Our weekly summary of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon and a greener/fairer society.
This weeks top story highlights the report from the California ISO on the massive investment needs to keep their grid operating with more renewables. In the Electricity Grid, we highlight the recent award of a contract for eight hour duration battery storage to a Li Ion battery provider, in Agetch, we discuss moves to ban the use of both dicamba and neonicotenoids in the State of Illinois. In Alternatives, we highlight another report that believes heavy trucking’s future is electric not hydrogen, and in Human Rights & Legal, our good friend Kristina Touzenis discusses a recent decision of the Constitutional Court in Ecuador, which could have implications for oil, mining & extractive projects in the country (and maybe elsewhere). Finally, we finish with our “one last thought” which highlights just how little we seem to be investing in innovation in our built environment (a recurring theme for us).
The format of the blog is simple, first our summary of the key points of the story (click on the green link to read the original) and then what we think it means for investors. The focus is on news flow that we think should change the markets perception of the investment case of individual stocks and sub sectors. So not the place to come to for news that has already been well covered in say the FT. Our approach is unashamedly long term, so we ignore short term noise.
If you would like to subscribe, please contact Dan at firstname.lastname@example.org. For the next few weeks, we will focus on just four key stories, and then we will ramp up coverage. For now, the blog will be freely available but at some point we will shift to a public blog and a more detailed client ie subscription version.
Top story : A weak grid is a barrier to renewable growth
Main points of the story as published
- California is aiming to supply 100% of its electric retail sales with renewable and zero-carbon resources by 2045, a target that — along with the electrification of transportation and other sectors — is driving the need for rapid development of renewable resources and energy storage over the next couple of decades.
- The latest draft 20 year plan from the California Independent System Operator (CAISO), assumes that the state will need to add around 120 GW of new resources — including utility-scale solar, energy storage, offshore wind, and out-of-state clean energy — to the system by 2040, in order to meet the rising demand for electricity.
- The study points to the need for a significant build-out of transmission to beef up the existing CAISO system, as well as to connect offshore and out-of-state wind, projected to cost roughly $30.5 billion. The ISO’s 10-year transmission plan was also developed at the same time, and recommends approving $2.9 billion of projects in a bid to boost grid reliability and facilitate more renewable energy.
- CAISO President and CEO Elliot Mainzer highlighted that “California is working very diligently to ensure resource adequacy during this transition to a carbon-free system,” Last year, he added, 79 clean energy projects were brought online in the state, the largest number in a single year.
Our take on this
- In our view there are two big challenges facing the planned roll out of renewables (wind & solar), beyond the obvious one of cost. The first is around the impact that the large scale development of either wind or solar farms in one locality has on the price received for the electricity generated. Parking for a moment CFD’s , PPA’s and subsidies, too much renewable generation capacity coming from one area can lead to massive “coincident” supply, potentially pushing down prices at peak times of the day and damaging financial returns. This topic is going to be one of the big drivers of long term industry profitability and its one we aim to come back to. Thanks to the Redefining Energy team and Quinsbrook Infrastructure Partners for building our understanding of this (episode 66).
- The second challenge is the one highlighted by the CASIO 20 year plan. To accommodate renewable targets, we will need massive spending on electricity grid strengthening, enhancement and connections. In the case of California alone, its over $30bn in only the next 2 decades, but with only $2.9bn in the oncoming 10 year plan, so lots more still to come.
- CASIO congratulates themselves on bringing 79 clean energy projects online last year, but a recent article highlighted worsening connection queues, with CASIO extending the timeline for evaluating projects due to an “unprecedented” volume of requests in the current queue cluster—373 in total comprising 150,000 MW in generating capacity. This problem is not limited to California. Recent data from the Netherlands shows that the grid is challenged in large parts of the country, meaning that grid upgrading work will be needed before new renewables etc can be added.
- The real punch line in the California statement is this “we have a 10-year transmission planning process; however, given that transmission requires long lead times thanks to permitting processes and right-of-way acquisitions, a longer-term blueprint is essential”. Our analysis is simple – massive grid spending is needed if countries are to get even close to their renewable targets, regardless of how much financial capital utilities, the O&G industry etc throw at wind & solar.
Electricity grid : Li Ion batteries to dominate longer duration storage ?
Main points of the story as published
- Last year, the California Public Utilities Commission (CPUC), put out a historic requirement for California’s energy providers to procure a portion of long-duration storage in its Mid-Term Reliability plan. This includes California’s Resource Adequacy contracting, which means ensuring electricity supplies can be maintained over four and eight-hour periods. It’s effectively a long-term contracted capacity payment for availability and it is largely what has led to the boom in four-hour duration lithium-ion battery projects in the state.
