Because at any other time of year, you cannot see anything at all. Only leaves and thorns. Indeed, in the spring, you feel the mosquitoes bite a piece out of you, and then you hear them sitting in the võsa and gnawing away. This is a land type that can be substantially improved. Both aesthetically, and in terms of carbon storage. Ultimately it can look like the carbon dense pine-spruce forest shown above, although ideally with more bio-diversity.

Hence we have cleared the võsa this winter, which will be mulched and returned to supplement the soil. The video below is taken just over the ‘border’, in the plot next door (yes, Estonia is cold in the winter).

The aerial photo below shows what was cut, and what remains, including one giant spruce, estimated to be 100+ years old and dating back to the original forest here. The idea is to plant more spruce in the spring (inter alia), which can grow well in the dappled light beneath the relatively open birch canopy. But then spruce has a tendency to shoot up in the gaps, once the birch trees reach end-of-life.

There are also clearings on the land, with only minimal võsa, where we have other options, and the chance to bring more biodiversity into the mix.

To document the process, and help appraise further prospective land parcels in 2022, we also invested in a drone. I have not yet learned to fly it convincingly.

For more light-hearted content on six-months’ perspectives, living in Estonia, please see the short video below. Genuinely, please visit, if you would like a tour of some amazing Estonian forests, and our future reforestation projects.

Sustainable forestry: a new listed entity?

For the first time, in November-2021, a moderate-sized company has gone public with a mandate to generate CPI + 5% returns, by investing in forestry and nature-based afforestation projects. This short article summarizes the key points from the 216-page prospectus. We remain excited by the theme. The fine-details are informative.

Foresight Sustainable Forestry Company PLC (FSFC) went public in November-2021, listing in London and raising £130M in its IPO. This makes FSFC the second listed afforestation company in our screen that will be commercializing CO2 removals, and the only one of moderate size (below). The notes below are our highlights from the prospectus.

The Ambition of the group is to generate a total return of CPI + 5% by creating a balanced portfolio of sustainable timber and afforestation assets, while protecting nature and enhancing biodiversity.

Revenues. “The group’s revenues will primarily be generated by the sale of harvested timber and, in due course, the sale of Carbon Credits”. But harvested timber is “the primary revenue stream”.

Why forestry? Forestry investment returns are quoted at 12-16% pa over the past decade.

Timber. Global demand for timber is predicted to rise 4x from 2012 to 2050, by which year the market is seen being 4.5bn m3 pa under-supplied, increasing timber prices. UK timber prices have risen at 2% pa in the last 30-years and 5.6% pa in the last 20-years.

Future timber upside is seen from new wood products, with excellent carbon credentials, including mass timber, packaging and biochar. We would agree here, notes below. In the UK, upside is seen from the government’s plan to construct 300,000 new homes, increasingly sustainably, as well as practically and cost-effectively.

The harvest paradox. The prospectus addresses the paradox that timber harvesting might be seen to worsen natural carbon stocks. Academic research is cited showing that planting (or re-planting) conifers can mitigate 3x more emissions than conserving pre-existing broadleaf forest. Again we would agree (notes below) 65% of harvested tonnage is seen being used as sawlog, for lumber, with structural use and a long life. 25% will be small roundwood (particle board, fiber board, packaging, paper) and 10% is wood fuel.

Sustainable Timber standards. All projects will meet or exceed UKFS standards. The company notes it must obtain certifications from the FSC or PEFC, in order to sell its forest products.

Afforestation. “The Company will seek to make a direct contribution in the fight against climate change through forestry and Afforestation carbon sequestration initiatives.” Afforestation assets may comprise up to 50% of gross asset value. This matters in the UK, where forest cover is cited at 13%, one-third the level of other European countries.

Policy support is cited. In March-2020, the UK committed to reforest 30,000 hectares per year. In May-2021, plans were laid out to treble tree-planting rates in England, with grants from the £500M Nature for Climate fund. Scotland aims to plant 10-15k hectares per year and has a grant scheme, which tends to average £4k per hectare. Most recently, COP26 has explicitly encouraged the protection and restoration of forests.

