ESG Focus: Eye On Green Energy

ESG Focus | Nov 29 2022

This story features FORTESCUE METALS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FMG

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ESG focus: ASX300 Eye Green Energy (2)

Fossil-fuel energy inflation hugged the spotlight in 2022 masking strong green-energy investment – a period in which green hydrogen came of age.

-Green energy hits a tipping point
-Global demand for green energy companies steps up
-Big money, big players, big action
-Renewables, green hydrogen and new nuclear hold pole position
-Green methanol and ethanol have a seat at the table
-Hydrogen vs batteries; the final battleground

By Sarah Mills

Green energy approached a tipping point in the year, in which most of the technological blocks and pricing points required to progress the transition fell into place.

Renewables (solar, wind, hydro and geothermal) are now an established part of energy production. Prices are plummeting but grid stability has proved intractable.

Enter green hydrogen, which is now competitive with fossil fuel prices thanks to the Ukraine conflict (at least in the lab).

In the real world, transport and storage remain a sticking point, but green hydrogen is at the point that, with investment and regulatory support by way of subsidies and tariffs, it offers a solution for grid stability, and prices are expected to fall precipitously from here.

Green methanol, or methanol from waste also received large financial commitments from big capital in 2022, particularly as a fuel of choice in shipping, and the world’s first green-hydrogen steel has been delivered.

Nuclear energy was included in Europe’s taxonomy under certain conditions.

Combined, these factors have brought the blueprint for the transition into focus.

This is for a world fired by renewable energy, with green hydrogen the preferred fuel for grid stability and any application requiring a more explosive fuel (such as aviation, heavy industry such as steel, and long, heavy haulage and shipping).

This is followed by more easily retrofittable green methanol, and biomethanol, and ethanol energy, and “acceptable” nuclear energy (yet to be fully defined for grid stabilisation) as the transition fuels of choice as gas is slowly phased out (most likely from 2030).

Carbon capture remains the dark horse, many doubting its credentials. 

Some analysts continue to insist there is a place for the technology despite its failure to prove economic, claiming investment is estimated in the trillions over the decade. 

In the US, for example, which has a plethora of old shale gas wells, the storage process is simple enough, but even there, transporting the gas to the wells is costly and the economics are never likely to stack up against renewables, according to most experts.

So this columnist still views carbon capture storage as a lobbying game for government dollars and a potential green-washing tool rather than a genuine solution. Although if climate change were to prove a genuinely imminent threat, it could be used as a desperate measure – particularly for extracting carbon from the air.

Even then, there are far more simple technologies in the making. For example, several companies are examining algae-based solutions, which pump seawater to algae-growing facilities where the algae are extracted and dried (releasing water back into the air) before being buried as land mass, or possibly used as fertiliser. 

These technologies are already successful in the lab and, at face value, appear cheap and simple to replicate at scale.

From Here On It’s A Race

The International Energy Agency estimates annual renewable energy investment will need to double from its current US$1.4trn a year out to 2030, taking total annual renewable energy investment to US$3.8trn. This compares with COP27’s latest target of US$4trn a year (US$6trn at the upper limit).

Scaling green hydrogen is the main game going forward.

This will require government regulation to compete with fossil fuels (in both subsidies, and carbon taxes and tariffs), similar to renewables in the early days, and this is likely to be forthcoming within the next two years. 

It will also require the development of off-take markets, much of which is already under way.

Memorandums of Agreements are being signed globally for the delivery of green materials and products. For example, in Australia alone, SSAB has signed deals with mining service provider Schlam and for the use of green steel in its dump trucks, and this is just one of a plethora SSAB has signed around the world.

Conversations around business tables these days are pivoting to the securing of green inputs as major companies seek to protect themselves from a flight of capital. The conversations are going something like “well if you can’t deliver green, I will find someone that can, even if I have to pay more”. 

Many of the memorandums are filled with provisos centred primarily around affordability, but their proliferation provides a strong insight into the mood and focus of corporations as big capital turns its focus to decarbonising downstream markets.

Construction, materials and industrial markets are particularly vulnerable over the next few years and are marked as next off the rank for decarbonising.

As green hydrogen technology evolves, prices are expected to fall -75% by 2030 according to Renew Economy, and reach full price-parity as early as 2025, according to NEL, the world’s largest manufacturer of electrolysers.

Goldman Sachs (one of the few to predict the rise of the oil price to above US$100/b from its covid-induced lows) says affordability, government policy and scalability seem to be converging to create “unprecedented momentum” for the clean hydrogen economy.

The analyst estimates green hydrogen’s total addressable market could double to US$250bn by 2030 and become a US$1trn a year market by 2050.

It is now likely the world will approach another tipping point between 2030 and 2035 when global decarbonisation in downstream markets gathers pace and the green transition snowballs.

The economics of fossil fuels will fall sharply to a potentially precipitous point without intervention.

