Category: Report

CO2 removal credits could add 6-60% to the GDP of 47 emerging countries as they reforest 1.5bn acres and create a 7.5GTpa CO2 sink, while the resultant cash flows could double these countries’ investment rates. Reinvesting in wind, solar, electrification avoids higher carbon fuels and deforestation for firewood. Reinvesting in timber value chains maximizes CO2 permanence and value. This 13-page note explores ‘reforest and reinvest’ as a promising framework for clean economic development in the energy transition.

An important objective in the energy transition is to accommodate clean economic development for 4bn people on Planet Earth, with incomes around $2k pp pa, who currently use 90% less energy per capita than the ‘top 1bn’ in the developed world (page 2).

However clean economic development requires investment, especially for clean infrastructure. Without financing this infrastructure, there are risks that development will be slower and more skewed to particularly high-carbon energy sources; such as cheap coal and even worse, firewood from deforestation (page 3).

But what if emerging countries could reforest half of the areas that have historically been deforested, selling the resultant CO2 credits at $50/ton, and reinvesting a large portion of the income? (page 4).

We think there are 47 countries where this model could uplift GDP by 6-60% and ‘double’ potential annual investment rates in the country. Examples, numbers and case studies are presented on pages 5-7.

Where to reinvest the cash flows from selling nature-based CO2 removals? We think that 2-10x multipliers can be achieved. In other words, if the sales proceeds from 1 ton of CO2 removals are reinvested in emerging world countries, they can abate 2-10 tons of future CO2, while promoting clean economic development, and progressively increasing the ‘quality’ of nature based CO2 removals (pages 8-9).

Integration into timber value chains is explored as a method to maximize value and ensure that sustainably harvested timber sees its carbon locked up for the long-term in higher-value construction materials, which are 20-60x more valuable than raw stumpage (pages 10-11).

Wind, solar and electrification can also be financed to lower countries’ reliance upon coal and deforestation wood. This option has a strong multiplier effect (numbers in the note) and also enhances the quality of reforestation in the country (page 12).

Implications for the energy transition? Emerging world reforestation may increasingly gather momentum as a clean economic development model. We think this presents opportunities for companies that align themselves with the ‘reforest and reinvest’ model, while it will contribute to pushing high cost options off of the CO2 abatement cost curve.

Projections of future global energy demand depend on energy efficiency gains, which are hoped to step up from <1% per year since 1970, to above 3% per year to 2050 by some forecasters. But there is a problem. Energy efficiency is vague. This 17-page note explores three definitions. We are worried that global energy demand will surprise to the upside as energy efficiency gains disappoint optimistic forecasts.

Forecasts of future energy demand hinge on energy efficiency. When energy efficiency increases, then less primary energy needs to be supplied to meet the ultimate energy demands of civilization. But definitions matter, as some forecasters are now assuming enormous accelerations of efficiency gains in the energy transition (page 2).

Definition #1. Energy intensity of GDP? The primary energy intensity of global GDP has declined at 1.0% per year since 1970. We can also measure this metric by sector. But there are two great controversies with this measure of energy efficiency (pages 3-4).

Definition #2. Primary energy efficiency is the percent of the thermal energy in fuels that is converted into useful energy for machines. The definition has its roots in the power sector. We have charted 20 examples of energy efficiency factors, which can also be aggregated by fuel, over time, and for the entire global energy system. So we think primary efficiency of the global energy system is around 45% today, has been improving at 0.8% per year, and the gains will accelerate to 1.1% per year through 2050. But this definition only gives a partial picture. See pages 5-9.

Definition #3. Secondary energy efficiency is the percent of useful energy supplied to machinery and appliances that is actually used for its intended thermodynamic purposes. This is the most challenging concept of energy efficiency. It can be almost impossible to define and measure. See pages 10-12.

Efficiency paradox #1. On our best attempts to parse the data, we think secondary energy efficiency has most likely declined on a global average basis over the past half-century. We are not sure whether there is a historical precedent for secondary efficiency to improve on a global average basis (sometimes called Jevons Paradox). Our roadmap to net zero requires an inflection in secondary efficiency from -0.3% per year to +0.2% per year. Others’ roadmaps require an inflection to 2-3% per year. There are very important controversies here. Energy demand could surprise strongly to the upside (page 13).

Efficiency paradox #2. Primary energy efficiency is seen improving from 45% in 2019 to above 60% in 2050 in our roadmap to net zero. However, many transition technologies, especially hydrogen value chains, have round-trip efficiencies well below the global average. How can you increase total global primary efficiency by deploying technologies with lower-than-average primary efficiency?! (page 14).

Efficiency paradox #3. Industrial history has seen primary efficiency of heat engines improve by a factor of 3-5x each century since 1650. This is amazing. But it cannot continue, as primary efficiency is capped at 100%. Although we do think primary efficiency gains enjoy a final 2-3x surge upwards through the deployment of more renewables and electrification, as a mega-trend for the 21st century (page 15).