Carbon Credit standards. The company plans to meet the criteria for creating carbon credits under the UK’s Woodland Carbon Code. This is encouraging, as we have generally found prior projects in the WCC to be high-quality (data below).

Carbon removals from the IPO are ascribed potential to enable 4MT of additional CO2 removals.

CO2 attribution. The company states “regardless of who ultimately acquires and/or retires the CO2 Credits, investors in the Initial Issue will always reserve the right to the claim they provided the original enabling capital to get the additional Afforestation and natural capital projects into action”.

Ancillary Revenues. Where appropriate, additional revenues may be generated by leasing the land for sporting, eco-tourism, renewable energy, telecommunications towers. Wind farms are noted in particular, as newer, taller turbines can now be ‘key-holed’ into forestry areas without impacting wind resources. This looks interesting to us.

Biodiversity. “The Company will seek to preserve and proactively enhance natural capital and biodiversity”. In addition, biodiversity credits will be commercialized “if a future market develops”. Some reports suggest legislation is progressing that will market worth hundreds of millions pa. Biodiversity can also be its own benefit (see below).

Other co-benefits cited are stabilizing soils from erosion, preventing flooding and landslides, supporting rural jobs, active engagement, education and health benefits for local communities.

Land ownership could be either on a freehold or leasehold basis.

Diversification. The company is using a portfolio approach, across a mixture of assets, asset types, geographies (although at least 90% will be in the UK), age classes, harvesting profiles and off-takers. No single asset is to represent more than 15% of the firm’s gross asset value.

Control. Assets will typically be owned 100%.

Gearing may be used to enhance returns but will not exceed 30% of gross asset value. One reason noted is that forestry assets are inherently illiquid.

Distribution yield. The company states that it will not retain more than 15% of its income. Distributions will be in the form of dividend (or “interest distributions” for UK tax purposes).

Operating history. Foresight Sustainable Forestry Company PLC is a new entity with “no operating history”.

Capital Raise. The company’s ambition was to raise £200M, of which £4M would comprise initial expenses for setting up and listing. (The IPO amount of £130M seems to be at the lower end).

Speed of capital deployment is cited as a key challenge for meeting earnings and returns targets. We have found this to be a challenge in our own reforestation efforts (see below).

Hence an initial acquisition has been scoped out at the time of the IPO, with a related party, Blackmead Infrastructure Limited. FSFC has the option to acquire 11,000 hectares of standing forests and afforestation assets from Blackmead, based on a third-party valuation, conducted by Savills (at £138M). In return, Blackmead will invest for 30% of the initial IPO.

The Target Asset comprises 34 discrete areas. 85% is in Scotland, 10% in Wales, 5% in England. 59% is mature, 38% are afforestation assets and 3% are mixed. Average age is 19-years. 10 species are used across these sites.

Further land acquisition is cited as another potential risk area. FSFL’s main targets are pasture land and semi-natural grasslands, which comprise 22% and 17% of UK land, respectively. 47,000 hectares of farmland was openly marketed in 2019, a new record low. c£325M of forestable or farm land transacts each year in the UK. Brexit is said to have reduced farmland values by 2% since the Brexit referendum in 2016 and the scale-back of EU subsidies may bring more land to the market. Our own land data are below, comparing the UK to other geographies.

“Converting largely sub-economic grazing land into a commercial forest can increase the value of the asset by 2-3x over an 8-10 year time horizon” (chart below). The rationale also fits within changes in the food system (note below).

Pipeline. The company has identified 324,00 hectares in Scotland, 166,000 hectares in Wales and 68,000 hectares in Northern England that could be suitable for afforestation. The total pipeline is seen to be in excess of £300M per annum.

Due diligence will include legal, financial and other advisory expenses. These expenses may be incurred without necessarily resulting in a successful acquisition.

Land quality matters for carbon credentials. Forests with the best wind-firm soil can achieve up to 80% sawlog, while poorer ground may only achieve c50%.

Rising future competition is also cited as a possible risk. Today “there are a limited number of investment managers… in the UK forestry sector for institutional clients”.