Big money attracts big pockets and financial heavyweights are jockeying for position as the new energy barons of the world, some publicly, some stealthily. 

In Australia, Fortescue Metals Group ((FMG)) chairman Andrew Forrest has been open about his ambitions to support green hydrogen in a bid to attract the backing of big capital. Michael Cannon-Brookes has been active in the utilities market.

In a move that sent a shudder down the spines of Australia’s cosy board corporate board community and their sometimes convenient skills matrices, AGL Energy ((AGL)) shareholders overruled the board to elect directors nominated by Cannon-Brookes.

Meanwhile, as renewables markets matured, markets witnessed a wave of mergers and acquisitions in 2022, which are only expected to accelerate over the decade as the world’s would-be barons consolidate their positions and some of the more stealthy players start to emerge.

Demand For Green Energy Steps Up But Ukraine Proves A Brake

The Ukraine conflict turbo-charged the shift to renewables during 2022, as fossil fuel prices soared and the ASX300 sought avenues to cut energy costs and seek energy-price stability, raising demand for green energy. 

Efforts in this respect were constrained somewhat by a slowing in growth in green finance markets but this is expected to recover when the Ukraine conflict abates.

While the date is anyone’s guess, many are expecting an easing in Ukraine tensions by the European spring. 

The Economist surmises that Russian President Vladmir Putin is hoping that a freezing winter may encourage the West to reconsider support, improving withdrawal terms. 

The G7’s demand for total Russian surrender ain’t gunna happen in my view, and is simply jawboning.

Similarly, Ukraine is posturing, saying it will fight to the bitter end to regain its lands, even in the event of a nuclear strike, but already the West is urging the nation to consider future peace terms. 

While the conflict also increased the world’s appetite for fossil-fuels, IEEFA describes the recent increase in thermal power prices as a “short-term hiccup”.

Global Commitments Accelerate

Meanwhile, the world’s major nations and trading blocs upped the renewables ante in 2022.

In the US, the Biden Administration launched the Inflation Reduction Act.

In Europe, the push to reduce reliance on fossil fuels became even more pronounced after the Ukraine conflict threw into sharp relief the bloc’s vulnerability to Russian gas supply.

In China, the nation’s 14th five-year plan for Renewable Energy suggests China’s energy generation from wind and solar will need to rise by 150Tw/h a year over 2021 to 2025, compared with 100Tw/h in the previous plan.

Under the plan, about 25% of China’s energy will come from non-fossil fuel sources by 2030.  At least half of increased electricity demand will be covered by renewables. The nation is also about to embark on an ambitious domestic electric vehicle rollout.

China has a track record for over-performing on renewables targets (in fact for over-performing on most measures), so the risk is to the upside.

The nation’s Ministry of Finance also published fiscal and taxation policies this year to support the shift towards carbon neutrality.

To get a feel for the scale of China’s investment: in 2021 the country’s investment in clean energy constituted more than 30% of total global investment according to the International Energy Agency. The agency expects this trend will continue.

India is also investing heavily in renewables, and International Energy Agency describes the nation’s scale of transformation as “stunning”.

The IEA reports renewable electricity is growing at a faster rate in India than any other major economy with new capacity additions on track to double by 2025. 

“India’s sheer size and its huge scope for growth means that its energy demand is set to grow by more than that of any other country in the coming decades, which will support other lower-carbon energy sources and will ensure fossil fuels remain in the mix for some time,” says the agency. 

“Owing to technological developments, steady policy support and a vibrant private sector, solar power plants are cheaper to build than coal ones.”

The IEA expects India to overtake Canada and China in the next few years to become the third largest ethanol market worldwide after the US and Brazil.

According to PV Magazine, India has already surpassed its target of achieving 50% of its energy from non-fossil fuel sources by 2030.

On the demand side, green hydrogen is a major force that promises to massively drive India’s clean energy ambitions, says IEEFA. 

“Companies such as the Adani group and Reliance Industries have wholeheartedly supported the country’s green hydrogen policy, announced in June 2022, and its 5m tonnes p.a. target, with several major commitments,” says IEEFA.

On top of transitioning to renewable energy, India is also one of the world’s largest producers of modern bioenergy and is likely to lean heavily on green methanol to reduce coal imports, say observers.

Many governments are turning their sights to green hydrogen, including Britain, which is also upping its nuclear-energy capability.

Global Picture Bodes Well For Metals Markets

Rising global investment in renewables and green hydrogen infrastructure will be welcome for iron-ore and copper producers at a time when the Chinese construction market is slowing and the world is forecast to tip into recession. 

A recession will conveniently take the pressure off raw materials prices just as demand from the clean energy sector steps up.

Renewables are likely to pick up the slack (assuming a soft landing) as new plants, electrolysers, green hydrogen infrastructure, green steel and electric vehicles start to flow.

