Category: Report

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Carbon neutral investing: hedge funds, forest funds?

Carbon neutral investing

This 11-page note considers a new model of ‘carbon neutral’ investing. Look-through emissions of a portfolio are quantified (Scope 1 & 2 basis). Then accordingly, an allocation is made to high-quality, nature-based CO2 removals. This allows portfolio managers to maximize returns, investing across any sector, while also neutralizing the environmental impacts.

Is continued capital allocation needed, for energy-intensive sectors, even amidst the energy transition? We outline the arguments on pages 2-4, finding stark differences between other sectors where ‘divestment’ has been effective.

A new model is proposed on pages 5-6. The look-through CO2 intensity of a portfolio is calculated, then all emissions are offset using high-quality nature based allocations.

Advantages of the model are described on page 7, including the commercial opportunity for fund managers, cash coverage ratios and second order consequences.

More detailed challenges are then covered on pages 8-11, looking issue by issue, for implementing this model in practice, and where we hope we can help.

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End game: options to cure energy shortages?

options to cure energy shortages

This 13-page note considers five options to cure emerging energy shortages in the gas and power sectors of countries working hard to decarbonize. Unfortunately, the options are mostly absurd. They point to inflation, industrial leakage and slipping global climate goals. But there may be a few glimmers of opportunity in LNG, nuclear and efficiency technologies.

How did we get here? Our latest models for gas, LNG and power shortages in Europe are laid out on pages 2-4, to illustrate the scale of looming under-supply.

The first option to cure long-term under-supply is to incentivize more gas projects. Unfortunately, energy transition has become irrational and adversarial. Hence we worry hurdle rates for these big, capital intensive projects are around 15-20% and this could make the marginal cost of LNG around $12-16/mcf (pages 5-7).

The second option is to use more coal and fuel oil to lower the need for gas, especially in the most price-sensitive emerging market geographies. But this is not good for decarbonization. “Switching economics” are laid out on pages 8-11.

The third option is to ‘leak’ industrial activity away from the West, so our energy demand decreases. We model what a long-term doubling of gas and power would do to the cost curves of ten major industries, finding inflation of c30% on average (page 12).

The fourth option is to step up efficiency gains: a very broad area. This would include cancelling nuclear scale-backs, backtracking on ridiculous green hydrogen, and an accelerated cycle of capital investments to promote more efficient energy use. This is the best option. But it only has a limited impact. And we only scratch the surface on page 13.

The fifth option is a 100% renewable powered energy system, which avoids any need for gas in the mix, by 2025-30. Unfortunately, this is a fantasy, for practical, economical and timeframe reasons. We have not re-hashed all of our prior analysis in this note, but for further details, please see here, here, here, here, here, here, here and here.

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Power grids: tenet?

Overview of power grids

How do power grids work? How will they be re-shaped by renewables? This 20-page note outlines the underpinnings of electricity markets, from theoretical physics through to looming shortages of ‘inertia’ and ‘reactive power’. Some commentators may not have fully grasped the challenges of back-stopping renewables and opportunities thus created.

The purpose of this note is to outline how power grids actually work. Amazon.com sells two introductory electronics textbooks. But they weigh in at 544-pages and 1,056-pages, respectively. We are going to try to run through the important ideas in about twenty, for the reasons outlined on page 2.

The fundamentals of electromagnetism are covered on page 3, and important concepts are explained from first principles, as clearly as possible.

The fundamentals of electrical power, including key units of measurement, are covered on pages 4-5, again introducing the key concepts from first principles.

Conventional power turbines are described on pages 6-7, including how they synchronize and supply crucial inertia and reactive power.

Solar generation is described on pages 8-9, including the physics of bandgaps, and the electronics of MPPTs and inverters.

Wind generation is described on pages 10-11, including the physics of swept areas, and the electronics of DFIGs and AC-DC-AC converters.

Power distribution and transformers are described on pages 12-14, covering the growing trend towards smaller and more fragmented power distribution.

Power-consuming technologies are described on pages 15-17, explaining how induction motors, resistive heaters, lighting and electro-chemical cells regulate their power consumption.

The crucial debate is over the optimal share of renewables. Our most noteworthy data-points and conclusions are spelled out on pages 18-21.

Overall, the power grid is somewhat reminiscent of Christopher Nolan’s 2020 science fiction thriller, Tenet. Nobody understands it. Tracing a causal chain of events requires looking forwards and backwards in time simultaneously. Someone is hiding in a wind turbine. And the protagonists insist they are working to avert the end of the world.

