Electrification: the rings of power?

Electrification in the energy transition

Electrification is the most overlooked, most misunderstood opportunity in the energy transition. Hence this 10-page note aims to explain the upside, simply and clearly, for electrification in the energy transition. Electricity rises from 40% of total useful energy today to 60% by 2050. Within the next decade, this adds $2trn to the enterprise value of capital goods companies in power grids and power electronics.

Electrification in the energy system. In the past five-years, 38% of global useful energy has been consumed as electricity. Our forecasts for 70,000 TWH of total global electricity demand are explained on page 2-3.

The single biggest reason for accelerating electrification is to expand renewables as much as possible, while also keep renewables as a right-sized share of the total power grid. After four years of research, our simplest, clearest explanation of this effect, along with our ‘top three charts’ are presented on pages 4-5.

What about energy storage? Can batteries and hydrogen solve the various volatility issues, and increase the percentage share of renewables. Again, summarizing four years of research, our conclusions and key numbers are summarized on page 6.

The best solution to backstop renewables is via electrification. Expand the grid. Hence renewables will not reach ‘problematic’ or ‘impassable’ shares of the total. We summarize how this will actually happen, and ‘how it works’, with examples, on pages 7-8.

Who benefits? Electrification requires expanding power grids and power electronics. The extent of this upside is truly overlooked, due to its complexity. We quantify the upside, and why it is overlooked on pages 9-10.

(There is also upside for nuclear, gas and CHPs, which will provide most of the remaining shares of an increasingly large grid).

1,100 companies have crossed our screens since starting Thunder Said Energy, including dozens in power grids and power electronic capital goods. Although four listed companies seem to come up again and again, with leading positions in some of the different market segments that excite us most (page 11).

Solar capacity: growth through 2030 and 2050?

Solar capacity growth

Forecasts for future solar capacity growth have an unsatisfyingly uncertain range, varying by 3x. Hence this 15-page note discusses the future of solar. Solar capacity additions likely accelerate 3.5x by 2030 and 5x by 2040. But this creates bottlenecks, including for seven materials; and requires >$1trn pa of additional power grid capex plus $1trn pa of power electronics capex.

There is a 3x margin of uncertainty over future solar capacity growth. This is the range of forecasts that have crossed our screen. And the IEA has revised its assessment of 2030 solar capacity growth upwards by 3x in the past 3-years. We quantify the uncertainty on pages 2-3.

Definitions are an issue. Some forecasts of solar growth are discussing panel additions in GW, others are considering full AC solar project additions in GWe, and others still are quantifying net capacity change in GWe after deducting retirements. A summary of ‘who uses which definition’ is given on pages 4-5.

Our numbers see an acceleration to a peak of 500GWe of net capacity growth in 2040. The first reason that growth ‘peaks’ is that the average solar panel in the field today is 4-years old, and eventually panels get retired (page 6), and our full numbers are spelled out on page 7.

How much solar energy will be produced in 2030, 2040 and 2050? Our numbers, in “useful TWH” terms, are discussed on page 8.

Why can’t the numbers be higher? This would clearly be helpful. We want faster solar growth in order to achieve important goals in the energy transition, and to alleviate devastating energy shortages. With some help from Nigel Tufnel, in the cult 1980s rock comedy, This is Spinal Tap, we discuss the limits on solar capacity growth on page 9.

Seven materials are going to act as bottlenecks on growth. The numbers are truly staggering. Our solar trajectory raises total global demand for these materials by 20-120%. Fig 11, on page 11, is possibly the most important chart of energy transition bottlenecks that we have produced all year.

Bottlenecks also exist downstream of the solar projects, as our numbers require a vast expansion of power grids and power electronics. We quantify the growth for both of these markets at around $1trn each, with discussion and links to further research on pages 13-15.

Fluorinated polymers: flying under the radar?

fluorinated polymers in the energy transition

Fluorinated polymers are a ‘stealth bottleneck’ for the energy transition: used in solar back-sheets, battery binders/separators, wind blades, and across the hydrogen chain. But low down the bill of materials, they are easily overlooked. This 400kTpa market grows 6x by 2050. Rising 2021 margins already suggest tightness. And the ‘CO2 curve’ is steeper than any other material. So Western companies must scale up? Our 15-page report explores the upside for fluorinated polymers in the energy transition, and who benefits.

