ESG Focus | May 18 2023
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:
ESG Focus: Fusion Or Fiction
Fusion is the holy grail of governments globally, attracting hundreds of billions in funding and, more recently, the private sector has entered the fray, no doubt expecting a return on its investment sooner rather than later.
-The trillion-dollar fusion prospect
-Private investment on the rise
-Downstream and upstream markets and applications
-Spin-offs represent a potential treasure trove for investors
-Big guns and big projects
-Decarbonisation could spur investment
-Financial innovation to support fusion
By Sarah Mills
Fusion has long been the holy grail of governments worldwide and now the private sector has entered the fray.
Lured by the prospect of decarbonisation, which has opened the field for a new generation of energy moguls, not to mention generous subsidies, investors such as Bill Gates, Jeff Bezos, Peter Thiel, and several major corporations have taken up the fusion gauntlet.
Nuclear-based fusion technology promises clean, “limitless” energy requiring expensive capital infrastructure, which represent strong barriers to entry – just the kind of prospect investors love.
The world’s ESG fraternity would also welcome the carbon-free energy source.
There is an old joke that fusion (a net positive energy outcome from the fusion process) is only a decade away and always will be.
The industry, like its fission cousin, is regularly beset by project delays and blowouts, and sceptics doubt this will change any time soon.
But recent developments in fusion technology, including the establishment of both government and private sector pilot projects, have had the world abuzz, so FNArena thought it would take the time out to revisit the prospect.
Pundits from the fusion and finance industries say this time the industry could experience a breakthrough as early as 2025.
We are told fusion reactors will be better than they were before – better, smaller, cheaper.
If so, this could have serious ramifications for the future of green hydrogen this and next decade, and for renewables industries in the longer term (fusion has a lower total carbon footprint than renewables).
This article examines the fusion market, including demand for auxiliary applications and spin-off technologies, and examines the argument as to why things might be different this time.
It will be followed by a second article explaining the nuts and bolts of fusion technology, which also checks out the latest innovations.
The Trillion-Dollar Fusion Prospect
The fusion prospect is large, comprising more than just the energy market.
Fusion’s ecosystem and potential technology spin-offs represent a trove of investment opportunities.
According to the International Energy Agency, the industry is hoping to extract US$1trn from the US$9.2trn annual funding that is estimated to be necessary to decarbonise the global economy.
At the current rate of progress, Allied Market Research estimates that between 2030 and 2040, the global fusion energy market will post a compound annual growth rate of 6.9%.
The researchers estimate the industry will be valued at US$429.6bn in 2030 before reaching $840.3bn by 2040
This is just one of many estimates doing the market rounds, which vary widely.
Bloomberg, for example, predicts the industry could reach a US$40trn valuation by mid-century.
The industry is already attracting some significant funding from governments, much to the chagrin of the already functional renewables industry.
The US government spends roughly US$700m on research a year, and this would be easily matched by other governments such as China and France.
France and China are jointly leading the recently constructed US$67bn International Thermonuclear Experimental Reactor (ITER) located in France, a collaboration between 35 nations.
ITER, a magnetic confinement project, is expected to start burning plasma in 2025 – using a magnetic field 280,000 times stronger than the earth’s
Fusion also managed to gain a mention in the US Inflation Reduction Act, garnering US$280m from the Department of Energy’s Office of Science; and loans from the Department of Energy loan program, a sign fusion is accepted as a decarbonising technology for funding purposes.
Private Investment Is Also On The Rise
One thing that has changed dramatically in the past decade is the rise in private funding for fusion.
Previously the domain of government, the US in particular, has been scaling back funding and expecting the private sector to lean in.
This could be an indication the technology truly is close to succeeding.
According to a Fusion Industry Association report, US$2.83bn of investment was publicly declared by private nuclear fusion companies over FY22. This compares with total private capital invested of only US$4.7bn.
But a quick tally of the dollar numbers of Bloomberg’s and The Economist’s fusion start-ups lists, suggests a figure closer to US$10bn.
The timing of the 2022 capital raises was fortuitous given rising interest rates choked start-up funding in 2023. Observers believe the 2022 funding rounds will carry the industry through the next few years.
The problem for your average punter at this stage, is that very few fusion companies are listed, although some exposure can be gained via parent companies such as Chevron or Alphabet (Google).
Types Of Fusion
Another thing that has changed is advancements in technology supporting the process.
There are two main fusion technologies in play: inertial confinement (using lasers) and magnetic confinement (you guessed it, using lasers), with magnetic confinement generally garnering the most industry support.
The private sector has also been dusting off old technology from the 1950s – stellerators and pinching – but these constitute just a handful of projects.
