Sustainable Investing weekly blog: 6th August 2021 (Issue 3)

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 .


 

The format is simple, first 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.

This week we look at exciting developments in renewables in Australia, moves to roll out vehicle to grid charging (V2G) in Europe, a recent report on pesticides and bees and how it might impact use by farmers, and our partners at BST-Impact review the implications of the Shell case in light of their upcoming appeal and lack of plans to change their strategy

Electricity Production




AEMO to fast track grid forming inverters (Renew Economy)

  •  Australia’s market operator AEMO has now openly admitted that the key to the country’s “once in a lifetime” energy transition will be found in advanced grid-scale inverters. This is as profound as the switch from analogue to digital, with the added complexity that AEMO needs to try and manage the transition from incumbent to new technologies and keep the lights on at the same time.
  • It is a significant development, because it points to the ability of inverter-based technologies to not just produce and store enough electricity to meet grid demand, but also to deliver the same key grid services that have traditionally been supplied by synchronous generators, such as coal and gas.
  • Over the last few years, AEMO had raised concerns about system strength issues across the grid, and these have often translated into heavy constraints on wind and solar farms in certain regions, or a requirement to install expensive spinning machines known as synchronous condensers.
  • AEMO says its new white paper, the Application of Advanced Grid-scale Inverters in the NEM outlines how the shift from synchronous generation towards inverter-based resources (IBR) is changing the way the industry must plan for the future.

Our take on this

  • We are not sure why but this week we seem to have a couple of fairly technical stories. Of the two, this one is both the most complicated to explain and potentially the most important. It’s a longer “our take on this” than normal, but I promise its worth it. Before we dig down into the technology, there are two big challenges facing the roll out of renewables that it looks like it can resolve.
  • The first, a short/mid term issue is delays in connection. This article call to accelerate renewable grid connections, quoting data from the respected Berkeley Lab (also reported here record amounts of solar seeking grid connection) shows how many US renewable projects are just “sitting in the queue”, waiting to be hooked up to the grid. Part of the problem is regulatory but much of it relates to grid instability – you cannot add renewables to an already weak grid.
  • The second, a material long term challenge, is around grid stability as we add more renewables, or in industry parlance, “non dispatchable generation”. The old grid relayed on a combination of inertia (think of the big rotating mass that is a fossil fuel powered generator) and peaker capacity (mainly older fossil fuel powered generation that could be switched on quickly) to cope with grid instability.
  • The new grid has less of this and when we have a higher proportion of renewables in the mix, grid instability could become a major problem. In simple terms, when either supply or demand changes rapidly, grid frequency dips (or rises). This trips out solar and wind generation (to protect the electronics) and the problem gets compounded. Recent examples include the UK system failure in 2019 (reported here major power cuts across the country) and the massive Australian power outage in 2016 storm causes state wide power outage.
  • Ok – given this background why is this news such a big deal. Because it looks as if what are called grid forming inverters, also known as “virtual synchronous machines” when paired with sophisticated software, can help to stabilise the grid by adjusting output power instantaneously to maintain local voltage and frequency.
  • This could mean more renewables can be connected to the grid more quickly and at a lower cost (fewer system upgrades needed) plus no requirement for expensive “synchronous condensers”, which seek to mimic characteristics of coal and gas generators to provide grid support. Longer term it may mean we can push the percentage of renewables in the generation mix up closer to 100%, without causing excessive system instability.
  • The AEMO white paper has just gone out for discussion in Australia but the early feedback looks really positive, with a real world example from the Hornsdale Power Reserve during the grid disturbances created by the Callide coal plant explosion in Queensland. When added to advances in battery storage and long distance HVDC grid interconnectors, solutions to a 100% renewable grid are lookign viable.

Electrification applications


Image from Virta

EDF launches V2G service for Nissan in the UK (electrive.com)

  • EDF is launching a new commercial charging service in the UK  – using vehicle-to-grid (V2G) technology established through its joint venture branded Dreev website here, with US company Nuvve (their website here). Nissan will offer the new V2G service exclusively to fleet customers of the Leaf and e-NV200 models.
  • EDF and Nissan expect fleet operators to earn around £350 per charger per year using the V2G service. The utility says it assumes an average electricity cost of 11.54 pence/kWh (13.5 cents/kWh) and a 0.33 kWh/kilometre consumption.
  • The service builds on existing technology. The San Diego-based green energy firm has been working with Nissan before, including in the UK, where the companies were working to install a 1,000 V2G charger network (as reported).
  • The company also expects to install 1,500 “smart electric chargers” in the United Kingdom through the joint venture with EDF. The V2G chargers store energy at less busy times to make it available for sale on the energy markets or for supporting grid flexibility at times of peak energy use.