- In Oct 2020 Silicon Valley Clean Energy (SVCE), along with several other Community Choice Aggregators (CCAs) put out their request for offers (RFO) for long-duration storage. The requirements of the final request for proposals that the CCAs put out was for an eight-hour minimum discharge duration resource of at least 50MW. Projects had to connect to the CAISO grid, or if not, to ensure full transfer rights for power delivered for SVCE and the other aggregators. Three projects were shortlisted, two lithium-ion and the other an emerging technology which they are not able to disclose at this stage.
- In the end it was one of the Li Ion offers that was accepted. What surprised many about the contract with developer REV Renewables for its Tumbleweed battery project is that Tumbleweed is a lithium-ion battery energy storage system (BESS). There had been an expectation from some industry commentators — although admittedly not others — that flow batteries, or some form of thermal or mechanical energy storage might have been the front runner in a long-duration procurement.
Our take on this
- When we started writing on long duration battery storage a few years ago, our working assumption was that while Li Ion batteries would probably dominate the short duration market (say up to two hours), the longer duration requirement would probably need a variety of other alternatives, including iron redox and vanadium flow batteries.
- To be fair, this is very much the case currently in say the UK, where Gresham House, a stock exchange-listed investor in battery storage in the UK and Ireland, has said the majority of its development pipeline projects could have at least two hour duration of storage when built. This in turn is a shift up from the frequency response market, which only requires sub-one hour duration projects.
- More recently, we have seen a large number of new technologies jostling for position in the longer duration market, including compressed air, hydrogen fuel cells, gravity storage, pumped hydro and then a variety of thermal energy storage technologies like molten salt and liquid air. Most of these, excluding pumped storage hydro, are still at the development or pilot stage.
- The big question that the California contract begs is if Li Ion can economically move into the eight hour market will there be a material role for these other technologies. One comment we frequently hear from industry experts is that Li Ion benefits from the massive investments being made in the technology by the transport sector (for EV’s). In addition, from a bid perspective, its a known and proven technology.
- Clearly, the others have little or no intention of giving up. Recently listed Form Energy recently announced it was in talks with Georgia Power for a 100 hour iron air battery storage project, so at the really long end of the market. As the CEO of Silicon Valley Clean Energy said in a recent interview “from very large, pumped storage projects, compressed air energy storage projects, to storage in people’s garages, for resiliency purposes and affordability purposes. So it really is an ‘all of the above’ that we’re looking at”. This is clearly a sector that is developing fast.
Agtech: Pesticide Dicamba back in the line of fire
Main points of the story as published
- Legislation is being proposed in the US state of Illinois that would ban the use of both dicamba and neonicotenoids for “agricultural, commercial or residential use within the state” with effect from the start of 2023. Based on a poll of readers (who are predominantly US-based ag retailers), 92% believe that at least some other US states will also attempt to ban dicamba.
- Dicamba has had a troubled history due to its tendency to volatise and drift, damaging crops in neighbouring fields. In 2020 a US Court of Appeals cancelled the registration for three dicamba products before the US EPA reinstated registrations for two of the products four months later. Unsurprisingly, dicamba has also been the subject of litigation; Bayer for example had to pay US$400m in 2020 to settle a series of claims.
- Problems with dicamba emerged in the last five years after its use changed. Due to widespread emergence of glyphosate resistance among broadleaf weeds, new soyabean varieties were genetically engineered with dicamba resistance, allowing farmers to replace glyphosate with dicamba in their post-emergence weed management programmes.
Our take on this
- Pesticides, along with fertiliser and new seed varieties, formed the backbone of the green revolution which saw crop yields increase materially from the 1950s onwards. However, with the increased understanding in recent years of the complexity and critical importance of the soil microbiome, the downsides of agchems have become apparent. By impairing the soil microbiome, farmers have become ever more reliant on agchems to maintain yields.
- As well as damaging the microbiome, pesticides have been linked to human health problems in farmers and neighbours and to off-target effects on beneficial insects. Pesticide resistance is a growing problem as well. Over 250 species of weeds and 600 species of arthropods are resistant to at least one synthetic herbicide/pesticide with nearly 17,000 cases of insecticide resistance now reported.
- In response, regulators are increasingly restricting the use of pesticides. Neonicotenoids have been effectively banned in the EU since 2020 while glyphosate has faced usage restrictions if not outright bans globally. In parallel, there has been increased litigation, the most high profile case being Bayer which set aside US$10bn in 2020 to settle claims that glyphosate caused non-Hodgkin’s lymphoma. Meanwhile the EU’s farm-to-form strategy proposes “[reducing] the overall use and risk of chemical pesticides by 50% and the use of more hazardous pesticides by 50% by 2030” (although defining “use” and “risk” is moot). To deliver on this goal, this week the EU published new rules to accelerate the adoption of biopesticides, naturally occurring alternatives.