Physical risks are also noted, including possible fires (see below), pest damage, disease, extreme weather. These may lower the value, or delay the timing of harvests.

Environmental laws are noted. For example, the Group could be held liable for historical contamination on land that it acquires, and forced to pay for remediation measures. Other sites in the UK are designated as “Sites of Special Scientific Interest” or “Special Areas of Conservation”. The group would be liable for fines in the event that it damaged or disturbed such designated sites.

Species selection. Conifer species such as Sitka spruce are highlighted for their yield advantages. Such softwoods (pine, fir, spruce, larch) can be harvested after 40-years, whereas broadleaved hardwoods (oak, ash, beech) will take up to 150-years before they reach maturity. Our own data are below.

Modern forestry techniques are “generating accelerated rates of tree growth and higher overall forest timber productivity”. They include decisions into thinning, understory management, species selection, soil management. For our own views on improving forestry techniques, please see the research note linked below.

Relatively early harvesting may be favored. “Once commercial conifers reach maturity they become much more susceptible to damage” from wind, fire or beetle attacks. Again this matches with our data.

Carbon inventories will be run following guidelines from the UK Woodland Carbon Code, using third-party service providers. For our views on measuring forest carbon, please see the research note below.

Overall we like the space of afforestation, as more and more companies seek to compensate for unavoidable and residual CO2 emissions, and truly get to net zero (note below). Please contact us for a more specific discussion on FSFC.

Neodymium: our top ten facts?

Neodymium is a crucial Rare Earth metal, used in permanent magnets for the ramp-up of wind turbines and electric vehicles. The market is small, growing rapidly. This could create opportunities, as bottlenecks and cost-inflation need to be kept in check. Hence this short note outlines our ‘top ten facts’ on neodymium.

(1) What is neodymium? Neodymium is the 60th element in the Periodic table, a rare-earth element, in the Lanthanide series. The most important use of Neodymium is in alloys with iron and boron, creating tetragonal crystals of Nd2Fe14B, which are some of the strongest permanent magnets known to mankind, capable of lifting over 1,000x their own weight. The alloy was discovered independently, by GM and Sumitomo, in the early 1980s.

(2) How are neodymium magnets used? These magnets are used in electric motors, generators (especially wind turbines) and other electronics (especially computer hard drives, audio equipment, and the accelerometers in cell phones). For example, each Toyota Prius might contain 1kg of neodymium (some vehicles use as much as 2.5kg), and a wind turbine might contain 125kg per MW of capacity (some direct-drive generator designs use 600kg/MW). These have been crucial themes in our recent research, as cost-inflation and bottlenecks need to be avoided (see below).

(3) Physics: How are magnets measured? The strength of a magnet is measures in Teslas. Specifically, a magnetic field with 1 Tesla’s strength will exert 1 Newton of force on a particle with 1 coulomb of charge that is moving perpendicular to the magnet at 1 meter per second. This is due to fundamental electro-magnetic laws of the Universe, such as the Lorentz Force Law. Ferrite magnets’ magnetic fields typically peak out at 0.5-1.0 Teslas, and this is for very large and heavy magnets. Nd2Fe14B magnets can have magnetic fields of 1.0-1.4 Teslas. They can also have very dense magnetic fields, of 200-440kJ/m3, making them compact. Finally, they are relatively “permanent” magnets, resisting demagnetization up to 750-2,000kA/m competing magnetic fields and temperatures up to 310-400ºC.

(4) The market? There are seventeen rare earth elements. Data here are opaque. Hence what follows is some simple ballparking, triangulating between online sources and technical papers. The global market for rare earth oxides is about 160-240kTpa in 2020, worth around $4bn per annum. Of the metals in these ores, c20% is Neodymium. Around 50kTpa of the Rare Earth ores are likely to be used to make 140kTpa of permanent magnets (the other components are not Rare Earths), worth as much as $14bn per year. The largest Rare Earth component in permanent magnets is Neodymium, comprising 27% by mass of Nd2Fe14B magnetic material. Overall, our best guess for neodymium demand in 2021 is around 20-30kTpa. Total demand for Rare Earth Oxides is seen growing at 4% per annum by CRU. Nd-Pr is seen growing at 7% per annum. Roskill sees demand for permanent magnets in EV power-trains increasing at 17.5% per annum from 2021 to 2030. Total demand for these materials could thus rise 3-10x by 2050, among the fastest growth rates of any commodities in our energy transition research (chart below).