Fluorine is the smallest and simplest halide, with an atomic number of 9 and an atomic mass of 19. C-F bonds have high enthalpy and resistance to thermal and chemical attack. Thus fluorinated polymers are among the most resilient polymers in the world (page 2).

Yet they are overlooked. When you think about the materials in solar panels, you are primarily going to think about silicon, and maybe secondarily silver. When you think about wind, you are primarily going to think about glass fiber, and maybe secondarily resins. When you think about batteries, you are primarily going to think about lithium, and then maybe secondarily graphite or nickel.

Fluorinated polymers are lower on the bill of materials. Yet they are crucial to producing solar panels (page 3), lithium ion batteries (page 4), helpful for wind turbine blade-moulding (page 5) and more broadly in electrification and hydrogen (page 6). In each case, we have estimated future market upside.

Can fluorinated polymers be substituted? We answer this question on page 7, including interesting data on the cracking of solar panel back-sheets. So how are fluorinated polymers produced?

The first stage for producing fluorinated polymers is to mine fluorspar. The key mineral in fluorspar is CaF2. Our outlook for fluorspar markets is discussed on page 8.

The next stage in producing fluorinated polymers is to produce hydrofluoric acid, by reacting acid-grade fluorspar with sulphuric acid, modeled here. Our outlook for hydrofluoric acid is discussed on pages 9-10. Hint: it is used everywhere!

The complicated part is converting methane, chlorine gas and hydrofluoric acid into useful fluorinated polymers. This is one of the most complex value chains we have evaluated in our works. Halocarbon emissions, with GWPs well over 10,000x CO2, can blow the CO2e intensity of these materials out of the water. Some FP product on the market can surpass CO2e intensity of 500 tons/ton, especially for producers that are not focused on environmental credentials (see pages 11-12).

Leading companies in fluorinated polymers, and the upstream value chain, are going to be needed to meet the call for rising future demand, and environmentally minded production processes. Our company screen includes a dozen OECD leaders, and ideas, as discussed on pages 13-15.

Energy shortage: fear in a handful of dust?

Reasons energy shortage matters

Should restoring the world’s energy surplus be seen as the most important ESG goal of the 2020s? This 12-page note outlines our top ten reasons energy shortage matters. Our energy balances have deteriorated even further in the last year. Under-supply could persist through 2030. Energy shortages have cruel consequences. And unexpected ripple effects. Energy surplus also helps energy transition.

Global energy is complex. Commentators often write long and equivocal reports, where key points can get lost. This note aims to illustrate a simple and unequivocal point. Getting back to ‘energy surplus’ should be the #1 ESG goal of the 2020s. We must avert the truly catastrophic scenario charted below.

Reasons energy shortage matters

Basic human needs require energy. Energy costs are now consuming an additional 10% of global incomes. It takes 0.09 units of modern energy to create each unit of food. And the single largest cause of environmentally damaging deforestation is a shortage of modern energy for the world’s poorest 4bn people (pages 3-6).

History shows that geopolitical tensions, changes of government and even outright wars and revolutions are all more likely during times of energy shortages. The pain and suffering caused by these events outweighs anything else in ESG (pages 7-8).

We want to achieve an energy transition. This is easier with an energy surplus. In the short term, building renewables and EVs consumes net energy (solar case study here). There are also materials bottlenecks. And CCS, batteries, biofuels, hydrogen have energy penalties (pages 9-11).

Our final consideration is that harnessing energy has been one of the greatest enablers of human progress. It truly has. One narrative for net zero is that we will unlock the best outcomes for humanity via a century of ‘energy thrifting’, and the goal is simply to take today’s energy system and decarbonize it. How depressing. A more exciting future for humanity might perhaps include new ways of using energy (page 12).

Energy transition is a crucial goal for the world. It involves meeting the future energy needs of human civilization, while decarbonizing, and protecting nature. But after reviewing the reasons energy shortage matters, we believe this goal is easier to achieve from a position of energy surplus, and may be near-impossible to achieve with persistent energy deficits. Here is hoping for more progress in 2023, including a constructive, ‘all of the above’ approach to unlock energy and infrastructure investment. This remains the focus in our energy transition research.

Reaching criticality: nuclear re-accelerates?