The acceleration to renewables should also continue to support battery metals demand until new supply comes on board, or alternative technologies scale up. 

China is about to ramp up its domestic electric-vehicle production, which should support battery critical minerals prices over the near term, such as nickel, cobalt, lithium, rare earths, copper and platinum. 

Developments In Other Green Energies Downunder

Fortescue Metals' (and others') green hydrogen ambitions and the green commodities boom have overshadowed developments in other green energy markets in Australia.

Several Australian companies have been pivoting towards geothermal and green methanol markets and are worth a mention.

Oil and gas explorer Strike Energy ((STX)) has clean energy ambitions, operating geothermal plants on top of low-carbon urea (fertiliser) manufacturing ambitions, planning to be a net-zero manufacturer by 2030.

The company also announced in May its mid-west Geothermal Power Project in Western Australia’s Perth Basin had been independently assessed. 

The company is evaluating targets for a pilot program and it received a $2m grant from the Federal Government’s Clean Energy Future Initiative. 

On the green methanol front, Cleanaway Waste Management ((CWY)) was the major mover in 2022.

In June, Cleanaway announced it would pursue a $2bn waste-to-energy investment (analysts expect cost will blow out further as the project progresses), planning a permanent $15m increase to annual spending (up 60%).

Cleanaway continued to secure sites for energy-from-waste development projects in Victoria and Qld.

Like clean hydrogen, green methanol (derived from hard-to-recycle waste) infrastructure requires investment but it is considered a good option in many applications in the near term given, despite still releasing carbon emissions into the air. 

Shipping giant Maersk established a Danish facility to produce e-methanol late last year, and this year ordered 19 green methanol vessels with dual-fuel engines that can operate on green methanol. 

The shipping industry generally is leaning towards green methanol but it is far from a done deal, with ammonia a strong contender pending storage and fuel-cell technology. The main stumbling block is a lack of green methanol.

Meanwhile, a Bill Gates-led fund is also investing in technology that extracts hydrogen molecules from methanol to be used in a fuel cell, one of many innovations in the area.

Outside of shipping and waste-to-electricity, green methanol’s markets appear dubious, but it is both a climate and circularity play containing high-quality carbon credits and projects should receive the support of big capital in the medium term.

Uranium is also likely to gain support for now, along with gas, but it could be a rocky road as big interests battle out the specs.

Britain, for example, is backing nuclear energy, but Germany as a major global manufacturer proceeded to close half its nuclear power stations even after the Ukraine conflict, and will be lobbying hard for taxonomy terms that favour its ex-nuclear status.

Observers expect the country may well yet litigate against the European Union’s inclusion of nuclear in its green taxonomy, or at least demand more stringent rules on the type of nuclear energy provided, which could prove problematic for the uranium market going forward, if not nuclear energy per se, which is expected to continue providing energy to global grids for some time.

Batteries And Green Hydrogen Fuel Cells – The Final Battle.

All this takes us to the next phase of the green transition – the battle for market share between green hydrogen and battery technology.

At the moment, batteries have a big lead on green hydrogen fuel cells, but now the latter is ready to scale, the pair will be punching it out for market share some time in the 2030s.

Most analysts expect batteries will maintain dominance in land-based sectors such as electric vehicles, and that hydrogen will be used in any segment that requires high bursts of combustive energy, such as aviation and heavy industry.

Expensive battery costs could prove a weakness as hydrogen scales up. Batteries will have to become either more efficient, or use alternative materials, and there are plenty of innovations on the horizon. 

All of this will have implications for the critical minerals markets in the second half of the decade and beyond.

Climate Energy Finance director Tim Buckley doubts green hydrogen fuel cells will gain the jump or prove a contender for at least the next decade.

In the long-term, green hydrogen is interesting. It requires expensive, dangerous technology to operate. 

One would assume this favours more benign, readily available batteries; but it does increase the barriers to entry and is likely to be attractive to some energy barons from this perspective, in a similar way to existing fossil-fuel infrastructure. 

Technological advancements in downstream industries would be the main swing-factor.

Flying cars, for example, are a reality and it is only a matter of time until they become a genuine alternative to wheel-based transport (it would rid the world of one of its greatest sources of plastic pollution).

But electricity doesn’t begin to compete with combustible energy as a fuel source in the air. Developments in green hydrogen fuel cells could prove a game changer in this respect if battery costs fail to fall and renewable energy innovation (i.e. efficiency of solar cells and use in dyes for downstream purpose) stalls.

But all of this is mere speculative hot air, so distant is its horizon.

Our next articles take a deeper dive into individual clean energy markets over the next decade.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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AGL CWY FMG STX

For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED

For more info SHARE ANALYSIS: CWY - CLEANAWAY WASTE MANAGEMENT LIMITED

For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED

For more info SHARE ANALYSIS: STX - STRIKE ENERGY LIMITED