Category: Report

In the under-supplied world of 2022-30, raising interest rates might not mute inflation, but could actually deepen it. By deterring the investments needed to cure inflation itself. Each 1% increase in capital costs re-inflates new energies 10-20%, infrastructure 2-20%, materials 2-6%, and conventional energy 2-5%. This 12-page note outlines the tension between energy transition versus interest rates. And the implications.

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Inflation in the energy transition. In 2021, we began to worry about inflation. In May-2021, we asked if it would de-rail important goals in the energy transition (note here). In December-2021 we started forecasting double-digit inflation across the whole world (note here – indeed, this note is both interesting and dispiriting to re-read from today’s vantage point).

There are nasty feedback loops, where the deeper you delve into commodity chemicals, the more unfortunate cascades you will find (the best recent example is here). So inflation can become self-reinforcing (page 2).

So can persistently high inflation be averted by raising interest rates? The first consequence of higher rates is to de-value financial assets. Not only bonds (page 3). But many wind and solar projects with fixed-price PPAs would also become impacted, possibly even distressed, which is not going to help the energy transition to progress (pages 4-5).

Developing more energy also becomes harder. Energy is capital intensive (page 6). Providers of capital require higher returns when interest rates rise. This re-inflates the costs of developing additional energy supplies (page 7). And because of their financial characteristics, wind, solar, hydro, nuclear are about 5x harder-hit than conventional energies (page 8).

Developing more infrastructure becomes harder. It is not enough to produce wind and solar. You must construct power grid infrastructure too. This is also capital intensive, and prone to re-inflating with higher interest rates (page 9).

Developing more materials becomes harder. Unfortunately solar panels do not grow on trees. Building more solar requires building more PV silicon, or silver, or copper production facilities. These are also capital intensive, and prone to re-inflating with higher interest rates (page 10).

Our conclusion is that raising interest rates would be an unbridled disaster for the energy industry. Policy-makers face a dilemma between curing energy shortages versus interest rates. Between energy transition versus interest rates. Forecasts are set out on page 11.

What does it mean for investors and other decision-makers? Our best ideas for navigating this environment are summarized on page 12.

What causes battery degradation? This 14-page note offers five rules of thumb to maximize the longevity of lithium-ion batteries, in grid-scale storage and electric vehicles. The data suggest hidden upside in the demand for batteries, for lithium and high-quality power electronics, especially if batteries are to backstop renewables.

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Battery degradation matters. Small changes in battery modelling parameters — e.g., a 3-4% decline rate and a 2-3 year shorter lifespan — can obliterate a 10% IRR on a grid-scale battery. Conversely, optimizing the lifespan and functioning of a battery can double its IRR (page 2).

We present a very simple “rule of thumb” model on page 3. Then we explain why batteries degrade on pages 4-5, covering fabled mechanisms such as the solid electrolyte interface, lithium plating, positive electrode decomposition, particle fracturing. In total there are 18 main battery degradation pathways.

The complexity gets worse. We aggregated 7M data-points into a big battery degradation data file, in turn sourced from excellent lab studies by Sandia National Laboratories. When the exact same cells are tested under the exact same cycles, their lifespans can vary by a factor of 3x. One of the drivers of degradation is random manufacturing defects (page 6).

Five rules of thumb for battery degradation may nevertheless be helpful, to derive actionable conclusions. The top five drivers of battery degradation are reviewed on pages 7-11. In each case, we outline the parameter, why it causes degradation, and how it can be improved.

Are lithium ion batteries a good fit for backing up volatile renewables inputs? We answer this question on pages 12-13. There is an array of companies that increasingly excites us here, such as CATL, Stem, Powin, Eaton, supercapacitors, and other power electronics names; and general upside for lithium demand, as degradation can best be avoided by over-sizing the batteries.

However, we also fear some battery projects may end up underwater and we see more muted upside for metals such as nickel and cobalt, due to the degradation rates of different battery chemistries, which does seem to favor LFP.

Data and details on what causes battery degradation are in the note, alongside a more actionable overview of maximizing battery value.

Modelling Europe’s gas balances currently feels like grasping at straws. Yet this 10-page note makes five predictions through 2030. Thus our new European gas outlook revises our views on how fast new energies ramp, which gas gets displaced first, which energy sources are no longer ‘in the firing line’, and how gas pricing will evolve from here.

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Our starting point for understanding Europe’s gas market in 2022 to 2030 is to consider the ramp up of new energies. We see enough growth from wind and solar to displace the equivalent of 14 bcfd from Europe’s 45bcfd gas market by 2030 (page 2).

Who is in the firing line to be displaced? Russia’s gas supplies to Europe are discussed on page 3, including our latest gas supply modelling.