Outlook for nuclear in the energy transition

400 GW of nuclear reactors produce 2,800TWH of zero carbon electricity globally each year. But the numbers have been stagnant for two decades. This is now changing. This 14-page note explains our outlook for nuclear in the energy transition. We expect a >3% CAGR through 2030, and hope for a 2.5x ramp through 2050. A ‘nuclear renaissance’ helps the energy transition.

The world generated 2,800 TWH of nuclear electricity in 2021, across 444 operable reactors with 400 GW of total capacity, spread across 33 countries. This is 10% of all global electricity. It is 4% of all useful global energy consumption. However, capacity has been stagnant for 20-years, as the OECD has closed 5 GW pa of reactors (pages 2-3).

History suggests that energy crises underpinned the first large wave of nuclear construction, where new capacity additions peaked in the half-decade from 1984-89. The evidence suggests energy crises in the 2020s will re-awaken this sense of pragmatism (pages 4-6).

Near-term upside, including slower shutdowns, faster construction schedules and the re-start of idled nuclear capacity (especially Japan) are explored on pages 6-7.

There is longer-term upside for nuclear in the energy transition. A good target is to ramp nuclear from 4% to at least 6% of the world’s total useful energy, which in turn requires a 2.5x capacity expansion. The size of the capex cycle is compounded by needing to replace old plants reaching end of life. Spending may ramp by 4x to as much as $150bn pa (pages 8-9).

A renaissance in new nuclear technology will help to meet the call. Out of hundreds of technologies we have reviewed in the energy transition, we have found new nuclear concepts to be some of the least hyped yet “most real” and most natural to de-risk. We note particularly interesting concepts and companies on pages 10-13.

What outlook for uranium? 2-3% demand growth for nuclear already leaves uranium markets deeply under-supplied by late in the 2020s. After re-accelerating our outlook for nuclear in the energy transition, updated numbers, and leading uranium miners are noted on page 14.

Weird recessions: can commodities de-couple from GDP?

Can commodities de-couple from GDP?

In a ‘weird recession’, GDP growth turns negative, yet commodity prices continue surprising to the upside. This 10-page note explores three reasons that 2022-24 may bring a ‘weird recession’. There is historical precedent, prices must remain high to attract new investment, and buyers may stockpile bottlenecked materials. So can commodities de-couple from GDP and how will this affect different industries?

This 10-page note condenses all of our research from 2021-22, into an updated ‘macro thesis’. We wonder whether 2022-24 could bring a ‘weird recession’, where traditionally cyclical commodities and industrials proved unexpectedly resilient.

The conventional wisdom is that commodities get crushed in a recession, declining by at least 30%. We re-cap this conventional wisdom on page 2, using data from historical recessions. However, could 2022-24 defy conventional wisdom?

(1) What is the right analogue? It is tempting to take 2007-09 as a case study for commodity price performance during recessions. It was recent. But we explore other analogues and case studies, which may be more appropriate on pages 3-4, focusing in particular upon the 1973-75 oil shock.

(2) Supply-side paradox? A major reason to fear recession in 2022-24 is persistently high commodity prices. New investment is ultimately needed to normalize commodity prices in the late 2020s. But a commodity crash would disrupt that investment. This argument is quantified on pages 5-7.

(3) Stockpiling? The average material needed in the energy transition sees its demand quintuple between now and 2050. Buyers are already worried about shortages for many key materials. Hence we speculate that buyers may enter bottlenecked markets and counteract price weakness (see pages 8-10).

The note ends with a list of materials that we think may offer the most resiliency in the ‘weird recession’ scenario described in this note. Can commodities de-couple from GDP? We think so. We are happy to discuss the work in more detail with TSE clients.

How does methane increase global temperature?

How does methane increase global temperature?

How does methane increase global temperature? This article outlines the theory. We also review the best equations, linking atmospheric methane concentrations to radiative forcing, and in turn to global temperatures. These formulae suggest 0.7 W/m2 of radiative forcing and 0.35ºC of warming has already occurred due to methane, as atmospheric methane has risen from 720 ppb in 1750 to 1,900 ppb in 2021. This is 20-30% of all warming to-date. There are controversies over mathematical scalars. But on reviewing the evidence, we still strongly believe that decarbonizing the global energy system requires replacing coal and ramping natural gas alongside low-carbon energies.