- At the same time, new precision ag technologies have emerged which allow farmers to do more with less. The first precision sprayers, that allow farmers to spray individual weeds, are now being sold by the likes of Deere and Greeneye Technology and in theory can reduce pesticide use by up to 95%. We explored these issues in more detail in a report ‘Agricultural technology – field of dreams’ dated 9 December 2021. Businesses with material exposure to pesticides include BASF, Bayer, Corteva, FMC, Nufarm and Syngenta.
Alternatives : no role for hydrogen in road transport ?
Main points of the story as published
- The urgency of the climate crisis means that the world should focus on accelerating the build-out of battery-powered vehicles and fast-charging infrastructure, rather than hydrogen fuel-cell cars and trucks and H2 filling stations, according to a study in the journal Nature Electronics. “Hydrogen will play a vital role in industry, shipping and synthetic aviation fuels. But for road transport, we cannot, I believe, wait for hydrogen technology to catch up, and our focus now should be on battery electric vehicles in both passenger and freight transport,” writes Dr Patrick Plötz, co-ordinator of the energy economy business unit at the Fraunhofer Institute for Systems and Innovation Research (ISI) in Germany.
- “The current challenge for battery electric vehicles is long-haul logistic operation (with an average of 100,000 km per year) and transport of very heavy goods (which implies high energy consumption per kilometre),” Plötz writes. “This is the use case often discussed for hydrogen trucks. “But this seems very unlikely when contrasted with announcements from the companies about the earliest start date for the production of commercial series fuel-cell electric trucks being in 2027. By that time, the second-generation battery electric vehicles will already be commercially available and in operation.”
- He explains that while long-haul trucking of more than 500km per day “poses a challenge” for battery-electric options, European regulations mean truck drivers are required to stop for a 45-minute break after driving for more than four-and-a-half hours. “Within 4.5 hours, a heavy truck could travel up to around 400km and thus practical [battery] ranges of about 450km would suffice, if high-power fast charging for battery electric trucks was widely available,”
Our take on this
- We broadly share this view, although we accept that this report has a strong European focus. The main exception could be heavy goods vehicles running dedicated A to B and back routes, where suitable hydrogen fueling might make sense. Green hydrogen has a potentially material role to play in replacing existing dirty hydrogen use, and longer term in industry (especially steel), shipping and maybe aviation. We see transport as a bit of a distraction in most markets.
Human Rights : Ecuador & indigenous rights
- This week our good friend Kristina Touzenis, who has many years experience in the human rights field (LinkedIn profile here), has again kindly guest written the human rights, social & legal section of the weekly. Thank you Kristina. Just a reminder, this section is not written and prepared by Sustainable Investing LLP. Quite frankly, we are not experts in this field, so we leave the topic to those that are. This week she reviews the recent decision of the Constitutional Court in Ecuador, which could have implications for oil, mining & extractive projects in the country (and maybe elsewhere)
- On February 4, 2022 the Constitutional Court of Ecuador, the country’s most powerful judicial body, published a ruling recognizing, for the first time, the right of indigenous communities to have the final decision over oil, mining and other extractive projects that affect their lands. Ecuador now has one of the most powerful legal precedents in the world on the internationally recognized right of Indigenous peoples to Free, Prior and Informed Consent, a powerful legal tool for Indigenous survival and the protection of huge swaths of forests and mega-biodiverse ecosystems.
- The ruling stems from the A’i Kofán community of Sinangoe’s 2018 lawsuit that annulled 52 gold-mining concessions granted by the government along their most important river. Sinangoe hosted the Court’s first ever hearing in Indigenous territory in the heart of the Amazon on November 15th, 2021. The decision signals that the nation’s highest court backs the right of Indigenous peoples to have the final say over extractive projects that may affect over 23 million acres of Indigenous lands and forests nationwide.
- The ruling highlights the need for the State to obtain the consent of the affected communities before undertaking oil, mining or other extractive plans or projects, based on Indigenous peoples’ right to self-determination. The Judges cite ex-United Nations Special Rapporteur on the Rights of Indigenous Peoples James Anaya to explain: “A direct or considerable effect in the lives or territories of Indigenous peoples establishes a solid presumption that the proposed measure should not be adopted without the consent of the Indigenous Peoples. In determined contexts, that presumption can convert into a prohibition of the measure or project if consent of Indigenous peoples does not exist.”
One last thought
The fine folk at the World Fund flagged this chart from a recent PWC report (see link above). Its so good we wanted to share it. While our Built Environment is responsible for c. 21% of global emissions, it gets roughly 4% of global climate tech VC investment. At the other end of the scale we have Mobility (at 16% of emissions but 61% of investments). Makes you think – which sector might be over crowded and which one is just ripe for innovation ?