Category: Cutting Edge

Chinese coal provides 15% of the world’s energy, equivalent to 4 Saudi Arabia’s worth of oil. Global energy markets may become 10% under-supplied if this output plateaus per our ‘net zero’ scenario. Alternatively, might China ramp its coal to cure energy shortages, especially as Europe bids harder for renewables and LNG post-Russia? Today’s note presents our ‘top ten’ charts on China’s opaque coal industry.

China’s coal industry provides 15% of the world’s energy and c22% of its CO2 emissions. These numbers are placed in context on page 2.

China’s coal production policies will sway global energy balances. Key numbers, and their impacts on global energy supply-demand, are laid out on page 3.

China’s coal mines are a constellation of c4,000 assets. Some useful rules of thumb are given on the breakdown on page 4.

China’s coal demand is bridged on page 5, including the share of demands for power, industrial heat, residential/commercial heat and coking.

Coal prices are contextualized on page 6-7, comparing Chinese coal with gas, renewables, hydro and nuclear in c/kWh terms.

Coal costs are calculated on page 6-8. We model what price is needed for China to maintain flat-slightly growing output, while earning double-digit returns on investment.

Accelerating Chinese coal depends on policies, however, especially around a tail of smaller and higher cost mines. The skew and implications are explored on page 7-8.

China’s decarbonization is clearly linked to its coal output. We see decarbonization ambitions being thwarted in the 2020s, per page 8.

Methane leaks from China’s coal industry may actually be higher than methane leaks from the West’s gas industry (page 9).

Chinese coal companies are profiled, and compared with Western companies, on pages 10-11.

For an outlook on global coal production, please see our article here.

Who will ‘win’ the intensifying competition for finite lithium ion batteries, in a world that is hindered by shortages of lithium, graphite, nickel and cobalt in 2022-25?

Today’s note argues EVs should outcompete grid storage, as the 65kWh battery in a typical EV saves 2-4x more energy and 25-150% more CO2 each year than a comparably sized grid battery.

Competitor #1: Electrification of Transport?

The energy credentials of electric vehicles are laid out in the data-files below. A key finding is their higher efficiency, at 70-80% wagon-to-wheel, where an ICE might only achieve 15-20%. Therefore, energy is saved when an ICE is replaced by an EV. And CO2 is saved by extension, although the precise amount depends on the ‘power source’ for the EV.

When we interrogate our models, the single best use we can find for a 65kWh lithium ion battery is to electrify a taxi that drives 20,000-70,000 miles per year. This is a direct linear pass-through of these vehicles’ high annual mileage, with taxis in New York apparently reaching the upper end of this range. Thus the higher efficiency of EVs (vs ICEs) saves 20-75MWH of energy and 7-25 tons of CO2 pa.

More broadly, there are 1.2bn cars to ‘electrify’ in the world, where the energy and CO2 savings are also a linear function of miles driven, but because ordinary people have their cars parked around 97% of the time, the savings will usually be 10-20MWH per vehicle pa.

(Relatedly, an interesting debate is whether buying a ‘second car’ that is electric is unintentionally hindering energy transition, if that car actually ends up under-utilized while consuming scarce LIBs, which could be put to better use elsewhere. As always, context matters).

Competitor #2: Grid-Scale Batteries?

The other main use case for lithium ion batteries is grid-scale storage, where the energy-saving prize is preventing the curtailment of intermittent wind and solar resources. As an example, curtailment rates ran at c5% in California in 2021 (data below).

The curtailment point is crucial. There might be economic or geopolitical reasons for storing renewables at midday and re-releasing the energy at 7pm in the evening, as explored in the note below. But if routing X renewable MWH into batteries at midday (and thus away from the grid) simply results in X MWH more fossil energy generation at midday instead of X MWH of fossil energy generation at 7pm, then no fossil energy reductions have actually been achieved. In order for batteries to reduce fossil energy generation, they must result in more overall renewable dispatch, or in other words, they must prevent curtailment.

There are all kinds of complexities in modelling the ‘energy savings’ here. How often does a battery charge-discharge? What percent of these charge-discharge cycles genuinely prevent curtailment? What proportion of curtailment can actually be avoided in practice with batteries? What round-trip efficiency on the battery?

To spell this out, imagine a perfect, Utopian energy system, where every day, the sun shone evenly, and grid demand was exactly the same. Every day from 10am to 2pm, the grid is over-saturated with solar energy, and it is necessary to curtail the exact same amount of renewables. In this perfect Utopian world, you could install a battery, to store the excess solar instead of curtailing it. Then you could re-release the energy from the battery just after sunset. All good. But the real world is not like this. There is enormous second-by-second, minute-by-minute, hour-by-hour, day-by-day volatility (data below).

