Sustainable Investing weekly blog: 21st Jan 2022 (Issue 22)

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 the key news stories, developments, and reports that are impacting investing in the wider transition to net zero carbon and a greener/fairer society.


I don’t know what the weather is with you, but here its cold. Not central Canada cold, but still cold for us. That could be why we are running with a heat pump story again, but this time in a more positive vein.

This weeks top story highlights the apparent shift in Germany away from Blue Hydrogen.  In Grid Management, we highlight the possible (long term) demise of the traditional centralised electricity company model, in Built Environment, be look at how heat pump sales in Germany are booming (a contrast with last weeks story about their struggle in the UK), in Renewable’s, we cover the recent Scottish off shore wind bidding, in which a lot of floating platform proposals were successful. Finally in Agetch,  we discuss the debate around making fertilisers more sustainable. We finish with our “one last thought” which highlights an apparent contradiction in the position of the German government on blue hydrogen

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 dan@sustainableinvesting.co.uk. 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 : Is Germany about to “kill off” blue hydrogen ?




German government disavows blue hydrogen (Euractiv)

Main points of the story as published

  • The new German government unveiled plans last week to massively increase the ambition of its national hydrogen strategy. But, fossil gas-based hydrogen likely won’t be included in subsidy schemes. Clean hydrogen is seen as a potential silver bullet to decarbonise industries like steel and chemicals, which cannot fully electrify.
  • According to Vice-Chancellor Robert Habeck, the steel industry alone would require five times more hydrogen than currently planned for in all sectors. To achieve their goal, Germany aims to double its hydrogen electrolyser capacity from 5GW to 10GW in 2030 as part of its upcoming “Easter package” of legislation. This is likely to include rapidly implementing the €8 billion worth of hydrogen “Important Projects of Common European Interest” (IPCEI), establishing additional subsidy schemes, and offering companies “Carbon Contracts for Difference” to de-risk their investments.
  • However, Germany will make no subsidies available for so-called “blue hydrogen”, created by using fossil gas and carbon capture & storage (CCS) technology, said Patrick Graichen, Habeck’s state-secretary and right-hand man. Oil and gas industry representatives have come out strongly in favour of blue hydrogen and even the European Commission said it will be needed in the transition to a fully renewable-based hydrogen economy. According to a 2021 report sponsored by the industry, hydrogen production based on natural gas could save Europe €2 trillion by 2050 because it can be based on existing gas infrastructure.

Our take on this

  • This is a position (we will not call it a decision until we see the plan) that is going to incite a wave of lobbying between now & Easter. The gas industry have put a lot of weight behind the twin arguments that not only is supporting blue hydrogen cheaper (saving on infrastructure costs), it also bridges the so called chicken & egg situation – where customers are unwilling to shift as there is not enough supply, which in turn makes customers even more cautious.
  • Ignoring the technical & cost challenges of scaling up CCS (carbon capture and storage at the end of a lost decade), we think the gas industry argument also ignores the reality of where most short & even mid term green hydrogen demand will come from. The best market is in replacing the current use of dirty hydrogen in oil refining and fertiliser production. This hydrogen production is mostly via co-located plants, making it easier to switch to a green alternative, without expensive pipelines or transport.
  • Yes, the cost issue still remains, with green hydrogen being a lot more expensive, a situation we cannot see being reversed (ex subsidies) until c. 2030. But from where we sit the German thinking makes sense. However, in politics, its never that simple, see our last thought (below).

Electricity grid : the end of the centralised utility model ? 



Emerging utility business models (Energy Spectrum)

Main points of the story as published

  • As numerous prior articles have pointed out, the traditional utility business model seems to be on its last legs in markets with competitive wholesale and/or retail. Moreover, as consumers discover and exercise options to migrate away from total reliance on upstream generators to produce electricity and on the delivery network for its transmission, the “utilities” – be they distributors or retailers – must go to Plan B.
  • What does Plan B need to solve – basically how they find sufficient revenues to cover their fixed and variable costs as volumetric consumption declines when some consumers become prosumers – or go a step further and become prosumagers? The debate about the future of net energy metering in California, and similar debates in Australia and elsewhere with significant rooftop solar penetration, is very much focused on this issue
  • The traditional utilities do not seem to be active enough in any of the new endeavours such as semi-self-sufficient micro-grids, energy communities and smart aggregation – occasionally throwing roadblocks to the inevitable, trying to slow down the eventual outcome. But these efforts are unlikely to succeed in the long run in places where the conditions are ripe for self-generation and storage – namely sunny places, with high proportions of dispatched households facing high retail tariffs.