(5) Global reserves of Rare Earth metals have been estimated at 120MT by the USGS, equivalent to a 600-year reserve life. In turn, this might imply as much as 24MT of neodymium reserves, if neodymium comprises 20% of all Rare Earths. However, reserves of neodymium, specifically, have been more conservatively estimated at 8MT in other sources. Nevertheless, this still implies a c300-year reserve life at today’s current rate of production. The material’s total abundance in the Earth’s crust is 38mg/kg (38ppm). And this is actually “high” (chart below). For contrast, copper is 66pm, cobalt is 25ppm, lithium is 20ppm, uranium is 2pm, platinum is 0.004ppm and gold is 0.003ppm. This all suggests that there is no shortage of Neodymium in the Earth’s crust, only a possible shortage of projects to extract and upgrade it economically from high-grade ores.

(6) How is it produced? The two main ores for Neodymium are monazite and bastnasite. Neodymium comprises 10-18% of these minerals by mass. The ore is mined, crushed, screened, leached, precipitated, calcined, and then chemically separated and precipitated (e.g., using nitric acid) in order to produce Neodymium oxides with 99% purity. This is not dissimilar to other materials value chains that have crossed our screen, such as lithium, uranium or copper, and similar models could be translated across.

(7) Where is it produced? Output from Rare Earth mines runs at around 160-240kTpa, of which c20% is neodymium. c60% of global output is from China, primarily six state owned enterprises. Other large producers include Australia and Myanmar. Non-Chinese mine output has been increasing since 2015. But the mined materials are still largely refined in China, which supplies c85% of total refined rare earth production. As usual, this creates the Catch 22 of whether China’s decarbonization needs to go hand-in-hand with the West’s, or whether this is even possible without accelerating inflation even more so (note below).

(8) What does it cost? Prices of neodymium have run around $60-70/kg in 2017-20. Prices have risen sharply in 2021 to around $160kg. Again, our nemesis of inflation is rearing its ugly head…

(9) What is the CO2 intensity? Carbon-accounting for rare earth materials is complex, because many materials are co-produced. Hence it is debatable how to allocate CO2 emissions across these different materials. One study estimated 12kg of CO2 emitted per kg of neodymium oxide (here), while another found 66kg of CO2 per kg of neodymium oxide (here). You can compare and contrast these CO2 intensities with other materials in our granular data-file of global CO2 emissions below.

(10) Which companies? China is the world’s largest producer of rare Earth materials, mining over 100kTpa, and refining c80% of global supply. Companies are also ramping up outside of China. One of the largest producers is MP Materials (NYSE-listed), which operates the Mountain Pass mine on the Nevada-California border, supplying and processing 15% of the world’s Rare Earths in 2020 (of which 11.5% is neodymium). Lynas Rare Earths (listed in Australia and the US) recently agreed to construct a 5kTpa rare earths separation plant in Texas, which will yield 1.25kTpa of neodymium-praseodymium, sourced from ores in Western Australia. Rare Element Resources is developing the Bear Lodge project, which comprises 18% neodymium by weight. Texas Minerals is progressing the Round Top Rare Earths project, of which 7% is neodymium. Finally, many of the uranium companies that have crossed our recent screens also co-produce Rare Earths, while we like this theme as we also see nuclear projects re-accelerating (screen and note below).

Power functions: how would gas shortages change the cost curve?

This note evaluates how sustained gas shortages could re-shape power markets (chart above). Nuclear is the greatest beneficiary, as its cost premium narrows. The balance also includes more renewables, batteries and power-electronics; and less gas, until gas prices normalized. Self-defeatingly, we would also expect less short-term decarbonization via coal-to-gas switching.

Across our research we have modelled over 150 different technologies which can help the world on its pathway towards net zero. Naturally this includes power generation sources such as wind, solar, gas turbines, CHPs, coal, hydro, nuclear and hydrogen fuel cells.

