Sustainable Investing weekly blog: 15th October 2021 (Issue 11)

This blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”). See the end of this blog for links to important information and disclaimers.

Our weekly summary of some of the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon .

 

Our top story is on green hydrogen, post the ITM Power capital raise earlier in the week; then we look at a report from the Institute for New Economic Thinking at the Oxford Martin School, which claims that not only can the cost of renewables keep falling, but that a rapid transition to net zero is the cheapest alternative, by a long margin , we then report on a French ban on single use plastics – which like our water story last week seems to have dropped down the green agenda as a topic, before finishing with our BST-Impact partners on the vote by the Human Right Council, during its 48th Session,  to recognise access to a clean and healthy environment as a fundamental human right.

The format 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 dan@sustainableinvesting.co.uk. While our new team member, Nick, gets up to speed, we will continue to 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, which focuses more on the stock implications.

This week’s top story : Green hydrogen – a coming supply surge ?



ITM Power launches £250 capital raise to fund green hydrogen gigafactory (FT)

Main points of the story as published

  • ITM Power, the UK AIM listed, Sheffield based, producer of green hydrogen electrolysers, has raised £250m (company exchange announcement) by way of an over subscribed placing. In August 2021 ITM opened the world’s largest electrolyser factory, with the capacity to produce c. 1GW pa. It will use the money to build a second, bigger factory, next to its existing plant, and another plant in an international market where there is significant demand. Together this will increase its production capacity to 5GW by 2024.
  • ITM chief executive Dr Graham Cooley was quoted as saying that demand in the market is very very strong. He also commented that the surge in global gas prices and efforts to decarbonise heavy industry had resulted in a significant acceleration of large scale “green” hydrogen projects, where the electricity used to make the gas derives from renewable sources.
  • The Capital Raise is conditional upon, amongst other things, shareholder approval and Admission becoming effective. The Placing is also conditional on the Placing Agreement not being terminated in accordance with its terms.

Our take on this

  • We apologise for having a green hydrogen story two weeks on the trot, it just happens that way sometimes. As we highlighted in the Thyssen story last week, a number of electrolyser producers are  adding or proposing to add capacity. As another example, earlier today, Plug Power (the North American hydrogen technology company), announced (Fortescue links up with Plug Power) it had linked up with the Australian company Fortescue Future Industries, to build a  2GW plant in Queensland. The plant will apparently manufacture not only large-scale proton exchange membrane (PEM) electrolysers, but also cabling and wind turbines to drive production of green hydrogen for global markets. FFI has also announced plans to develop a 1 GW solar PV module manufacturing plant. Similarly, Recharge covered a deal (Asia’s richest man to build gigafactory) between Stiesdal and the Indian conglomerate Reliance Industries to mass-produce ultra-low-cost electrolysers at a new gigafactory in Gujarat state.
  • Interestingly, this follows a release from Reuters (in advance of an upcoming hydrogen conference) where they reported a Delta Energy & Environment analyst (I have been unable to find the original source) as saying that Europe will likely miss its 6GW of green hydrogen production capacity by 2025 target, with their estimate being more like 2.7GW.
  • Its probably not totally incorrect to call what is happening as a rush to create production capacity soon (by 2025), in the face of a demand profile that looks like it may be multiple years behind. We get the desire to create production capacity in an industry where many can see cost economies of scale, so looking to get down the cost curve as quickly as possible. Its worth remembering that the biggest cost element in producing green hydrogen is the cost of the renewable electricity. This effort is brought further into focus when you add in that BNEF is apparently reporting that the cost of producing alkaline electrolysers in China (to be clear, not the PEM technology that ITM and Plug Power produce) is a fraction of that currently achievable in Europe and the US. 
  • It makes you think …if you want to discuss this sector further, please contact Dan at dan@sustainableinvesting.co.uk

Electrification – will the cost of renewables continue to plunge ?