Thus look back at the curtailment chart below. If you built a battery that could absorb 0.3% of the grid’s entire installed renewable generation capacity throughout the day, then yes, you would get to charge and discharge it every day to prevent curtailment. But you would only be avoiding about 10% of the total curtailment in the system.

Conversely, if you built a battery that could absorb 30% of the installed renewable generation capacity throughout the day, you could prevent about 99% of the curtailment, but you would only get to use this battery fully to prevent curtailment on about 5 days per year. This latter scenario would absorb a lot of LIBs, without unleashing materially more energy or displacing very much fossil fuel at all.

This is all explored in more detail in our detailed modelling work (data file here, notes below). But we think an “energy optimized” middle ground might be to build 1MW of battery storage for every 100MW of renewables capacity. For the remainder, we would prefer other solutions such as demand-shifting and long-distance transmission networks.

Thus, as a base case, we think a 16kW battery (about the same size as in an EV) at a 1.6MW solar project might save 5MWH of energy that would otherwise have been curtailed, abating 2T of CO2e. So generally, we think a typical EV is going save about 2-4x more energy per than a similarly-sized grid-battery.

Another nice case study on solar-battery integration is given here, for anyone who wants to go into the numbers. In this example, the battery is quite heavily over-sized.

Other considerations: substitution and economics?

Substitution potential? Another consideration is that an EV battery with the right power electronics can double as a grid-scale storage device (note below), absorbing excess renewables to prevent curtailment. But batteries affixed to a wall or on a concrete pad cannot usually double as a battery for a mobile vehicle, for obvious reasons.

Economic potential? We think OEMs producing c$70-100k electric vehicles will resist shutting entire production lines if their lithium input costs rise from $600 to $3k per vehicle. They will simply pass it on to the consumer. We are already seeing vehicle costs inflating for this reason, while consumers of ‘luxury products’ may not be overly price sensitive. By contrast, utility-scale customers are more likely to push back grid scale storage projects, as this is less mission critical, and likely to be more price-sensitive.

Overall, we think the competition for scarce materials is set to intensify as the world is going to be ‘short’ of lithium, graphite, nickel in 2022-25 (notes below). This is going to create an explosive competition for scarce resources. The entire contracting strategies of resource-consuming companies could change as a consequence…

Energy shortages are gripping the world in 2022. The 1970s are one analogy. But the 14^th century was truly medieval. Today’s note reviews its top ten features of Medieval energy shortages. This is not a romantic portrayal of pre-industrial civilization, some simpler time “before fossil fuels”. It is a horror show of deficiencies, in lifespans, food, heat, mobility, freight, materials, light and living conditions. Avoiding devastating energy shortages should be a core ESG goal.

(1) 300-years of progress. Per capita income in England had trebled between 1086 and 1330. It was stoked by trade, including via Europe and the Hanseatic League. And by technology, including world-changing innovations such as plowing with horses, vertical overshot wheels, windmills (introduced from Iran in the late 12^th century), wool spinning wheels, horizontal pedal looms, flying buttresses, compasses, sternpost rudders, larger sailing ships and spectacles. Note about two-thirds of these are about ways of harnessing or using energy. To a person born in 1250, it must have looked as though human civilization was on an ever-upwards trajectory.

(2) Downwards trajectory. Europe’s population fell from 70M in 1300 to 52M in 1400. In the UK, numbers fell from 5M in 1300 to 2.5M in 1400, shrinking by 10% during the famines of 1315-1325, 35% in the Great Plague (1347-1351) and 20% in famines of the 1360s. Unrest accelerated too, culminating in the ‘Peasants Revolt’, the first mass rebellion in English history, in 1381. These were dark times, a “lost century”.

(3) Climate and energy. Some accounts say Britain cooled by 1ºC in the 14^th Century. There are records of vineyards in 1300, but they have disappeared by 1400. The greatest danger was when two years’ crops failed in succession. 1315-17 is known as the ‘great famine’. But bad years for wheat occur in 1315-17, 1321-3, 1331-2, 1350-2, 1363-4, 1367-8, 1369-71 and 1390-1. As muscle power was the main motive energy source of the world, medieval energy shortages were effectively food shortages, curtailing human progress. And this would last until the industrial revolution.

(4) Living conditions. Life expectancy was lower and more variable than it is today. Half died before adulthood. The median age was 21. Only 5% were over 65. The average man was 5’7”, the average woman 5’2”. Only c10% of Europe’s population lived in towns. Even the largest cities only had 20-200k people (Paris, Venice, Ghent, Milan, Genoa, Florence, Rome, London). Literacy was about 5-10%. Again, many of these are symptoms of a civilization struggling to produce enough food-energy.