On the Importance of Reaching Net Zero?

There is a danger that writing anything at all about climate science evokes the unbridled wrath of substantially everyone reading. Hence let us start this article by re-iterating something important: Thunder Said Energy is a research firm focused on the best, most practical and most economical opportunities that can deliver an energy transition. This means supplying over 100,000 TWH of useful human energy by 2050, while removing all of the CO2, and avoiding turning our planet into some kind of Waste Land.

Our roadmap to net zero (note below) is the result of iterating between over 1,000 thematic notes, data-files and models in our research. We absolutely want to see the world achieve important energy transition goals and environmental goals. And part of this roadmap includes a greatly stepped up focus on mitigating methane leaks (our best, most comprehensive note on the topic is also linked below).

However, it is also helpful to understand how methane causes warming. As objectively as possible. This helps to ensure that climate action is effective.

It is also useful to construct simple models, linking atmospheric methane concentrations to global temperature. They will not be perfect models. But an imperfect model is often better than no model.

Methane is a powerful greenhouse gas

An overview of the greenhouse effect is written up in a similar post, quantifying how CO2 increases global temperature (note below). We are not going to repeat all of the theory here. But it may be worth reading this prior article for an overview of the key ideas.

Greenhouse gases absorb and then rapidly re-radiate infra-red radiation. This creates a less direct pathway for solar radiation to be reflected back into space. The ability of different gas molecules to absorb and re-radiate infra-red radiation depends on the energy bands of electrons in those molecules, especially the shared electrons in covalent bonds between non-identical molecules with “dipole moments” (this is why H2O, CO2, CH4 and N2O are all greenhouse gases, while N2, O2 and Ar are not).

There are two reasons that methane is up to 200x more effective than CO2 as a greenhouse gas. The first reason is geometry. CH4 molecules are tetrahedral. CO2 molecules are linear. A tetrahedral molecule can generally absorb energy across a greater range of frequencies than a linear molecule.

The second reason is that methane is 200x less concentrated in the atmosphere, at 1,900 parts per billion, versus CO2 at 416 parts per million. We saw in the post below that radiative forcing is a log function of greenhouse gases. In other words, the first 20ppm of CO2 in the atmosphere explains around one-third of all the warming currently being caused by CO2. Each 1ppm increase in atmospheric CO2 has a ‘diminishing impact’, because it is going to absorb incremental radiation in a band that is already depleted by the pre-existing CO2. Thus small increases in methane cause more warming, as methane is currently present in very low concentrations, and thus at a much steeper part of the radiative forcing curve.

The most commonly quoted value we have seen for the instantaneous global warming potential of methane (instantaneous GWP, or GWP0) is 120x. In other words 1 gram of methane has a warming impact of 120 grams of CO2-equivalent. Although the 20, 50 and 100-year warming impacts are lower (see below).

What formula links methane to radiative forcing?

Our energy-climate model is linked below. It contains the maths and the workings linking methane to radiative forcing. It is based on a formula suggested in the past by the IPCC:

Radiative Forcing from Methane (in W/m2) = Alpha x Methane Concentration (in ppb) ^ 0.5 – Small Adjustment Factor for Methane-N2O interaction. Alpha is suggested at 0.036 in the IPCC’s AR5 models, and the adjustment factor for methane-N2O interactions can be ignored if you are seeking an approximation.

This is the formula that we have used in our chart below (more or less). As usual, we can multiply the radiative forcing by a ‘gamma factor’ which calculates global temperature changes from radiative forcing changes. We have seen the IPCC discuss a gamma factor of 0.5, i.e., 1 W/m2 of incremental radiative forcing x 0.5ºC/[W/m2] gamma factor yields 0.5ºC of temperature increases. However, there are controversies over the correct values of alpha and gamma.

How does methane increase global temperature?

Interaction Effects: Controversies over Alpha Factors?

The alpha factor linking methane to radiative forcing is suggested at 0.036 in the IPCC’s AR3 – AR5 reports. Plugging 0.036 into our formula above would suggest that increasing methane from 720 ppb in pre-industrial times to 1,900 ppb today would have caused 0.52 W/m2 of incremental radiative forcing. In turn, this would be likely to raise global temperatures by 0.27ºC.

