Border taxes: a carbon curtain has descended?

As Europe advances its decarbonization agenda, a ‘border adjustment mechanism’ has now been proposed to mitigate carbon leakage. Its initial formulation is modest. But it will snowball. And ultimately divide the global economy in two. Hence this 15-page report lays out our top five predictions for CO2 border taxes to reshape energy markets and the world.

In 1946, Winston Churchill made his famous ‘Iron Curtain’ speech, prophesizing decades of tensions between different economic systems in the West and elsewhere. The concept of a carbon curtain is similar, and is laid out on pages 2-4 of our report.

These wheels are now firmly in motion, as Europe has proposed a carbon border adjustment mechanism, in order to stem carbon leakage, as it tightens its environmental policies. For those who prefer not to read the Commission’s entire 291-page leviathan, we have summarized the key features on pages 5-6.

Expansion is inevitable. Page 7 argues for domino effects, where CBAM will be emulated by other Western economies; and then broadened, first into the manufacturing sector, then universally.

There will be five investable consequences of these escalating border taxes, which we spell out on pages 8-15. They could be extremely constructive for the gas/LNG industry, pre-existing renewables assets, and some lower carbon economies. But we also see major losers in the coal industry, higher-carbon countries and victims of inflation.

Lithium: reactive?

Lithium demand is likely to rise 30x in the energy transition. So this 15-page note reviews the mined lithium supply chain, finding prices will rise too, by 10-50%. The main reason is moving into lower-grade ores. Second is energy intensity, as each ton of lithium emits 50 tons of CO2, c50% due to refining spodumene at 1,100◦C, mostly using coal in China. Low-cost lithium brine producers and battery recyclers may benefit from steepening cost curves.

Inflationary feedback loops increasingly matter in the energy transition. Decarbonization technologies themselves need to be decarbonized. But this tends to re-inflate their costs. Page 2 re-caps this issue and why it matters.

An overview of the lithium supply chain is spelled out on pages 3-7, across the three major categories of “brine”, “mine” and “refine”. In each case, we aim to highlight the key numbers and energy costs.

An economic model of mined lithium can thus be derived on page 8. We outline what price is needed for a 10% IRR across the value chain.

The first re-inflation risk is the direct cost of decarbonization, which is quantified on pages 9-10, including carbon prices, energy costs and materials costs.

The second and larger re-inflation risk is the need to move into lower ore grades, to meet a 30x increase in future lithium demand. This is quantified on pages 11-12.

The impacts on batteries and electric vehicles are then translated through on page 13. We conclude that OEMs may consider backwards-integrating, to secure supplies.

Who benefits? Steepening cost curves are best for those at the bottom of those cost curves. And possibly also for battery recycling. We have screened 20 companies and discuss our conclusions on pages 14-15.

Energy transition: the top ten controversies?

This 11-page note summarizes the ‘top ten’ controversies in the energy transition, based on 2,000 pages of our research to-date, and resultant discussions. Our outlook is increasingly despairing. And inflationary. Yet opportunities do exist to unlock value amidst bizarre and market-distorting policies.

Thunder Said Energy has now published over 2,000 pages of research, plus 400 data-files and models into the energy transition, since its inception in 2019. The purpose of this short note is to look back across all of our work, and ask…

What are the top ten controversies in the energy transition? In each case, we will outline what the controversy is; why it matters; and our own view. There is only one rule for this exercise. To limit ourselves to 1 page per controversy, in order to distill the key points.

The controversies make us fearful that well-intentioned policies may unfortunately be painting the world into a corner, as outlined on pages 2-4.

We hope our work can arm decision-makers with ideas: to preserve value, even create value, by anticipating market distortions. This includes ‘printing money’ by back-stopping volatile renewables, debottlenecking future commodity bottlenecks, improved technologies, and implementing nature based solutions that help the world avoid becoming a waste land (pages 5-11).

Gas turbines: what market size in energy transition?

Combined heat and power systems are 20-30% lower-carbon than today’s gas turbines, as they capture waste heat. They are also increasingly economical to backstop renewable-heavy grids. Amidst uncertain policies, the ultimate market size for US CHPs could vary by a factor of 100x. We nevertheless find 30 companies well-placed in a $9trn global market.

What are CHPs and why do they matter? Gas turbines have been in use for power generation since the late 1930s. They usually range from 500kW to 300MW capacity. We outline how they work, why CHPs are more efficient, and why they could be well-placed for backstopping renewables on pages 2-3.