Our take on this

  • This may seem like a peripheral technology but it’s likely to become materially more important as the number of EV’s in the system grows, we have more renewables in the generation mix and electricity demand increases. There are broadly three classes of solution – battery storage, grid interconnectors and smarter grid management.
  • The concept is simple behind V2G. By 2030, EV’s collectively will make up a large source of battery storage, especially given that they spend most of the day parked up (generally > 90%).  Most of you will be familiar with smart charging (so called V1G), where the EV only takes electricity from the grid when demand is lower. This helps keep the cost of charging down and it smooths demand, helping grid balancing.
  • V2G technology goes a step further. It takes electricity from the system when its cheap (& abundant) and “sells” it back, when supply is tight, and pricing is high. And, a bigger win financially, is the additional provision of frequency response balancing services. Basically, when generators trip and the frequency of the grid drops, the EV’s act together to inject electricity to rebalance the system.
  • Getting the first question out of the way, no it doesn’t really degrade the battery, if done well. For more detail see Appendix A of  this report from the Australian Renewable Energy Agency. Second question – what are the financial benefits? Research by a consortium including the UK grid operator National Grid estimated that V2G could save £180m pa across the whole energy system by 2030, compared with unmanaged charging. Plus, it could help avoid c. £200m of grid capex. BNEF estimates that on top of this V2G can be a cheaper way of charging your EV fleet.
  • But there are some challenges to be overcome, before we see a wider rollout. It’s just a B2B offer, co-ordinating thousands of domestic chargers is tougher. And we have the ability of car chargers to support V2G. For now, it’s limited to the CHAdeMo plugged vehicles (such as those produced by Nissan) but the new European ISO 15118-20 standard will support bi directional charging, so V2G should get a boost.
  • From an investment perspective, the small number of companies that can facilitate V2G and bidirectional charging, should be well placed to lead the charge. Definitely, a theme to watch and one that, combined with grid interconnectors and battery storage, will play an important role in making a renewable heavy grid more stable.

Agriculture & Natural Capital


Charl Folscher from unsplash

World’s food production depends on pollinators (our world in data)

  • The populations of many pollinator insects – bees, wasps, and butterflies – are in decline. Many crops rely on pollinators, which raises concerns about the future of our food. We might associate crop pollination with honey bees, but a range of studies have shown that non-bee pollinators (such as butterflies, beetles and hoverflies) also play an important role.
  • Three-quarters of our crops depend on pollinators to some extent, but only one-third of global crop production does. Most of our staple crops – cereals such as maize, wheat and rice; roots and tubers such as cassava; and legumes such as peas and lentils – do not rely on bees and butterflies at all.
  • There are only a few crops that are fully dependent, including brazil nuts, fruits including kiwi and melons, and cocoa beans. A world without pollinators would mean a world without chocolate. But a lot of crops, such as many fruits, almonds, cashews and avocados are highly dependent, meaning yields would fall 40-90% without pollinators.
  • Most crops would see a decline in yields if pollinator insects disappeared but would not collapse completely. Taking all this in account, studies suggest crop production would decline by around 5% in higher income countries, and 8% at low-to-middle incomes if pollinator insects vanished.

Our take on this

  • Those of you who have followed my weekly for some time will know that I keep bees. So, this is a topic that resonates personally as well as professionally. We are all aware of the threat to bees from environmental changes, including habit loss and pesticides. This report, in Nature magazine Agrochemicals interact to increase bee mortality, (reported by the BBC here farm pesticides killing more bees) suggests that the threat may be greater than initially thought.
  • To quote one of the study authors, Dr Harry Siviter, from the University of Texas at Austin “Exposure to multiple pesticides is the norm, not the exception. Put simply, if you have a honeybee colony exposed to one pesticide that kills 10% of the bees and another pesticide that kills another 10%, you would expect 20% of the bees to be killed. But a “synergistic effect” could produce 30-40% mortality.
  • What might this mean for regulation of pesticides? Again, quoting Dr Siviter, “we really should consider the interaction between those chemicals when licensing commercial formulas for use”. So potentially tighter rather than looser regulation of pesticides in the future.
  • This is consistent with moves we reported earlier by the European Union, to reduce pesticide use by 50% by 2030 EU aims to cut pesticide use by 50%. And it resonants with the report we covered last week on the new French climate law new French climate law takes aim at fertiliser use