Helpfully, this tallies with the values you might see in other well-known sources, such as the Wikipedia page on Radiative Forcing.

However, many technical papers, and even the IPCC’s AR5 report, have argued that alpha should be ‘scaled up’ to account for indirect effects and interaction effects.

Tropospheric Ozone. In the troposphere (up to 15km altitude), ozone is a ridiculously powerful greenhouse gas, quantified at around 1,000x more potent than CO2. It is postulated that the breakdown of atmospheric methane produces peroxyl radicals (ROO*, where R is a carbon-based molecule). In turn, these peroxyl radicals react with oxygen atoms in NOx pollutants, yielding O3. And thus methane is assumed to increase tropospheric ozone. Several authors, including the IPCC, have proposed to scale up alpha values by 20% – 80%, to reflect the warming impacts of this additional ozone.

Stratospheric Water Vapor. Water is a greenhouse gas, but it is usually present at relatively low concentrations in the stratosphere (12-50 km altitude). Water vapor prefers to remain in the troposphere, where it is warmer. However, when methane in the stratosphere decomposes, each CH4 molecules yields 2 H2O molecules, which may remain in the stratosphere. Several authors, including the IPCC, have proposed to scale up alpha values by around 15% to reflect the warming impacts of this additional water vapor in the stratosphere.

Short-wave radiation. Visible light has a wavelength of 400-700nm. Infra-red radiation has a wavelength of 700nm – 1mm and is the band that is mainly considered in radiative forcing calculations. However, recent research also notes that methane can absorb short-wave radiation, with wavelengths extended down to as little as 100-200nm. Some authors have suggested that the radiative forcing of methane could be around 25% higher than is stated in the IPCC (2013) assessment when short-wave radiation is considered. This impact is not currently in IPCC numbers.

Aerosol interactions. Recent research has also alleged that methane lowers the prevalence of climate-cooling aerosols in the atmosphere, and this may increase the warming impacts of CH4 by as much as 40%. This impact is not currently in IPCC numbers.

Hydrogen interactions. Even more recent research has drawn a link between methane and hydrogen GWPs, suggesting an effective GWP of 11x for H2, which is moderated by methane (note below).

N2O interactions. The IPCC formula for radiative forcing of methane suggests a small negative adjustment due to interaction effects with N2O, another greenhouse gas, which has been rising in atmospheric concentration (from 285ppb in 1765 to 320ppb today). The reason is that both N2O and CH4 seem to share an absorption peak at 7-8 microns. Hence it is necessary to avoid double-counting the increased absorption at this wavelength. The downwards adjustment due to this interaction effect is currently around 0.08 W/m2.

The overall impact of these interaction effects could be argued to at least double the instantaneous climate impacts of methane. On this more strict vilification of the methane molecule, rising atmospheric methane would already have caused at least a 1.0 W/m2 increase in radiative forcing, equivalent to 0.5ºC of total temperature increases since 1750 due to methane alone.

Uncertainty is high which softens methane alarmism?

Our sense from reviewing technical papers is that uncertainty is much higher when trying to quantify the climate impacts of methane than when trying to quantify the climate impacts of CO2.

The first justification for this claim is a direct one. When discussing its alpha factors, the IPCC has itself acknowledged an “uncertainty level” of 10% for the scalars used in assessing the warming impacts of CO2. By contrast, it notes 14% uncertainty around the direct impacts of methane, 55% on the interaction with tropospheric ozone, 71% on the interaction with stratospheric water vapor. These are quite high uncertainty levels.

A second point is that methane degrades in the atmosphere, with an average estimated life of 11.2 years, as methane molecules react with hydroxyl radicals. This is why the IPCC has stated that methane has a 10-year GWP of 104.2x CO2, 20-year GWP of 84x CO2, 50-year GWP of 48x CO2 and a 100-year GWP of 28.5x CO2.

There is further uncertainty around the numbers, as methane that enters the atmosphere may not stay in the atmosphere. The lifetime of methane in additional sinks is estimated at 120 years for bacterial uptake in soils, 150-years for stratospheric loss and 200 years for chlorine loss mechanisms. And these sources and sinks are continuously exchanging methane with the atmosphere.