The cost of renewables continues to plummet (Clean Technica)

Main points of the story as published

  • According to a new report from the Institute of New Economic Thinking at the University of Oxford, previous estimates about how quickly the price of renewables will fall have consistently underestimated reality (We think they are pointing their fingers at the International Energy Agency here.)
  • Here’s the first few paragraphs of the report: Rapidly decarbonizing the global energy system is critical for addressing climate change, but concerns about costs have been a barrier to implementation. Most energy economy models have historically underestimated deployment rates for renewable energy technologies and overestimated their costs. The problems with these models have stimulated calls for better approaches and recent reports have made progress in this direction.
  • Here we take a new approach based on probabilistic cost forecasting methods that made reliable predictions when they were empirically tested on more than 50 technologies. We use these methods to estimate future energy system costs and find that, compared to continuing with a fossil fuel based system, a rapid green energy transition will likely result in overall net savings of many trillions of dollars (emphasis added) — even without accounting for climate damages or co-benefits of climate policy.
  • We show that if solar photovoltaics, wind, batteries and hydrogen electrolysers continue to follow their current exponentially increasing deployment trends for another decade, we achieve a near-net-zero emissions energy system within twenty-five years. In contrast, a slower transition (which involves deployment growth trends that are lower than current rates) is more expensive and a nuclear driven transition is far more expensive.

Our take on this

  • Firstly yes, we admit this story is not strictly from this week, the report was published on the 14th September and it was covered in this Clean Technica article on the 6th October. But, we felt it was potentially so important that we still wanted to cover it. And to be honest, its taken us a while to read it though (its only 23 pages, 13 if you exclude the references etc, but its dense).
  • If you have been in this industry for a while, you will have noticed that the forecasts of many industry bodies have either underestimated the penetration of new technologies or been way out on how far costs can fall. In their defence, our industry has not been great with its forecasts either (read pretty much anything by James Montier for data on this). Forecasting is hard. Or to quote Niels Bohr, the Noble prize for physics winner  “Prediction is very difficult, especially if it’s about the future!”
  • The challenge is, as the report states “sound energy investments require reliable forecasts”. Some reasons for the poor performance of energy-economy models include their seemingly arbitrary assumptions regarding the maximum deployment and maximum growth rates of renewables, plus the imposition of “floor costs”, i.e. fixed levels that costs are assumed never to fall below.
  • The bottom line is that they believe costs can fall a lot further, and that the net zero technologies will, over time, work out a lot cheaper (many trillions of dollars cheaper) than continuing with the current fossil fuel system or following a slower transition.  Its well worth a read, especially if you investment time horizon is longer than next year. We don’t have to highlight just how important this could turn out to be…. well perhaps we do, if this is correct we can build a lot more renewable energy, which will need a much enhanced electricity grid. And sunk assets in fossil fuels will become even more real !

Agriculture & Natural Capital – action on plastics



France to ban plastic packaging for fruit and vegetables  (Reuters)

Main points of the story as published

  • Implementing a February 2020 law, the government published a list of about 30 fruits and vegetables that will have to be sold without plastic packaging from Jan. 1. The list includes leeks, aubergines and round tomatoes as well as apples, bananas and oranges. “We use an outrageous amount of single-use plastic in our daily lives. The circular economy law aims at cutting back the use of throwaway plastic and boost its substitution by other materials or reusable and recyclable packaging,” the ministry said in a statement.
  • Cut fruits and a limited number of delicate fruits and vegetables can still be sold with plastic packaging for now but that will be phased out by end June 2026. Plastic packaging will be banned by end June 2023 for cherry tomatoes, green beans and peaches, and by end 2024 for endives, asparagus, mushrooms, some salads and herbs as well as cherries. By end June 2026, raspberries, strawberries and other delicate berries must be sold without plastic.

Our take on this

  • While our new colleague Nick Anderson gets himself up to speed, we are using this slot in the weekly blog to highlight some important Natural Capital themes outside of the carbon mainstream. Our take on this is short. As with our water story, this is a theme that seems to us to deserve a higher profile. It may just be that climate change and specifically carbon emissions, have got more of a focus, with COP26 and the various government plans and targets, but its a topic that we haven’t seen much coverage on from the investment community.
  • The French ban follows a similar move in Spain (Spain to Ban Plastic Wrap for Fruits and Veggies) – which kicks in from the beginning of 2023. Environment Health News, recently covered the lack of action in the US (the US falls behind), and the World Economic forum picked up on the theme in an article back in Oct 2020 (which countries have single use plastic bans).
  • Just following on from our coverage last week of the water theme, it was interesting to see in the UK press this week (the title says it all) ….“adapt or die” warning from Environment Agency

Social and Legal factors – BST Impact


Photo by Mahosadha Ong on Unsplash

 European public supports law to hold companies liable for human rights and environmental damage (ECCJ)

  • Over 80 percent of citizens from across multiple EU countries want strong laws to hold companies liable for overseas human rights and environmental violations. People affected by such corporate driven abuses must be allowed to take the companies responsible to court in Europe, according to a YouGov poll released today. Given this, the BST-Impact weekly on the recent UN Human Rights Council decision, is very timely.