If the above technologies mean nothing to you, stay tuned for the next exciting instalment in this series, which examines the nuts and bolts of fusion.
How Much Energy Are We Talking About
The International Energy Agency says fusion is capable of generating 4m times the energy generated from coal, oil and gas.
To put this in perspective, a gallon of seawater could produce as much energy as 300 gallons of gasoline; or a kilo of fission fuel equals 5 million pounds of coal.
Markets Estimates Suggest Healthy CAGR
Bloomberg expects magnetic confinement will be the largest revenue-generating segment and that revenue will increase rapidly through 2030 to 2040, rising from an estimated market value of US$344.24bn to US$623.07bn – representing a compound annual growth rate of 6.1%.
The energy market is fusion’s first obvious prospect, although the price of fusion energy will need to plummet to be competitive.
The International Energy Agency expects energy demand will rise 50% by 2050, further accelerated by the energy demands of decarbonisation.
As countries such as India, Africa and emerging economies start to industrialise; and as the world’s populations grows an estimated 33% to as many as 10bn people by 2050, demand is expected to rocket.
To put this in perspective, it is estimated that only about 1bn people have access to fully functioning grids and transmission infrastructure today. At the other end of the spectrum, about 11% have zero access to reliable electricity.
Initially, fusion energy is likely to be promoted as a grid stabiliser, and for any applications that require intense heat such as industrial and chemical processes.
Lazard estimates of the energy market’s Implied Enterprise value multiples to gigawatt usage over 20 years, suggest single-digit multiples for oil gas and coal, and 17x for renewables. This analyst suspects cheaper fusion could exceed these multiples and, possibly beating Tesla’s stellar performance.
The Fusion Ecosystem
But wait, there’s more!
Investors are also eyeing the investment opportunity presented by the fusion ecosystem – its downstream and upstream markets, auxiliary markets and potential spin-offs of fusion technology into other industries.
Fusion’s upstream markets
At the moment the main fusion inputs include:
-flashlamp-pumped, neodymium-doped phosphate lasers, which use crystals comprising yttrium, aluminium and garnet doped with neodymium ions (advances are also being made with krypton fluoride gas lasers and diode pumped solid state lasers);
-toroidal superconducting magnets, or field coils, made of bronze and copper;
-tungsten (for the walls of the fuel capsules given it is the most heat resistant material available);
-deuterium (a heavy form of hydrogen extractable from heavy water or sea water);
-tritium (a rare, heavy form of hydrogen extractable from heavy water);
-lithium, beryllium, copper and stainless steel (for the fusion blanket);
-potentially boron (as an alternative to tritium),
-super computers and general digital control systems;
-3D printing – for tritium-breeding lithium blankets and capsules;
-thermal resistant materials;
-general materials science (barium copper oxide, which is being used in newer technology is one example);
-rapid automated material testing;
-plasma physics; and
-the usual standard commodities for the construction of plants.
Analysts expect demand for deuterium/tritium will generate the most income in the near term and expand at the fastest rate, estimated at US$350.62bn in 2030 and US$647.35bn by 2040, posting a compound annual growth rate of 6.3%.
Such is the urgency of the tritium scarcity problem, that the 3D tritium breeding-blanket market is expected to more than double by 2024.
Downstream and auxiliary fusion applications
Then there are the downstream and auxiliary fusion applications, not to mention opportunities to spin-off the technology into separate industries and licensing.
When assessing downstream and auxiliary applications, analysts suggest investors consider end uses that profit from a constant supply of power and heat, in addition to electricity production.
-Industrial energy – particularly for industries needing high heats such steel and chemicals
-Grid connection technology
-Direct air carbon capture;
-Creation of chemicals; and
-Electro fuels, among many others.
Spin-Offs From Fusion Start-Ups
Many of fusion’s potential spin-off industries could well see the light of day before fusion itself.
Fusion start-up TAE Technologies, for example, is already using its nuclear technology commercially in life sciences for cancer treatment.
Its boron neutron capture therapy, which involves injecting boron into a tumor then hitting it with a neutron beam, was recently spun off into a separate company for US$70m.
Industries receptive to fusion spin-offs are numerous and many may yet to be invented but include:
-fusion energy rocket engines;
-medical technology (think nuclear magnetic resonance imaging (MRIs));
-pharmaceuticals (think cancer);
-electrical delivery of medication;
-general robotics and superconductors developments;
-superconductor energy storage;
-magnetohydroynamic generations (think fluids such as plasma, liquid metals, salt water and electrolytes);
-material separation in mining;
-wind turbine generators;
-high temperature superconducting magnets
-defense (think electromagnetic aircraft launch systems)
-thermal measurement for metals, glass and other heat reliant materials; and
-robotics for maintenance in harsh environments.