The lowest-cost ‘net zero power grids‘, we argue, most likely comprise a mixture of 25-50% renewables, backstopped with the most efficient and low-carbon natural gas power. There will inevitably some CO2 emissions associated with the gas production, but we think this can be entirely offset with nature-based CO2 removals, for a cost below $50/ton. The model is explored in the note below.

The reason for this balance is that renewables start out as the lowest cost power source. Until they hit 25-50% of the total grid. This is because wind and solar generation auto-correlates over very wide areas (charts below). Hence at a certain point, any incremental renewables that you build will be trying to feed into the grid at a point when the grid is already saturated with renewables, and these incremental renewables will be curtailed.

You could build more renewables into these grids, but the costs would escalate rapidly, because of curtailment, because of the costs of batteries, and because of the complicated power-electronics that must be installed downstream to compensate for renewables’ inherent lack of inertia, reactive power and fault current (notes below).

A final issue with wind and solar is that they may see some inflation in their future costs. Although they are very low carbon, their costs are partly determined by the cost of input materials, many of which are energy intensive and themselves need to be decarbonized. For example, PV silicon, carbon fiber, other metals (see below). This is why higher gas/energy prices or higher CO2 prices mechanically translate into mild re-inflation for wind and solar in our analysis.

However, what has prompted the analysis in this short note is that we are confronting the possibility of materially higher gas prices in the next 2-5 years, due to sustained gas shortages. If fears over the energy transition have elevated capital costs in the gas industry to 15-20%, then we think international gas prices may need to run at $12-16/mcf, in order to attract sufficient investment to re-balance future gas markets (note below).

Higher gas prices clearly are going to translate into higher prices for gas-fired power. As a rule of thumb, each mcf of gas contains 304kWh of chemical energy. When combusted in an efficiency power generator, around 175kWh of electricity will be generated. Thus each $1/mcf increase in the gas price increases the marginal cost of gas-power by 0.6c/kWh.

In our chart below, we are also assuming that coal prices off of gas (i.e., the coal industry charges whatever it needs to charge, in order to incentivize the marginal consumer not to switch off its coal plant and switch to burning gas instead). So the levellized cost of coal power is also going to rise with gas prices. Finally, to be clear, we are assuming a $50/ton CO2 price, apples to apples, across the board in the analysis below.

So what changes if we were to have several years of gas prices in the range of $12-16/mcf, rather than $6-8/mcf as we have previously hoped for?

The first re-alignment is the relative balance between renewables and gas, in an optimized mix. Clearly if the baseline price gap between gas and renewables widens from 2c/kWh previously to 6c/kWh, then more renewables can be built before the cumulative costs of curtailments, backups and power-electronics upgrades sway the calculus. This might be good news for manufacturers of renewable assets, their underlying components, and power-electronics companies (some examples are profiled below). However, it is not necessarily great news for consumers, fore-suffering higher energy prices.

The other clear shift in the cost curve of power options would be bringing nuclear firmly into the money. In the past, our constructive outlook on the nuclear industry has hinged almost entirely on China (note below), where new nuclear facilities are constructed for c$3,000/kW. In the West (and in our model above), capex costs have been closer to $6,500/kW. And we have actually been assuming that Europe would phase back 15% of its nuclear capacity by 2025.

No longer. The easiest and most politically palatable way to address 2-4 years of gas shortages would be to cancel the nuclear phase backs. But moreover, at $14/mcf gas and $50/ton CO2 prices, there is effectively no economic difference between building new gas generators and new $6,500/kW nuclear plants. You probably want a mixture of both for diversification. And all the better if you can build the nuclear plants for less, for example, using some of the interesting next-generation nuclear concepts and SMRs under development.

Overall, our conclusion is that a period of sustainedly high gas prices would be most constructive for incumbent gas producers, who effectively print money until the world can be incentivized to quench painfully under-supplied gas markets. But longer term, upside is created for the nuclear, renewables and power-electronics industries. The data behind our analysis are tabulated below, with underlying details drawn from our other models.