Our take on this

  • We broadly agree with much of this thesis. To be clear, we are not forecasting the sudden & widespread collapse of our current utility industry structure. Any change is going to be slow & for some markets (such as those that are moving toward semi centralised utility scale wind based renewables) extremely slow. Plus in many markets, the regulator is very aware that if utilities do not get a degree of protection against early investment obsolescence, investment could dry up. And what ever electricity model a country uses the grid is going to remain a critical element.
  • Never the less, some electricity utilities will be having (or starting) some fairly urgent discussions with their regulators, as they try to anticipate change. The article above talks about maybe shifting to a fixed connection charge, like the water industry. What we do think is that new business models will continue to develop, and likely take share over time. For an industry that is valued using very long term revenue assumptions, this is starting to become a big deal.

Built environment – Heat pumps do have a role 



German heat pump sales are booming (bwp)

Main points of the story as published (in German)

  • 154,000 heating heat pumps were sold in Germany last year. This corresponds to growth of 28 percent compared to the previous year. Air-to-water heat pumps experienced the greatest growth last year: a total of 127,000 devices (+ 33 percent compared to the previous year) were sold, including around 83,500 monoblock devices (+ 48 percent) and 43,500 split devices (+ 12 percent). Brine-water heat pumps increased by 12 percent, 27,000 ground-coupled systems were sold in 2021.
  • The positive market trend is thus proving to be extremely stable despite corona-related restrictions and global supply chain complications. This is also reflected in the great demand for the new federal funding for efficient buildings BEG, which replaced the market incentive program this year. 66,496 funding applications for heat pumps were submitted to the Federal Office of Economics and Export Control for use in heating replacement alone.

Our take on this

  • This weeks heat pump story contrasts strongly with the position in the UK, where heat pump sales remain weak, despite the apparent acceptance of the key role that building heating & cooling needs to play in decarbonisation.
  • Its not only Germany where heat pump sales are doing well. Finland is another example which has seen a widespread transition to heat pumps: in a country of just over three million households, an estimated 1,030,000 heat pumps have been sold to date. Meanwhile less than 200,000 heat pumps have been sold for the UK’s 27.6 million households since 2000.
  • The Finnish example (Heat pump users in Finland and the UK ) highlights some key government actions, including raising awareness, developing standards and, perhaps most importantly, training installers (there is a good “cleaning up” podcast on this last topic – episode 72). The market was also encouraged through Government policies phasing out fossil fuel based heating and incentivising low-carbon heating options. Once the industry was kick started, manufacturers were able to introduce  off-the-shelf products, giving all users affordable, low-maintenance heating options that meet the demands of the Finnish climate.
  • What is really interesting long term, is when you start to add technologies such as heat pumps into a smart grid, as part of demand response.

Electricity generation: is this the decade where floating wind works ?


Scotland’s new floating wind projects – what we know so far (offshore wind biz)

  • Scotland made headlines by awarding seabed lease rights to 17 offshore wind projects totaling almost 25 GW in capacity, well beyond the expected 10 GW, and by the fact that more than half of this massive capacity is coming from floating wind farms. Although detail is lacking, what we know so far about the floating wind projects is that the total capacity they account for is 15,071 MW of the total 24,826 MW,
  • A consortium comprising Shell and Iberdrola’s Scottish arm ScottishPower Renewables, and SSE Renewables-led consortium with Marubeni and Copenhagen Infrastructure Partners (CIP) are planning to build the world’s biggest floating wind farms in Scotland. The Shell-ScottishPower partnership is offered option agreements for two floating wind projects with a combined capacity of 5 GW. Located 75 kilometres off the North East coast of Scotland, in water depths averaging 100 metres, the proposed MarramWind floating offshore wind farm will have an installed capacity of 3 GW. The CampionWind project, to be built 100 kilometres offshore of the east coast of Scotland, in water depths averaging 77 metres, is planned to have 2 GW of installed capacity.