Five future markets could exist for CHPs. We have quantified the opportunity in large-scale power (page 4), industrial heat (page 5), landfill gas (page 5), EV fast-charging (page 6) and smaller-scale residential/commercial systems (page 6).

The ultimate market can thus be assessed by adding together each use case. But future policies are uncertain. We find the total addressable market in the US by 2050 could be anywhere ranging from $30bn to $3trn, i.e., an uncertainty level of 100x (pages 7-9).

Amazing progress is nevertheless being made, despite the policy uncertainty, as we have tracked new developments from thirty leading companies, aiming to make gas turbines more efficient for the energy transition (pages 10-11).

Power grids: hell is a hot, still summer’s day?

Ramping renewables to 50% of power grids is a growing aspiration in the energy transition. But in some markets, it may result in devastating blackouts during summer heatwaves, as power demand doubles exactly when wind, solar, gas, transmission losses and disruptions all deteriorate. This 15-page note assesses the causes, implications and mitigation opportunities.

In David Copperfield, Charles Dickens’s quasi-autobiographical novel of 1849, Mr Micawber famously summed up his household’s finances: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”. So too with the grid. A small tilt from surplus to deficit results in blackout misery, costing billions in economic damages, and hardship for millions of people (pages 3).

High temperatures cause grid balances to deteriorate. Across every single line in our models. This is under-appreciated. It is mostly due to immutable laws of physics (which cannot be over-turned by policy-makers, try as they might). Hence our work aims to quantify these temperature sensitivities for cooling demand (page 3), wind (page 4), gas-fired power (page 5), solar power (page 6) and transmission losses (page 7).

A simple model is constructed, showing how a seemingly well-covered grid, which actually suffers from excess capacity most of the time, can thus fail catastrophically during a heatwave (page 8).

This is where power grids are heading. We outline our models and forecasts across the US, Europe, China and broader emerging markets (pages 9-10).

So what solutions exist? We fear that grids will grow more and more erratic amidst summer heatwaves. Hence we have reviewed 10 opportunities and implications, which may become interesting to investors and companies (pages 11-15).

Landfill gas: rags to riches?

Methane emissions from landfills account for 2% of global CO2e. c70% of these emissions could easily be abated for c$5/ton, simply by capturing and flaring the methane. Going further, low cost uses of landfill gas in heat and power can also make good sense. But vast subsidies for landfill gas upgrading, RNG vehicles and biogas-to-jet may not be cost-effective. Our 20-page note reviews the options.

Methane emissions from landfills are broken down on pages 2-5. We explain why they are generated, including the degradation pathways of different waste materials. We also review the typical sizes and end-markets for existing landfill gas capture programs.

Different options exist to capture and avoid these emissions. We have assessed ten options in this note, to quantify the potential market size. Our carbon accounting framework is summarized on page 6.

Different options are then reviewed in detail. In each case, we calculate the costs and discuss complexities. This includes methane capture and flaring (page 7), methane capture and sequestering (page 8), use of raw landfill gas in heat, power or CHP (pages 9-12), cleaning up to pipeline spec (pages 13-14), further cleaning into CNG transportation fuels (pages 15-16) and biogas-to-jet (page 17).

Perspective is crucial. The ultimate carbon abatement costs of landfill gas projects hinge on whether a project has served to reduce methane emissions. We are doubtful that some of the largest and most complex RNG projects will be genuinely incremental. They may simply offtake methane that was being captured anyway or could have been flared at vastly lower cost. This challenge is explored on pages 18-19.

Will subsidies stick? We debate this question on page 20, along with policy suggestions and conclusions for companies.

Solar costs: four horsemen?

Solar costs have deflated by an incredible 90% in the past decade to 4-7c/kWh. Some commentators now hope for 2c/kWh by 2050. Further innovations are doubtless. But there are four challenges, which could stifle future deflation or even re-inflate solar. Most debilitating would be a re-doubling of CO2-intensive PV-silicon. Our 15-page report explores re-inflation risks for solar developers.

Our current solar models are laid out on page 2, breaking down the capex costs of a new utility solar installation (in $/W) and the resultant levellized power prices required for various IRRs (in c/kWh).

But can solar costs deflate to 2c/kWh in the future? This is the base case assumption now factored into the IEA’s ‘roadmap to net zero’, which has solar generating 33% of all global electricity by 2050. If correct, this could unleash a very different roadmap to net zero than our own.

We outline four reasons we cannot see solar deflating to 2c/kWh on pages 6-15. The first three revolve around curtailment, geographic down-spacing and interest rates.