Energy transition: old Soviet jokes?

After six months living in Tallinn, Estonia, the history of the Baltic States has been swirling around in my mind. Especially a list of old jokes, told during Soviet times, about persistent industrial shortages, propaganda, the suppression of dissent and the ridiculousness of planned economies. This video aims to share some observations, and explore whether there is any overlap with energy transition policies.

Switching gears: the most potent GHG in the world?

SF6 is an unparalleled dielectric gas, used to quench electric arcs in medium- and high-voltage switchgear. There is only one problem. It is the most potent GHG in the world. Therefore, it may be helpful to find replacements for SF6, amidst the ascent of renewables and electrification. This note discusses resultant opportunities in capital goods, plus some minor cost inflation consequences.

Electrical Arcs and Amazing Switchgear?

Our recent research is taking us down the rabbit hole of power-electronics, looking for capital goods opportunities associated with increasingly renewables-heavy grids. For example, wind and solar are more volatile than conventional generation. They do not inherently provide any inertia or reactive power. For an explanation of these effects, and an example of a possible solution, please see below.

Another crucial theme is switchgear, which you can think of as the industrial-scale equivalent of the circuit-breakers and light switches in your house. At the 120-240V voltages in a typical home, flipping these switches ‘off’ is fairly trivial.

But once voltages surpass about 10kV, and especially above 150kV, we are starting to deal with serious amounts of energy. The potential difference on either side of these electrical contacts can be large enough to literally rip the electrons off of air molecules, and form an ‘electric arc’, which is like an electrical lightning bolt, whose core can reach 20,000◦C. For some slightly mesmerizing videos of electric arcs in primary power distribution, see below.

Further downstream, you obviously do not want uncontrolled electrical lightning storms raging through the sensitive and expensive electronic equipment in an industrial facility, every time you turn it on/off, or every time there is a fault on increasingly volatile power grids. Especially if people are in the vicinity. High potential differences will chemically degrade most substances. High enough temperatures will also melt practically anything.

Enter gas-insulated switchgear (GIS). In 1957, Westinghouse began commercializing switchgear containing a compound called SF6, which rapidly gained popularity in the 1970s. At comparable pressures, this gas has 2.5x higher dielectric strength than air (and more at even higher pressures, see below), which means it takes 2.5x more voltage to rip the electrons away and permit current to flow. Moreover, SF6 is ‘self healing’: in a few micro-seconds, any dissociated SF6 molecules will re-combine, so the SF6 can quench multiple electric arcs in quick succession. It has 3.7x higher specific heat than air, absorbing excess heat without transmitting it onwards. It is non-toxic. It is non-flammable. Hence it has become a dominant solution to ‘fill’ the cavities of switchgear and quench electric arcs. There is no other substance known to man with such an incredible array of properties.

Climate Impacts of SF6?

There is only one problem with SF6. It is the most potent greenhouse gas in the world, with around 23,900x higher warming potential than CO2 (chart below). Because of its exceptional stability, it also has an atmospheric lifetime of about 3,200 years, which effectively means that any SF6 released into the atmosphere stays there ‘forever’.

It is important not to sensationalize the climate impacts of SF6. The world consumes around 8kTpa of SF6, of which 80% is used in electrical switchgear, as described above. Especially in Europe, there are stringent regulations to ensure checks and prevent leaks of SF6.

But even if 8kTpa of SF6 were released to the atmosphere — e.g., at end-of-life, when switchgear is retired — then this would be equivalent to about 200MTpa of CO2, or around 0.4% of today’s global emissions. A study in the 1990s concluded that SF6 emissions had so far contributed <0.1% of all historical manmade warming. On the other hand, the $120bn pa market for switchgear will likely grow rapidly from here, with the themes of renewables, EVs and the policy-objective to ‘electrify everything’ (below).

A read-across for gas? There are people out there who look at natural gas’s global warming potential — 80-100x CO2 on an instantaneous basis, 21-25x CO2 over 80-100 years — and argue natural gas should therefore be ‘banned’. This is not our view. We simply think gas users and consumers must mitigate methane emissions (note below). But you cannot help wonder what these ‘abolitionists’ would say about SF6. Should it not be banned as well by the same logic?