Practical Applications Are Way Off
When the media talks of a fusion breakthrough, they are not talking about fusion’s commercial availability – they are talking about the science and the point at which the technology can reach energy breakeven.
Fusion’s path to commercialisation is a long one, extending way beyond initial breakeven.
At the moment, fusion remains unproven and is expected to remain so for next eight to ten years.
While markets on average conjecture a breakthrough in technology could be forthcoming in the early 2030s, fusion energy is not expected to be commercially available until at least the 2040s.
At least a decade of ecosystem development will be needed to bring it to market, and even then it will be a trickle before it becomes a flood.
Some analysts estimate a pilot plant could be established in the US by the early 2040s.
The more optimistic National Academies of Sciences is calling for a workable design by 2028 and a pilot plant operation between 2035 and 2040.
One start-up, Commonwealth Fusion Systems, expects it will have a working pilot ready to go by 2025.
Others doubt the industry will be ready to roll before 2050.
The Technology Path
In terms of its lifecycle, fusion is still in the incubator – or experimental phase.
Once proven, it will progress to the demonstration of fundamental technology phase, which will take years again.
The next stage is that of engineering (or pilot phase), which must prove the reactors can sustainably produce electricity – add several years again.
Then the technology moves to commercialisation, and the first plants are unlikely to be profitable because they will require a one-off design – add several years again.
Then it moves to scaling, which is the point at which viable power plants can be deployed en-masse.
At best, assuming CFS does reach its 2025 goal, it is estimated the engineering phase could start in the early 30s and be completed in 2040.
This is all assuming the technology can overcome the myriad of challenges facing it, not the least of which is cost.
By the time fusion is ready to go, renewable energy will be cheaper than it already is, and green hydrogen should have already scaled.
The three things that are likely to support its adoption in the face of such fierce competition is diversification; support for the technology; and a doubling down on the climate imprimatur (it is less carbon intensive than renewables).
Major Fusion Challenges
Fusions challenges are multitude and include:
-Technology/physics: the secret to sustaining a fusion reaction has not yet been discovered.
-Plasma stability: plasma is volatile and difficult to control.
-Hardware strength (fusion operates at high temperatures and volatile plasma can damage equipment).
-Costs – a fusion reactor currently costs roughly 10 times (some estimate 30 times) that of a fission nuclear reactor, which is already many times more expensive than renewables.
-Availability of tritium, a critical, rare input is a major problem that we discuss in the nuts and bolts article. So rare is it, than many conjecture the world could run out in the experimental phase, before the industry needs it to kickstart its first functional reactor;
-Low rate of investment: Lazard considers the industry to be woefully underfunded with cumulative capital raised for ITER only about 4% of its budget compared to the progress of research;
-Regulatory frameworks and statutes;
-The development of supporting ecosystems.
Governments are the largest investors in the sector.
By geography, the three major players are the United States, Europe and China.
The UK is also putting its best foot forward, investing in technologies such as its STEP project (Spherical Tokamak for Electricity Production), which aims to connect fusion energy to the national energy grid by the 2040s, as well as directly into fusion generation.
When it comes to tritium supply (and deuterium), Canada is the world’s largest source of tritium.
The nation boasts the world’s largest deuterium extracting plant, supplied with heavy water from its CANDU (Canadian Deuterium Uranium) fission nuclear reactors.
Europe and others are understood to be eyeing the tritium market, especially as Canada is set to retire about half its ageing reactor fleet. Tritium could well provide a respectable income stream for the nuclear fission industry over the next decade, prior to the development of tritium breeders.
Private Sector Investors
When it comes to the private market, two thirds of players are located in North America.
Major corporate investors include Chevron, ENI, Alphabet, Microsoft, Breakthrough Energy Ventures, George Soros, Sumitomo, Peter Thiel, Marc Benioff’s Time Ventures, Sam Altman, Softbank, the Oil Fund of Norway, Sequoia Capital, Energy Venture Capital and Jeff Bezos.
Not-for-profit Stellar Energy Foundation, led by Jesse Treu, has also been involved.
The Fusion Industry Association is the fusion industry body.
Major Projects And Breakthroughs
There are about 37 major fusion projects worldwide, several that claim they are close to achieving energy breakeven.
Once breakeven is achieved further evaluation and capitalisation of fusion companies will balloon and innovation should accelerate, bringing better, cheaper reactors to market.
The rapid acceleration of the mobile phone market from chunky brick phones to relatively svelte i-phones is just one examples of what can be achieved in a decade.
The biggest fusion projects are run by government, starting with the ITER, which is the world’s largest and best-funded fusion project.
China and the US also boast large national installations.