Social and Legal factors: a BST – Impact view

Shell – no plans to change strategy (The Guardian)

  • In an interview for the Guardian newspaper, the company CEO, Ben van Beurden, denied the company would need to change its plans to meet the tougher court-ordered climate targets. This comes in reaction to a recent Netherlands court ruling (26th May 2021) calling for the company to make a 45% cut to its carbon emissions by the end of the decade and the confirmation (20th July) that it would appeal the court ruling Shell confirms decision to appeal . 
  • Shell plans to reduce the average carbon intensity of the energy it produces by 20% by 2030, well short of the court’s ruling. But Van Beurden said asking “one company” to reduce emissions by 45% when oil industry rivals and EU states plan to achieve only half these reductions over the same period is “not only unreasonable but doubly ineffective”.
  • The oil boss also dismissed concerns over Shell’s plan to help private-equity backed Siccar Point to explore for new UK oil reserves in the Cambo oilfield near Shetland. “For as long as the UK still needs oil and gas in its [energy] consumption, it’s better to produce in its own backyard,” he said. “To import oil and gas, which would be the alternative, would obviously not serve the climate at all. Symbolically, it’s not what people would like to hear. But symbolism won’t help us with climate change.”
  • The Cambo oilfield expansion could ignite a legal challenge by Greenpeace against the government on the grounds that the new exploration would undermine the UK’s climate targets, and the government’s recent pledge to allow new oil exploration only if it aligns with climate targets.

The BST-Impact take on this

  • First – a quick reminder. This “take” on the news is from our legal specialist partners, BST-Impact. Unlike us, they have a deep and thorough knowledge of this topic, based on many years of practical experience, so their views are worth listening to. If you want to follow up with detailed training or consulting, you can find them here. Given how complex (and important) this topic is becoming, we will be publishing more on this theme, starting shortly with a blog piece. Something to watch out for. Before handing over to BST -Impact … we believe that this topic is going to become increasingly important for investors. Companies will find it harder to avoid their obligations under international law, the costs of doing so will rise and for those who don’t change willingly, it will gradually be forced on them.
  • The judgment makes clear that preventing further climate change is not an obligation falling solely upon States, but that companies too must align their policies and comply with the emission targets set by the Paris Agreement.  The same applies for the responsibility to respect international law around human rights (in this case the right to life and the right to a secure family life), which entails a positive obligation for enterprises, and requires them to take concrete measures to prevent, identify and mitigate human rights impacts.
  • The ruling is a step further towards greater corporate accountability for social and environmental impact, as it extends a company’s responsibility to prevent human rights impacts linked to climate change to cover its whole global value chain. It must also be considered in parallel with moves by the EU, with a number of directives currently being drafted in parallel which have a significant “how do you ensure social sustainability in reality” component to them.
  • The Hague District Court decision, and other similar decisions taken by national courts render very tangible the pressing expectation upon parent companies to carry deep, sufficient due diligence on the operations of their subsidiaries and contractors in the supply chain. The upcoming EU regulation on Human Rights Due Diligence (HHDD) will be a further step in this direction. This will require not only EU based companies, but all EU operating companies to identify, prevent, and mitigate adverse human rights and environmental impacts on their entire upstream and downstream value chain, and to account for how adverse impacts are addressed, even if such impacts do not take place within EU borders.
  • From an investment perspective, an important question is what happens if Shell loses the appeal, but still doesn’t make changes to their strategy ? The case is a civil, rather than criminal one, so the court currently does not have the power to impose criminal sanctions. But the court may end up imposing more specific obligations on Shell, if it becomes apparent that the company will not take the actions sought. If this occurs, the court could then impose financial penalties.
  • Clearly, this case still has a long way to go. But it looks as if its the beginning of a process of companies being held more responsible for ensuring compliance not just with domestic regulations, but with international law. This could end up having material financial and operation impacts for those companies who choose to “look the other way”.
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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