Reading through documents from the European Commission, one gets the sense that there is a desire to tighten regulations and lower SF6 usage in the electrical industry. (It has already been banned in other non-essential contexts, such as in double-glazing).

The challenge is that alternative solutions are not practical. One EU document from 2020 notes “it is a challenge to find cost effective, reliable, and safe SF6-free replacements for load break switches… because, compared to vacuum circuit breakers, load break switches are normally simpler, cheaper and maintenance free”. However, the document goes on to argue that “Where the SF6-free alternatives are more costly than switchgear containing SF6, policy intervention is likely to be needed to trigger a transition. As part of the European Green Deal, the Commission has recently launched a review of the EU rules on fluorinated gases”.

Replacements for SF6 — Capital Goods Opportunity?

What are the challenges? Larger footprints are needed for SF6-free switchgear. In other media, it simply takes more space to safely quench an electrical arc. This makes it difficult to replace switchgear at industrial sites with space constraints.

Larger switchgears also tend to use more materials, and require larger manufacturing efforts, which in turn makes their costs 20-30% higher than SF6-using switchgears (and 2x more expensive in some cases).

Finally, SF6 is so chemically inert that it does not react with metallic components or contacts, degrading switchgear over time, whereas other gases will likely require more maintenance over their operating lives.

Nevertheless, there are alternatives, using air insulation, mineral oils, fluoroketones, CO2, epoxy coverings and vacuum-mechanisms to quench electrical arcs. To re-iterate, they are simply more expensive and usually less practical than SF6.

There is a large prize for the capital goods industry, therefore, developing SF6-free alternatives. And we will note some examples below.

  • Eaton was the first manufacturer of SF-6 free switchgear, and has shipped 350,000 SF6-free switchgears by 2019, and 15M vacuum-interrupters, under its Xiria product range.
  • AirPlus is a mixture of Novec 5110 (C5-PFK) and dry air, commercialized by ABB and 3M. These have been field-tested since November-2015 and have largely behaved as expected. The product range includes a medium-voltage gas-insulated indoor RMU which can operate at 24kV and with a 630A rating.
  • g3 is a blend of Novec 471010 (a C4 PFN) and nitrogen, developed by GE and 3M and has been fully type-tested. It has similar performance to SF6 and has been proved up to 420kV. It is being tested at insulated substations by TSOs, including National Grid, with a single substation in SW Scotland saving 1.7 tons of SF6.
  • Nuventura has a product using ‘synthetic air’ as an insulator. The product is claimed to match the footprint of comparable SF6 solutions, while having 7-10% lower capex and opex. The product is currently rated up to 1,250A and 12-36kV. We currently see three patents for Nuventura in the EPO database. The company is privately owned, based in Germany and was founded in 2017.
  • Other manufacturers of SF6-free switchgear include Meiden, Hitachi, Schneider, Toshiba, Lucy et al. Screening different companies may form the basis of a future TSE research note. Please contact us if this would be interesting or helpful.

What impacts on renewables and electrification costs?

The best way to evaluate the future costs of a technology are to build up a detailed line-by-line cost model, then interrogate each line. Our main conclusion from this exercise, across 500 data-files so far, is that we many cost lines in the build out of renewables and electrification may actually re-inflate in the future. Especially where costs are linked to underlying materials.

Electrical balance of plant usually comprises $100-300/kW of the costs in our wind and solar models, out of $1,000-3,000/kW total costs (breakdowns below). A single circuit breaker might cost $5/kW (maximum capacity basis). A single transformer might cost $12/kW (note below). Generally, one might expect c10-30% reinflation in the cost of switchgear as SF6 is de-prioritized for new equipment in the future. Although we think this is unlikely to add more than 1-2% to the cost of an overall renewables project.

Examples of our research into future renewables costs are linked below. Again, we do not want to sensationalize the issue of SF6. But broadly, we think it may be dangerously incorrect to assume ‘perennial deflation’ for many renewables technologies, as there are many line items re-inflating in our models. We will continue to look for opportunities in power-electronics and materials.