The US’s National Ignition Facility, for example, recently claimed to have created energy breakeven but the calculations did not include the energy to power the lasers used in the process (just the energy being fired in vs the energy fired out).
China, on the other hand, has been producing some impressive results, which we discuss in the next article on the subject.
The major private sector project is that of CFS (Commonwealth Fusion Systems) SPARC reactor, a magnetic confinement system, which has received at least US$1.8bn in funding.
As discussed above, CFS believes it will reach the engineering demonstration phase by 2025 and be ready for commercialisation by the early 2030s.
CFS claims this is possible because it is using new high-temperature superconductor magnets using barium copper oxide that were not invented at the time of ITER’s design.
The project is backed by Italian multination energy company ENI and tied to the Massachusetts Institute of Technology (MIT).
If successful, ENI asserts that the cost of an ARC fusion reaction will be a fraction of the total investment in renewables, and will kickstart a developmental avalanche of smaller, faster and cheaper reactors.
Mini-reactors are a key goal for private companies, with some planning container-sized tomakaks and mobile reactors.
Major Private Sector Projects
Some of the major private sector projects include:
-First Light Fusion
-HB11 (an unlisted Australian company)
-Agni Fusion Energy.
We discuss these technologies in the following article on the nuts and bolts of fusion.
The Energy Market And Decarbonisation Prospect
Fusion supporters propose that fusion, which boasts extremely low climate emissions, could provide stability to a renewables grid in the first instance, making its initial competitors hydrogen and battery storage.
Providing the technology evolves and costs fall swiftly enough, some are even promoting fusion as a substitute for renewable energy given the technology’s overall carbon footprint is reported to be lower.
Fusion is not renewable but proponents hope to make it become sustainable by using a combination of fusion and breeder reactors (which we discuss in the nuts and bolts section in a separate article).
Above and beyond these reasons, the appeal of fusion generators lies in their ability to be inserted into existing power plants and connected to the grid using existing transmission infrastructure.
Analysts say renewables cannot solve the fall in productivity (real GDP growth has been slowing since the 1970s when the oil and gas became less productive). This problem has been exacerbated by the recent hike in oil and gas prices.
They say fusion could produce the lowest quantities of carbon dioxide equivalent per unit of energy produced in terms of total life-cycle emissions.
While the current expenditure on fusion is substantial, it pales in comparison to spending on other decarbonisation efforts.
The US’s Inflation Reduction Act alone totaled US$500bn in subsidies, not to mention global government expenditure. Europe’s subsidies and China’s investments in decarbonisation are also mammoth, and the rest of the world is doing its bit.
Funding And Financing
Given the low rate of funding for fusion projects relative to its progress, financiers are devising vehicles that help overcome financial barriers to investment.
Fusion companies typically demand much higher upfront investment than typical start-ups.
Fusions cost are high and lumpy, and the long-term pay-off horizon and risk profile of fusion projects are major hurdles to investment, particularly in the current climate.
As a result, fusion is being positioned as s long-term hedged investment for investors long on oil, large venture capitalist and private equity, observes Massachusetts Institute of Technology.
MIT is proposing a megafund structure for fusion projects, which securitises a large number of projects into a single holding company funded by debt and equity tranches with first-loss capital guarantees from governments and philanthropists.
The institute’s proposed megafund was designed specifically for large sovereign wealth funds which can place a long-term macro-bet on the fusion industry as a hedge against oil depletion or carbon regulation. The world’s largest funds are long oil and gas.
MIT says the proposal represents the first application of the megafund concept outside of biotech, for which the human genome project is the most notable example.
The institute observes the human genome project has since generated nearly US$800bn of additional economic activity in the US, making it one of the government’s most profitable investments in US history.
Finland employs the co-operative Mankala model in which investments in nuclear plants are pooled among a group of companies and through which shareholders gain the right to buy electricity from the plant, proportional to their holding, which can be used or sold.
France has a similar model – a consortium called Exceltium.
Britain introduced contracts for difference in 2014, in which a third-party agrees to bear responsibility for the difference between the cost of the plant and a pre-determined profit margin, and the market price for electricity, gains and losses being determined by movements in the electricity price.
Another barrier to funding among venture capitalists is simply a lack of knowledge about the technical specifics of fusion (we examine the technical aspects of fusion in our next story).
IP concerns also play a role, as does uncertainty around spin-off rights and regulation.
When it comes to valuing fusion companies, MIT says it used the Black-Schole/Merton real options model to value Commonealth Fusion Systems’ ARC tokamak, with preliminary results in the range of US$120bn (well above its initial US$1.8bn raising).
That ends FNArena’s evaluation of the fusion prospect. Next up, we check out the most prospective technologies.
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