Next, you might have shared our sense, when reading about the interaction effects above, that the mechanisms were complex and vaguely specified. This is because they are. I am not saying this to be some kind of climate sceptic. I am simply observing that if you search google scholar for “methane, ozone, interaction, warming”, and then read the first 3-5 papers that come up, you will find yourself painfully aware of climate complexity. It would be helpful if the mechanisms could be spelled out more clearly. And without moralistic overtures about natural gas being inherently evil, which sometimes simply makes it sound as though a research paper has strayed away from the scientific ideal of objectivity.

Finally, the biggest reason to question the upper estimates of methane’s climate impact are that they do not match the data. There is little doubt that the Earth is warming. The latest data suggest 1.2-1.3C of total warming since pre-industrial times (chart below). Our best guesses, based on our very simple models point to 1.0ºC of warming caused by CO2, 0.35ºC caused by CH4 and around <0.2ºC caused by other greenhouse gases. If you are a mathematical genius, you may have noticed that 1.0 + 0.35 + <0.2 adds up to 1.5C, which is more warming than has been observed. And this is not including any attribution for other factors, such as changing solar intensity or ocean currents. So this may all suggest that our alpha and gamma factors are, if anything, too high. In turn, this may mute the most alarmist fears over the stated alpha factors for methane being materially too low.

Conclusions for gas in the energy transition

How does methane increase global temperature? Of course we need to mitigate methane leaks as part of the energy transition, across agriculture, energy and landfills; using practical and economical methods to decarbonize the entire global energy system. Methane is causing around 20-30% of all the incremental radiative forcing, on the models that we have considered here. If atmospheric methane doubles again to 3,800 ppb, it will cause another 0.2-0.4ºC of warming, as can be stress-tested in our model here.

However, we still believe that natural gas should grow, indeed it should grow 2.5x, as part of the world’s lowest cost roadmap to net zero. The reason is that while we are ramping renewables by over 5x, this is still not enough to offset all demand for fossil energy. And thus where fossil energy remains, pragmatically, over 15GTpa of global CO2 abatement can be achieved by displacing unchecked future coal consumption with gas instead.

Combusting natural gas emits 40-60% less CO2 than combusting coal, for the same amount of energy, which is the primary motivation for coal-to-gas switching (note below). But moreover, methane leaks into the atmosphere from the coal industry are actually higher than methane leaks from the gas industry, both on an absolute basis and per unit of energy, and this is based on objective data from the IEA (note below).

Silver and gold: medal winners?

Overview of gold and silver production

Gold and silver are stores of value, especially in a world of persistently high inflation and low rates. Silver is also likely to be the main bottleneck for solar in the 2020s. Hence this 18-page note is an overview of gold and silver production, from mining to refining. We find very steep energy/CO2 curves, and fear supply shortages. What upside for well-run gold-silver incumbents?

Gold and silver are well-known stores of value, going back over 11,000 years. They may protect value in a world of persistently high inflation. While we also see silver becoming the key bottleneck for solar growth in the 2020s. Key numbers, and the reasons for exploring this topic are explained on pages 2-4.

How do you make silver and gold? This turns out to be one of the most complex supply-chains we have ever modelled, on a par with carbon fiber. In this note, we have broken down a typical mining-refining operation, into ten discrete steps. Each one is summarized, and then modeled individually on pages 5-15.

Different steps include mining, crushing, flotation, roasting, leaching, Merrill-Crowe, dore casting, Miller chlorination, the Wohlwill process and the Moebius process. Specifically, this overview of gold and silver production has estimated the capex costs, opex costs, energy consumption and CO2 emissions along each step of the chain. And then we can simply add all the steps together.

One conclusion is that silver and gold are two of the most energy intensive and CO2 intensive materials we have evaluated in our research to-date (chart below).

Overview of gold and silver production

The reason this matters is that complex and energy intensive processes are more likely to get disrupted, in the strange, under-supplied world of 2022-2030. The key pinch points are identified on pages 16-17. This re-affirms our fears for a silver supply shortage, and a solar bottleneck.

Well-run incumbents may enjoy pricing power, and may be able to avoid bottlenecks. Leading integrated producers of silver and gold are charted and summarized on page 18.

Runaway train: energy, interest rates and inflation?

energy transition versus interest rates

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.

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 (page 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.

Battery degradation: causes, effects & implications?

What causes battery degradation?

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.

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.

Copyright: Thunder Said Energy, 2022.