Our take on this 

  • While we understood the attraction of deep water off shore wind, especially stronger and more consistent winds, we had always thought about this as a distant future technology. This is largely due to the extra costs involved – to mis-quote our favorite wind expert (Rosemary Barnes of “Engineering with Rosie” fame) things get a lot more complicated when you move offshore & making the platform floating adds another layer of complexity = more cost
  • As we understand it, as of 2021, there are only 3 operational floating wind farms in the world. The first is the 30 MW Hywind Scotland with 5 floating turbines, developed by Equinor ASA and commissioned in October 2017. Clearly, the new projects proposed are much bigger than this.
  •  The well respected NREL in the US is currently leading a major project to advance the technology involved (this is a great video if you are interested  NREL – floating offshore wind systems of tomorrow). In their analysis they highlight that not only are the winds stronger and more consistent, but additionally some 80% of the US population lives near the coast, so helping to overcome the land side transmission line issues. Maybe this is a future technology that is not so distant future after all.

Agtech: do we need more sustainable fertilisers ?


Towards more sustainable fertilisers (FT)

  • Synthetic nitrogen fertilisers are responsible for 2.4% of global greenhouse gases (GHGs). As a result, there is growing interest in biofertilisers, the market for which is expected to nearly double from USD9.3bn in 2020 to USD17bn globally by 2026.
  • The video profiles two companies in France creating alternatives to the traditional, synthetic fertilisers produced from fossil fuels. Both produce fertilisers as by-products of their core manufacturing processes. Afyren recycles sugar beet waste to produce organic acids using a zero-waste fermentation process, producing a high value fertiliser with a very high potassium content as a by-product. Ynsect breeds mealworms to produce high-protein supplements for animal feeds and human foods. The faecal waste produced by the insects is turned into a fertiliser.

Our take on this 

  • Our view is that its the use of fertiliser is the real problem, not how it is made. There is growing evidence that fertilisers impact the global carbon cycle by stimulating the release of soil organic carbon (SOC).
  • Soil accounts for 80% of the carbon stored in terrestrial ecosystems, vegetation the remaining 20%. Of the soil carbon, two-thirds is SOC, the rest being mineralised, inorganic carbon. Overall, there is three times as much carbon in the soil as in the atmosphere.
  • Emerging research however is finding a link between loss of SOC and the use of nitrogen fertilisers. “The nitrogen in the [crop] residues stimulates the microbes to burn carbon off through respiration” according to Professor Richard Mulvaney, lead author of a recent University of Illinois study. As a result, despite decades of incorporating crop residues into farms in the US Corn Belt, SOC has continued to decline.
  • We believe the agchem companies face long-term structural headwinds from a combination of factors. As well as improved agricultural practices (such as regenerative agriculture) and stricter regulations, new technologies will reduce the required volumes. These include precision ag where farming is done at the plant not field level, and new biological products such Pivot Bio’s and Sound Ag’s that seek to restore microbial activity in the soil.
  • If you are interested in this topic, watch out for more on this topic in our upcoming blog, due in the next few days

One last thought

Germany may use blue hydrogen from Norway (Clean Energy Wire

As we highlight above, Germany aims to secure a full supply of green hydrogen in its drive to become climate neutral, but may use blue hydrogen made with natural gas and carbon capture and storage (CCS) in Norway for a transitional period. The government apparently won’t stand in the way if private investors decide to import blue hydrogen from Norway using infrastructure that can be climate-neutral in the long run. “Blue hydrogen for a transitional period in pipelines planned for green hydrogen is fine,”. Is it only me who finds this slightly ironic – politically expedient but still ironic. There is nothing on subsidies in the article, but we guess this option would not attract subsidies, at least at the German end.

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