Our conclusions, bluntly stated, are that some forecasts for declining global energy demand through 2050 may be based on vague, aspirational, and historically unprecedented efficiency assumptions. This matters. Persistent under-supply in global energy markets could de-rail the energy transition (fantasies then crises) and culminate in cruel energy shortages (page 16).

Our favorite opportunities to drive energy efficiency through the global energy system — reducing both primary demand and useful demand — are spelled out on page 17.

Controversies over oil industry flaring are re-accelerating, especially due to the methane slip from flares, now feared as high as 8% globally. The skew entails that more CO2e could be emitted in producing low quality barrels (Scope 1) than in consuming high quality barrels (Scope 3). Insane environmental impacts are entirely preventable. This 10-page note explores how, across producers, energy services and new technologies.

145 bcm of gas is flared globally, as 1.5 mcf/bbl bubbles out of the global average oil barrel, of which 0.2 mcf/bbl gets flared. Country-by-country dynamics are summarized on page 2.

Methane slip is a growing controversy. Methane causes 25-120x more warming than CO2. New technologies to mitigate methane leaks are evolving rapidly. But one of the biggest sources of leaks is incomplete combustion in flares, also known as methane slip. Numbers and controversies are presented on pages 3-4.

Insane implications. After exploring these numbers, we strongly believe there are barrels of oil in the market where the Scope 1 CO2 from low-quality flaring is higher than the Scope 3 CO2 from combustion. Or in other words, there can be less CO2 emitted from burning high quality barrels than from producing low quality barrels. The maths are on page 5.

The biggest challenge is to mitigate flaring outside of the US, Canada and Europe, which themselves account for 8% of global flaring, and <5% of the global CO2e from flaring. Clearly and categorically, the best way to do this is to develop gas value chains. Case studies prove this point and are outlined on page 6.

Preventing flaring requires investment, estimated at $70bn upstream, and $50bn in LNG liquefaction facilities, and pulling on an extremely broad array of sub-industries, from compressors to pipelines to new technologies. We have screened examples of companies and technologies that will help to reduce flaring on page 7.

Case studies of flaring reduction and leading companies involved? Approximately half of the challenge is in gathering and monetizing gas that is more than 20km from any existing infrastructure (page 8) and the other half of the challenge is in capturing small and hard-to-capture gas streams (page 9).

There are hundreds of reasons why oil industry flaring occurs; hundreds of solutions to improve the quantity and quality of associated gas handling; but likely you do not want to read hundreds of pages cataloguing all of these examples. Our solution is to end by summarizing some of the companies that stood out most from our work, and which may be interesting for decision-makers to explore further (page 10).

The universe of energy transition stocks seems small at first. 50 clean tech companies have $1trn in combined value, less than 1% of all global equities. But decarbonizing the world is insatiable. Consuming ever more sectors. In our attempt to map out all of the moving pieces, we are now following over $15trn of market cap across new energies, (clean) conventional energy, utilities, capital goods, mining, materials, energy services, semiconductors.

In one of the all time great works of literature, a tiny and very hungry caterpillar hatches into the world. Then over a period of several days, the caterpillar gobbles up substantively everything that it encounters: an apple on Monday, two pears on Tuesday, three plums on Wednesday, four strawberries on Thursday. No matter how much the insatiable little creature eats, it is still hungry. Although one day, it does eventually morph into a beautiful butterfly. And everyone lives happily ever after.

The energy transition is like the hungry caterpillar. At first it seems small. Confined to a few niche companies. But over time, it feels like the theme is also liable to gobble up whatever it encounters. We think the world will achieve an energy transition. The thermodynamics of renewables-electrification are simply astounding. And helping decision makers to find economic opportunities in the energy transition is the focus of TSE’s research.

But after four years, our definitions of ‘energy transition stocks’ seem to be getting ever broader. Consuming ever more sectors.

Five themes still dominate in the minds of many investors. 60% of the market cap in these themes is concentrated in 50 clean tech companies. But are there growing risks of crowding in some of these ‘obvious’ energy transition stocks? (pages 2-3).

Consuming the electric sector. We count c$4trn of addressable market cap in sectors linked to electrification, across utilities, power electronics and semiconductors. Some of the names that have stood out in our research are noted on pages 4-5.

Consuming the metals and materials sector. We count $2trn of addressable market cap in sectors linked to raw materials, across metals, mining, mining equipment. Some of the names and themes that have stood out in our research are noted on pages 6-7.

Consuming the commodity chemicals sector. “If you want to make an apple pie from scratch, first you must invent the universe”. There is no modern wind, solar, batteries without carbon fiber, ethylene vinyl acetate, fluorinated polymers; and in turn, these are some of the most sophisticated and complex value chains in human history. Commodity chemicals companies that have stood out in our research are noted on pages 8-9.