Who is no longer in the firing line? If the ramp up of renewables primarily displaces Russian gas, then we would need to upgrade our estimates for indigenous European gas production, coal consumption, nuclear generation, uranium consumption and LNG imports. The numbers are quite interesting and material, spelled out on page 4.

But timing matters. The ramp up of renewables is gradual. Conversely, Russian supplies could be offline through 2023, 2024. A 3-10bcfd gas shortage in Europe may persist through 2025, 2026. The moving pieces are described on pages 5-6.

Our pricing outlook is that 2023, 2024 could be worse than 2022. We think gas prices can continue making new highs for as long as policymakers continue to subsidise gas and cushion against demand destruction. Some numbers, in $/mcf, are thrown around on page 7-8.

Ultimately policymakers may need to change tack, and act to reduce demand. The higher gas prices go in 2023, 2024, then the more likely this will happen. Our European gas outlook, pricing scenario, and possible ‘rationing options’, are spelled out on pages 9-10.

What degradation rate is expected for a green hydrogen electrolyser, if it is powered by volatile wind and solar inputs? This 15-page note reviews past projects and technical papers. 5-10% pa degradation rates would raise green hydrogen costs by $1/kg. Avoiding degradation justifies higher capex, especially on power-electronics and even batteries?

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The second-by-second output from renewables is volatile. The volatility of solar includes around 100 volatility events per day. The volatility of wind includes around 75 volatility events per day. This is usually fine, as it can be smoothed out in large and diversified power grids, or via different batteries (pages 2-3).

But how can electrolysers run off renewables? This feels like an increasing necessity for green hydrogen, in order to ensure the hydrogen has minimal embedded CO2, and under new requirements from the US Inflation Reduction Act (page 4).

Degradation of electrical equipment under volatile input feeds, including case studies from the motor industry, are reviewed on (page 5).

A brief history of electrolyser and PEM fuel cell deployments are reviewed, in order to draw conclusions on the decline rates of installed systems (pages 6-7).

The technical literature into PEM electrolyser degradation is then reviewed on pages 8-10. We think uncertainty is still high, and it would be helpful to conduct more studies, longer studies and more rugged studies into electrolyser degradation under volatile inputs.

A case study is drawn from the technical literature and described in detail, explaining how dynamic loading has been linked to the degradation of electrolysers. Total stoppages of electrolysers may be a driver of degradation, and require further back-ups (pages 11-13).

Economic implications are spelled out on page 14. As a rule of thumb, adding a 5% pa decline rate to a base case electrolyser model might raise the total levelized cost of hydrogen by around $1/kg.

Can electrolysers run off renewables? Ultimately our answer to this question is yes, but it may require adding power electronics and batteries alongside the electrolysers, in a trade off with up-front capex, in order to mitigate against degradation.

Our roadmap to net zero still sees relatively more potential in large-scale transmission infrastructure, and short-duration battery back-ups, in order to maximize the ascent and impact of renewables.

Energy is the glue of our universe. Literally everything is at some level an energy flow – from viewing this text to matter itself – which can be expressed in Joules and kWh. Hence this 16-page overview is a useful reference, to translate from any energy units to any others; for comparisons; and to understand the units in energy transition.

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This reference document is an attempt to condense 15-years of energy research into a single overview, for anyone wishing to understand energy from first principles, juggle energy units seamlessly, and compare different energy technologies.

We will consider it ‘mission accomplished’ if this document gets printed, earns its keep on the desks of energy analysts for the foreseeable future; and despite the complex, numerical topic, if it leaves readers in awe of energy and vaguely amused by some of the ‘fun facts’.

Energy is the glue of our universe, and everything that happens within it: making things warmer, cooler, faster, slower, bigger, smaller, visible, audible, electrically charged, or chemically changed. Thus the ‘Joule’ is a miraculous unit, which definitionally links electricity, heat, motion, physics and chemistry, as explained on page 2.

However the kWh is a more useful unit, because 40% of all global energy is electricity, which in turn is primarily metered, bought and sold in kWh (or MWH). Our advice to understand energy transition is to translate everything into kWh (page 3).

An intuitive guide to mastering the orders of magnitude, from kWh to thousands of TWH, is presented on pages 4-5. This includes electrical processes, producing materials and entire countries’ energy balances.

Primary energy versus useful energy is another crucial distinction. Primary energy denotes the thermal energy contained in the bond enthalpy of fuels (yes, we will explain this in a way that is intelligible and avoids unnecessary jargon). But only a portion of this energy can be harnessed as useful energy, due to efficiency losses (page 6-8).