Over to the BST-Impact team …..

  • On Friday the 8th of October 2021 the Human Right Council, during its 48th Session,  recognised access to a clean and healthy environment as a fundamental right, formally adding its weight to the global fight against climate change and its consequences on people’s lives. The High Commissioner of the Human Rights called this a triple planetary threat of “climate change, pollution and nature loss.” It was also urged that the currently negotiated Global Biodiversity Framework shall integrate a “human rights” angle when discussing action to promote biodiversity.
  • This has life-changing potential in a world where the global environmental crisis causes more than nine million premature deaths every year,” said David Boyd, U.N. special rapporteur on human rights and the environment, who called the decision a “historic breakthrough”. The text, proposed by Costa Rica, the Maldives, Morocco, Slovenia and Switzerland, was passed with 43 votes in favour and 4 abstentions from Russia, India, China and Japan. The US did not vote since it withdrew from the Council under its previous administration
  • There has been an increase over the past years in cases against governments as well as private actors using legislation based on international human rights to create responsibility and accountability for actions that have a negative, at times devastating, impact on the environment. Rights recognized in international treaties, and transposed into national legislation, such as the right to life, the right to property, the right to a decent standard of living, rights related to work, food and water as well as to human security have all been used, in cases where companies have neglected to protect the environment or actively destroyed it.
  • This resolution, while not legally binding, is a natural progress of these developments – also bearing in mind that the resolution was first proposed in the 1990s and that a Special Rapporteur on Human Rights and the Environment has existed since 2012. It will have potentially enormous impact on future cases and legislation, especially where the link between the environment and the enjoyment of human rights were in doubt – legitimate or not. This is no longer a question. It will hopefully also open eyes in the ESG world that E and S are intimately connected and speed up progress on both.
  • Just a reminder. The team at Sustainable Investing LLP is unqualified to discuss the legal implications of cases such as these. Fortunately, the BST-Impact team has many years’ experience with international human rights legislation. The importance of international human rights law to investors is becoming material, both from a risk perspective but also with regard to informed engagement.  For follow up, consultancy and training etc, BST-Impact can be found here.

One last thought

Can wind turbines keep getting bigger (BBC)

Next year, Danish wind turbine manufacturer Vestas will put up a gargantuan prototype – a 15-megawatt (MW) wind turbine that will be powerful enough to provide electricity to roughly 13,000 British homes. It will be the biggest such turbine in the world, though potentially not for long. Wind turbines just keep getting bigger – and it’s happening faster than almost anybody predicted. Chinese firm, MingYang, recently announced plans for an even more powerful device clocking in at 16MW, for example. Just four years ago, the maximum capacity of an offshore turbine was 8MW. Clearly this is a good thing – well maybe not. 

“It’s happening quicker than we would wish, in a sense,” says Aurélie Nasse, head of offshore product market strategy at Vestas. “We need to make sure it’s a sustainable race for everyone in the industry,” says Ms Nasse, as she points out the need for larger harbours, and the necessary equipment and installation vessels required to bring today’s huge turbine components offshore. Then there’s the hefty investments required to get to that point. “If you look at the financial results of the [manufacturers], basically none of us make money anymore,” explains Ms Nasse. “That’s a big risk.”

I am not sure Ms Nasse meant to quite say it that way, but its a topic worth thinking about. My favourite wind turbine engineer (The Australian Rosie Barnes of “Engineering with Rosie”) touched on this topic in one of her podcasts and she talks a bit about the future of wind turbines in her latest video (back to the future of wind energy)

 

Sustainable Investing LLP is an appointed representative of Varramore Partners Limited which is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom (“UK”). Sustainable Investing’s FCA Firm Reference Number is 946165.

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