Photovoltaic silicon is the key focus on pages 10-15. This currently makes up one-third of a solar panel’s cost, and is one of the most CO2 intensive materials on the whole planet. Models must join up. Thus if the production of PV silicon itself needed to be decarbonized, then prices would easily rise by 2x, or more. The full analysis is broken out in the note.

Battery recycling: long division?

Recycling lithium batteries could be worth $100bn per year by 2040 while supporting electric vehicles’ ascent. Hence new companies are emerging to recapture 95% of spent materials with environmentally sound methods. To be practical, the technology still needs to be proven at scale, battery chemistries must stabilize and cheaper alternatives must be banned. Our 15-page note explores what it would take for battery-recycling to get compelling.

There are three aspirations for recycling electric vehicle batteries. The are outlined on pages 2-6, including an overview of future market sizing and companies.

How does it work? We have summarized the basic process for pyrometallurgical and hydrometallurgical recycling on pages 7-10, condensing the most helpful data-points from reviewing half-a-dozen technical papers.

The economics are outlined on pages 11-13, as we have modelled a hydrometallurgical facility that achieves c70% recovery of overall input materials, as our base case. Our commentary focuses on the best opportunities for cost deflation.

To get particularly excited by battery recycling, we would need to see improvements around half-a-dozen question marks, which are spelled out on pages 14-15.

Inflation: will it de-rail the energy transition?

New energy policies will exacerbate inflation in the developed world,  raising price levels by 20-30%. Or more, due to feedback loops. We find this inflation could also cause new energies costs to rise over time, not fall.  As inflation concerns accelerate, policymakers may need to choose between delaying decarbonization or lower-cost transition pathways.

The importance of costs on the roadmap to net zero evokes a surprising amount of debate. We re-cap these debates, including our own roadmap on pages 2-3. Recently, organizations such as the IEA have published a roadmap, which we believe will be c10x more expensive.

The inflationary impacts of energy transition can be compared for different levels of abatement costs. Hence we discuss the concept of abatement costs, including two paradoxes, on pages 4-5.

Top-down, we calculate that each $100/ton of CO2 abatement cost would likely lead to 6% aggregate price increases in the developed world, on page 6.

Bottom-up, we model that each $100/ton of CO2 abatement cost would lead to 2-70% price increases, across a basket of twenty different goods and commodities, on pages 7-8. The impacts are regressive and basic goods and staples rise more.

An additional source of inflation comes from supply-demand dynamics, as some materials will be dramatically under-supplied in the energy transition (page 9).

What does it mean for new energies? To answer this question, we bridge the impacts of all these cost increases in our models of wind, solar, hydrogen and batteries, on pages 10-12. There are surprising feedback loops, which could amplify inflation.

No brakes? We also find that the usual mechanism to slow inflation is blunted by the need for an energy transition, on pages 13-14. Hence if inflation accelerates, it could surprise by a wide margin.

Our conclusion is that policy-makers and companies should consider costs more closely, while there are measures for investors to inflation-proof portfolios.

Electro-fuels: start out as a billionaire?

Electro-fuels are hydrocarbons produced primarily from renewable power, CO2 and water. They are reminiscent of the adage that ‘the fastest way to become a millionaire is to start out as a billionaire then found an airline’. Because all you need for 1boe of these zero-carbon fuels is 2-3 boe of practically free renewable energy. Abatement cost is $1,000/ton. At best this could deflate to $150/ton. An ambitious new industry is forging ahead. The opportunity and challenges are explored in this 19-page report.

There are three excellent reasons for wanting to commercialize electro-fuels, converting renewable electricity, CO2 and water into zero carbon fuels. They are spelled out on pages 2-4.

Renewable power is the first ingredient needed to produce electro-fuels. We outline how much power, and at what cost, on pages 5-6.

A carbon source is the second ingredient needed. We have created a CO2-sourcing cost curve, then modelled a CO2 electrolysis stack, on pages 7-9.

A hydrogen source is the third ingredient needed. Our assessment of hydrogen costs is re-capped on page 10.

Re-combining these building blocks into an electro-fuel will most likely follow one of three main pathways: Fischer-Tropsch, green methanol and/or alcohol-dehydration. We spell out each option, and its ultimate cost on pages 11-14.

Our best case scenario is refined on page 15-16. Because we have broken down the costs of electro-fuels into their component parts, we can assess what is required for a c$150/bbl or c$150/ton abatement cost, and is this realistic?

Leading companies are profiled on pages 17-19. We screened 15 companies in the space. Many are forging ahead with pilot projects, or developing superior technologies.