(5) Possessions were few. Up to 80% of the population comprised peasant farmers, without much formal income. A laborer earned 1-3 pence per day (£1-3 per year), a skilled laborer such as a carpenter or thatcher earned 3-4 pence (£3-5) and a mason earned 5-6 pence (£5-8). (In the upper echelons of society, a ‘knight’ had an income above £40 per year). Two-thirds of a typical worker’s wages were usually spent on food and drink. Thus a middle income urban individual might at any one time possess only around 100 items worth £5-10 in total. Most are basic necessities (chart below, inventory here). The ratio of incomes:basic products has risen by an amazing 25x since 1400. And for many commodities, costs have continued falling in real terms since 1800 (data-file below).

(6) Mobility. Many manorial subjects (aka villeins) were effectively bound to 1-2 acres of land and lived their entire lives in one cottage. They traveled so little that they did not have or need surnames. Freemen, who could travel, would usually know what was to be found at market towns within a 20-30 mile radius. Horse mobility was much too expensive for the masses, with a riding horse costing maybe £4, around a year’s wages, plus additional costs to feed, stable, ride and toll. So most would travel on foot, at 2-4 mph, with a range of c15-20 miles per day. Horse travel was closer to 4-5 mph. Thus in 1336, a youthful Edward III rode to York covering 55 miles in a day. The ‘land speed records’ of the era varied by season, from 50 miles/day in winter to 80 miles/day in summer, and were determined as much by the roads as the ‘movers’. Again, this would persist until industrial times.

(7) Freight was very limited. Carts existed to transport goods not people. But they were particularly slow, due to bad road conditions, and expensive. Grain was imported during famines, but it physically could not be moved inland. The same trend operated in reverse, as candles (made from animal fat) cost 2x more once transported into a city than they did the countryside. The rural economy revolved around small market towns, which attracted hundreds of people on market days from a 1-5 mile radius, as it was not practical to walk c25-miles to a city, except for crucial specialist goods.

(8) Long-distance travel outside of Europe was practically unknown. So much so that myths abounded. The Terra Australis was rumored to be a vast Southern land, where men could not survive because it was too hot; instead inhabited by “sciopods”, who would lie on their backs and bask in the shade beneath their one giant foot. This mythical level of remoteness made spices from the East among the ultimate luxuries. Pound for pound, ginger might cost 2s (6-days’ wages) cloves 4s (12-days) and saffron 12s (60-days).

(9) Biomass was the only heating fuel. The right to gather sticks and timber was granted by manorial lords to their tenants. Every last twig was used. Heavy harvesting reduced woodlands to 7% of England’s land area (they have recovered to 13% today). Winter’s skyline was particularly bleak, as no evergreens have yet been introduced from Scandinavia. Heavy use of wood in construction also made fires a devastating risk, so many cities banned thatched rooves or timber chimneys. Ovens were communal. In a similar vein, the cost of lighting has fallen by 99.99% since these pre-industrial times.

(10) Appearances? “The prime reason to avoid medieval England is not the violence, the bad humour, the poor roads, the inequality of the class system, the approach to religion and heresy or the extreme sexism. It is the sickness”. Havoc was wrought by smoke, open cesspits and dead animals. Dental care was not about preserving teeth, only masking the scent of decay. Soaps were caustic and induced blisters. Excessive combing of hair was frowned upon. Moralists especially castigated the Danes who were “so vain they comb their hair everyday and have a bath every week”.

To an energy analyst, the list above simply translates into energy shortage after energy shortages. We are not left smiling at a romantic image of pre-industrial society, but grimacing at woeful deficiencies in food, light, heat, mobility, freight, materials. It has become common to talk about the 1970s as the stock example of global energy shortages. But the 14^th century was truly medieval.

Sources:

Crouzet, F. (2001). A History of the European Economy. 1000-2000. University Press of Virginia, Charlottesville and London.  

Mortimer, I., (2009). The Time Traveller’s Guide to Medieval England. Vintage Books. London.

Wickham, C. (2016). Medieval Europe. Yale University Press.

This 13-page on note presents 10 hypotheses on Russia’s conflict implications in energy markets. Energy supplies will very likely get disrupted, as Putin no longer needs to break the will of Ukraine, but also the West. Results include energy rationing and economic pain. Climate goals get shelved in this war-time scramble. Pragmatism, nuclear and LNG emerge from the ashes. 

For an overview of economic ratios from different models across conventional power, renewables, conventional fuels, lower-carbon fuels, manufacturing processes, infrastructure, transportation and nature-based solutions, please see our article here.

This gloomy video explores growing fears that the energy transition could change direction in the mid-late 2020s, due to energy shortages and geopolitical discord. Even more worryingly, could energy transition fall apart? Constructive solutions will include debottlenecking resource-bottlenecks, efficiency technologies and natural gas pragmatism.

To view the video directly in Vimeo, please click here. For a more recent video, taking a more front-footed approach to these energy transition dilemmas, please see here.

“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 on 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.