A reference for gas industry units is given on pages 9-10, converting gas units into kWh from standard cubic feet (mcf, mmcf, bcf, TCF), normal cubic feet, cubic meters, tons of gas, tons of LNG (MT, MTpa), British thermal units, the archaic therm; higher heating value versus lower heating value, and real-world gas blends. Gas is a low-carbon fuel as 54% of gas energy comes from converting hydrogen (in CH4) into water vapor.

A reference for oil industry units is given on page 11, converting oil units into kWh from gallons, barrels (bbls, kbbls, Mbbls, bn bbls), boe (boe, kboe, Mboe, bn boe), kilograms and tons; for ethane, methanol, ethanol, propane, butane, octane, gasoline, jet fuel, diesel, fuel oil and the ‘blended average oil barrel’; and the CO2 intensity of oil, of all of the above.

A reference for coal industry units is given on page 12, converting coal units into kWh from tons (kTpa, MTpa, GTpa), and the associated CO2 intensity of coal. The key challenge is understanding different coal grades, from anthracite, to bituminous, to sub-bituminous, to lignite.

A reference for biomass industry units is given on page 13, converting wood fuels into kWh from wet tons, dry tons, and across different products, such as fresh wood, dry wood, deforestation wood, wood chips, briquettes, wood pellets, charcoal.

A reference for food energy units is given on page 14, converting from calories into kWh, for different food products, within the world’s 10GTpa food production. The drawback of the calorie, as a unit of energy is an annoying custom, that many commentators abbreviate kiloCalories as ‘Calories’. This makes many technical papers confusing. It would be as though somewhat decided that ‘dollars’ would be a really handy abbreviation for ‘1,000 dollars’, and then sent you haphazardly into a casino.

A reference for hydrogen units is given on page 15, converting from kg of hydrogen into kWh, both in higher heating value and lower heating value terms, and for different volumes of hydrogen at standard conditions, for liquid hydrogen at -253C, and for compressed hydrogen at 10,000 psi. It is interesting to compare this with natural gas.

Other fuels and comparisons are also covered on pages 16-17. An amazing fact is that 1 kg of hydrogen releases 3 million times more energy as a fusion fuel than a combustion fuel. We also discuss the first and second laws of thermodynamics, which matters for maximizing the efficiency of clean fuels.

The note ends with some reference tables and links to our other data-files. Another excellent and free resource for comparing different fuels is Engineering Toolbox. We hope our own note is helpful for understanding all of our energy transition research.

The solar energy reaching a given point on Earth’s surface varies by +/- 6% each year. These annual fluctuations are 96% correlated over tens of miles. And no battery can economically smooth them. Solar heavy grids may thus become prone to unbearable volatility? Our 17-page note outlines this important challenge, and finds that high-voltage interconnectors cure renewables volatility most effectively. It also helps to keep power grids diversified.

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Renewables incur volatility over different timeframes, from second-to-second to year-by-year. We outline the most effective solution to each volatility duration on page 2. But year-by-year volatility is most challenging…

How bad is it? We have aggregated data from the excellent NREL NRRDB resource, showing the average solar energy arriving at ten major cities, hour-by-hour, for 23-years. The average location sees +/- 6% annual volatility in the solar energy reaching ground level, as quantified and discussed on pages 3-5.

What implications for energy supplies? A future energy system relying on solar for 50% of its incoming energy would therefore appear to incur comparable annual supply volatility to Saudi Arabia’s entire oil supplies vanishing from the market every year, then magically returning the next year. Or similar to Japan having to accommodate the Fukushima nuclear crisis every other year. Or Europe having to accommodate a shut off of 25% of Russia’s gas every other year. One cannot help wondering whether this would connote very large energy price volatility or indeed whether we have already entered this era (page 6).

Can batteries offer a solution? We explore this option on page 7. The maths simply do not work and the numbers get very silly very quickly.

Can wind offer a solution? We explore this option on pages 8-9. The answer is partially. Although wind speeds also vary year-by-year, and sometimes cross-correlate with solar.

Can power transmission lines offer a solution? We explore this option on pages 10-16, including some deep-dive modelling. The results are fascinating. Annual solar volatility is 96% correlated within an individual city, 50-70% correlated with neighboring cities, but completely non-correlated with other regions on the Continent. A single 2.5 GW inter-Continental transmission line that smooths out two 10 GW+ solar-heavy regions can effectively halve their annual volatility. We think up-scaling HVDCs is the best option to achieve resilient and renewable-heavy power grids. Numbers and costs are quantified. But overall, we conclude that interconnectors cure renewables volatility.

Can diversified power grids offer a solution? Our modelling also suggests that resilient grids should retain a healthy mix of supply sources, including wind, nuclear, hydro, and gas (the latter paired with CCUS or nature-based CO2 removals). Conclusions are on page 17, the full notes can be downloaded below, and underlying data-models can be audited here and here.