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Nature based CO2 removals: theory of evolution?

Optimization of nature based solutions

Learning curves and cost deflation are widely assumed in new energies but overlooked for nature-based CO2 removals. This 15-page note finds that via optimization of nature based solutions the CO2 uptake of reforestation projects could double again from here. Support for NBS has already stepped up sharply in 2021. Beneficiaries include the supply chain and leading projects.

Nature based carbon removals are re-capped on page 2, covering their importance, their costs and how they are re-shaping the energy transition.

But policy support is growing faster than expected, as outlined on pages 3-5. Now that nature-based CO2 removals are on the map, they are in competition with other new energies. Hence which technologies will ‘improve fastest’?

The historical precedent from agriculture is that yields have improved 4-7x over 50-100 years, due to learning curve effects. So will forestry practices be similar? (pages 6-7).

Thirty variables can be optimized when re-foresting a degraded eco-system. We run through the most important examples on pages 8-13.

But is optimizing nature ‘natural’? This is a philosophical question. Our own perspectives and conclusions on optimization of nature based solutions, and who benefits are offered on page 14-15.

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Integrated energy: a new model?

building blocks for a zero-carbon energy

This 14-page note lays out a new model to supply fully carbon-neutral energy to a cluster of commercial and industrial consumers, via an integrated package of renewables, low-carbon gas back-ups and nature based carbon removals. This is remarkable for three reasons: low cost, high stability, and full technical readiness. The prize may be very large.

Four building blocks for a zero-carbon energy mix are outlined on pages 2-5. They include wind, solar, gas-fired CHPs and gas-fired CCGTs. Costs, CO2 intensities and key debates are reviewed for each technology.

Taking out the CO2 requires high-quality nature based carbon removals, for any truly ‘carbon neutral’ energy mix. Meeting this challenge is described on pages 5-7. There will be nay-sayers who do not like this model. To them, we ask, why do you hate nature so much?

Finding a fit requires combining the different building blocks above into an integrated energy system. We find the optimal fit is for renewables capacity to cover 110% of average grid demand. The balancing act is outlined on pages 8-10.

The gas supply chain that backs up the renewables must minimize methane leaks and use the gas as efficiently as possible. Our suggestions are laid out on pages 11-12.

The commercial benefits of this integrated model are described on pages 13-14. We think this is an excellent opportunity to provide fully carbon-neutral energy, using fully mature technologies, at costs well below 10c/kWh and highly bankable price-stability.

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Heat pumps: hot and cold?

heat pumps in the energy transition

Some policymakers now aspire to ban gas boilers and ramp heat pumps 10x by 2050. In theory, the heat pump technology is superior. But in practice, there are ten challenges. Outright gas boiler bans could become a political disaster. The most likely outcome is a 0-2% pullback in European gas by 2030. We have also screened leading heat pump manufacturers in this 18-page note.

The opportunity for heat pumps in the energy transition is laid out on pages 2-3, as the IEA now advises that “bans on new fossil fuel boilers need to start being introduced globally in 2025, driving up sales of electric heat pumps”.

But are they ready for prime time? We have reviewed technical specifications, costs and consumer feedback on pages 4-13. The work suggests large heat pumps may not feasibly substitute for gas boilers in every context. There are ten crucial challenges for the industry to overcome.

Gas market impacts are quantified on pages 14-17. Our base case is that trebling heat pump capacity in Europe by 2030 will erode 2% of total gas demand. But rebound effects and under-performance could cut the net benefits to nil.

The best placed companies are explored in our detailed screening work (which we have used to select a heat pump provider for our own GSHP project in Europe). One company stands out in particular, having built-up an industry leading portfolio through acquisitions.

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Transformers: rise of the beasts?

Transformers for renewable energy

A transformer is needed to step the voltage up or down at every inter-connection point in the grid. Hence this 14-page note explores how renewables and EVs will expand future transformer markets. The main challenge is that the need for smaller, simpler units may exacerbate margin pressure in an already competitive industry. So who is best-placed?

It is sometimes said that ‘electrification is the future’ or that the 21st century energy system will primarily be about ‘moving electrons’. So how do you actually “move electrons”? The physics of power distribution and transformers are explained on pages 2-6.

What is changing in the energy transition is that renewables and EV chargers are being added to the grid. Each inter-connection likely requires a transformer. The market impacts are quantified on pages 7-10.