Consuming the energy sector. Building out new energies is a boot-strapping process, pulling on today’s traditional energies, while cleaner fuels such as natural gas double in volumes in our overall roadmap to net zero (page 10).

Consuming other sectors too? We explore the read across from energy transition to financial services, bio-sciences, aerospace and defence, consumer goods and healthcare, along with some broader conclusions about energy transition stocks, on pages 11-12.

Silicon carbide power electronics will jolt the energy transition forwards, displacing silicon, and improving the efficiency of most new energies by 1-10 pp. Hence we wonder if this disruptor will surprise to the upside, quintupling by 2027. This 12-page note reviews the technology, advantages, challenges, and who benefits?

Transistors, such as IGBTs and MOSFETs, are the building blocks for solar inverters, wind converters, battery chargers and EV drive trains. We argue that their crucial role in new energies is analogous to the $100bn pa valve sector in conventional energy (pages 2-4).

The incumbent semiconductor used in 99.9% of electronics and 95% of power electronics is silicon. However, a new entrant is gaining ground. Silicon carbide (SiC) is a fundamentally better semiconductor for power-electronic applications, yielding 1-10% efficiency improvements (page 5).

Why is SiC “better”? The answer stems from material properties, including 100x lower on-resistance, 10x lower switching losses and 3x better thermal performance. An explanation of these variables, and why they matter, is covered on pages 6-7.

Challenges for SiC power electronics? There are three challenges for SiC, around cost, reliability and scaling. These stem from the production process and can be quantified. Interestingly, we think this set of challenges shapes who is likely to dominate this fast-growing market (pages 8-9).

How large is the silicon carbide power electronics market in $bn? We think the SiC market may surprise to the upside. Different commentators’ SiC market sizing assessments and forecasts are summarized on page 10.

Companies producing SiC power electronics and materials? Our screen of SiC companies, covers 10 public and 2 private companies. There is one stand-out pure-play. Other names with exposure to the theme are mid-large cap companies listed in the US, Europe and Japan (pages 11-12).

Engines convert heat into work. They are governed by thermodynamics. This note is not a 1,000 page textbook. The goal is to explain different thermodynamic cycles and heat engines, simply, in 13-pages, covering what we think decision makers in the energy transition should know. The theory underpins the appeal of electrification, ultra-efficient gas turbines, CHPs, advanced nuclear and new super-critical CO2 power cycles.

Thermodynamics can be defined as the science governing energy flows. Especially at the “middle levels”, from the kinetic energy of billions of molecules in a container of gas/liquid to the machines, turbines and engines that turn those molecules’ kinetic energy into mechanical work. The three laws of thermodynamics, and the key definitions that every serious decision maker in energy should (probably) know, are summarized on pages 2-3.

Thermodynamic cycles are closed loops whereby different types of heat engines convert heat into work, from a system that starts and finishes with the same internal energy, pressure, volume, temperature and entropy (page 4).

The Carnot Cycle is the most efficient engine in thermodynamics, a physicist’s fantasy, that performs work as it transfers heat from a source to a sink with no losses along the way. The efficiency of the Carnot Cycle equal 1 – T_C/T_H (both quoted in Kelvin, relative to absolute zero, the coldest possible temperature in our Universe). It follows that the hotter the heat source, the more efficient the engine. Thus the maximum possible (Carnot) efficiency of low-grade steam at 200ºC is 38%, rising to 80-90% from super-heated gas at 1,200-1,750ºC (pages 5-6).

The Rankine Cycle is a modified variant of the Carnot Cycle, which adds a pump and a condenser, and thus approximates the steam engines of the Industrial Revolution, and still in use in many coal and nuclear power plants. There is one great advantage of the Rankine Cycle, and two devastating limitations (pages 7-8).

The Brayton Cycle harnesses work from hot gases, and approximates both jet engines and modern gas turbines. Well-designed Brayton Cycles are always going to ‘beat’ Rankine Cycles. As a rule of thumb, gas turbines are going to be 1.5x more efficient than steam turbines. But they are also harder to engineer, and continue to stretch the boundaries of material science. Indeed, once you grasp the concept of back work ratio, it explains the entire history of the Industrial Revolution and the future role of natural gas in the energy transition. “Gas turbines are better, but steam turbines had to come first” (pages 9-10).

Otto and Diesel Cycles are the thermodynamic cycles used in combustion vehicles’ engines. Theoretical engines are more efficient at higher pressures. But real-world fuels “knock” at higher pressures. This is why relatively more efficient gasoline vehicles rely on high-octane fuels from the refining industry (11-12).

Why do thermodynamic cycles matter in the energy transition? Understanding thermodynamic theory underpins the appeal of electrification, natural gas, ultra-efficient gas turbines, CHPs, advanced nuclear HTGRs and new super-critical CO2 power cycles; and conversely, some relative drawbacks for steam cycles, green hydrogen and electro-fuels.