What costs and consequences? We break down the cost of transformers on pages 11-12, with upside for specific raw materials. Recent raw material inflation has already increased transformer costs c12% in 2021. Deploying more renewables will create mild inflation in transformer costs (in c/kWh) for downstream power consumers.

Who benefits? The commercial landscape is explored on pages 13-14, including a screen of leading companies that manufacture transformers. The market is competitive. Hence we focus on who might be better-placed.

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Carbon fiber: the miracle material?

Carbon fiber in the energy transition

Energy transition will catapult carbon fiber demand upwards from today’s 120kTpa baseline, across wind turbine blades, more efficient vehicles and hydrogen tanks. This miracle material is 3-10x stronger than steel yet 70-80% lighter. Hence our 16-page note explores opportunities, economics, CO2 intensity, leading companies and one of the most amazing value chains of industrial civilization, which paradoxically depends upon fossil fuels.

What is carbon fiber? We explain the structure and market for this miracle material from first principles on pages 2-3.

All roads lead to carbon fiber in the energy transition. Its importance for fuel-efficient cars, planes, aerial vehicles, wind turbines, hydrogen and construction materials are spelled out on pages 4-7.

It is one of the most amazing value chains on the planet, which we disaggregate on pages 8-11, in order to quantify CO2 intensity, focusing in upon on the crucial step of carbon fiber production from polyacrylonitrile.

The economics are modeled on pages 12-13. We show marginal costs are likely to rise by 70-100% if this industry must itself decarbonize.

Opportunities and companies are discussed on pages 14-16, including an overview of eight leading carbon fiber producers and their positioning.

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Carbon stocks: measuring the forest from the trees?

Measuring carbon stocks in forests

Measuring forest carbon is uncertain. Pessimistically, estimation errors could be as high as 25%. So does this disqualify nature based carbon credits? This 12-page note explores solutions for measuring carbon stocks in forests, borrowing risk-pricing from credit markets, preferring bio-diversity and looking to drone/LiDAR technology.

The importance of nature-based solutions in our roadmap to net-zero is recapped on page 2. But how can we measure the carbon stocks in reforestation projects fairly?

Today’s methodologies are explored on pages 3-6, covering direct estimates, allometry equations and scale-up factors. The maths are horrible and precision is low.

Are ‘verified’ offsets any better? We are not convinced that these elaborate rules necessarily confer much better precision, as explained on page 7.

What hope then for offsets? It seems questionable to commercialize a precise number of carbon offsets against an imprecisely measured carbon sink…

Our first solution is a risk-tranching system, borrowed from the credit markets, described on page 8-9. This allows buyers to pay premium prices for higher certainty.

Our second solution is bio-diversity, explored on page 10, which can lower statistical uncertainty in allometry by an amazing 50-70%.

Finally, drone technologies are emerging. Their promise is described on pages 11-12.

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Offshore wind: will costs follow Moore’s Law?

How is the power of a wind turbine calculated?

Some commentators expect the levelized costs of offshore wind to fall another two-thirds by 2050. The justification is some eolian equivalent of Moore’s Law. Our 16-page report draws five contrasts. Wind costs are most likely to move sideways, even as the industry builds larger turbines. Implications are explored for companies.

Deflating wind costs are explored on pages 2-3. Deflation is important. But consensus forecasts could be dangerously wrong in our opinion.

Our report lays out five reasons why wind looks different to Moore’s Law, which has doubled computing performance every 18-months since 1965.

(1) Offshore wind costs are not following Moore’s Law yet. And after reviewing 50 patents from one of the world’s leading wind developers, we think the industry’s largest focus is not on costs (pages 4-5)

(2) Making turbines ever-larger is “the opposite” of making transistors ever-smaller. We review the physics and a simple issue around extrapolation (pages 5-6)

(3) Larger turbines face larger challenges. Unlike Moore’s Law, physics “work against” the up-scaling of wind turbines (pages 7-9).

(4) Larger turbines are more carbon intensive, using advanced materials that are 10-25x more costly and CO2-emitting, paradoxically requiring more fossil fuels. This looks like “the opposite” of the bootstrapping that helped propel Moore’s Law (pages 10-13)

(5) Wind turbines crowd out wind turbines, as grids ultimately become saturated with highly inter-correlated wind generation. This re-inflates marginal costs. Again, this is the opposite of bootstrapping (pages 14-15).

Our conclusions for companies are drawn out on page 16.

Copyright: Thunder Said Energy, 2019-2024.