Sustainability Trends: de-bottlenecking energy supply and upstream investment to accelerate energy transition
The consequences of low ‘upstream’ investment in energy supply chains, and therefore under-supply of critical materials – all exacerbated rather than caused by the Russia-Ukraine conflict – are abundantly clear today. Sustainable investing therefore has an important role to play in alleviating shortages and accelerating energy transition, not by pulling capital out of energy and materials sectors (is this ‘socially responsible’?) but by responsibly supporting capital investment to de-bottleneck current bottlenecks in the chain.
According to consultancy Thunder Said Energy, renewables are set to grow 5x over the next decade and will account for ~20% of global energy by 2050 (40% of global electricity). This may seem conservative, but a more widespread deployment of renewables is hindered by the time taken to build out renewables, bottlenecks in the value chain, incremental cost as we deploy more capacity and a lack of a compelling solution for intermittency issues. A tightening of 10-20% in nearly all supply chains for renewables, including steel, copper, fibreglass, carbon fibre, polysilicon and blade moulds and integration means de-bottlenecking is required just to hit the 20% figure.
Based on current trends, a concerning reality is that the world will be under-supplied relative to energy demands up to 2030. In a world with high energy prices, technologies that can save energy help both with alleviating energy shortages and decarbonisation will be highly prized, and therefore valuable investments. Energy efficient technologies that are already available include: EVs (70-80% thermal efficiency compared to 15-20% for a normal combustion engine), sustainable timber in construction (steel and cement account for ~10% of world’s CO2 emissions – we touched on some of the opportunities to de-carbonise the steel industry last quarter), insulation upgrades (~70% of houses in the West are under insulated), variable frequency drives (VFDs), light weighting, heat pumps, additive manufacturing and virtualisation.
Prioritising high energy return on energy invested (EROEI) is the fastest way to resolve energy shortages (higher = better)
Source: Thunder Said Energy
“Sustainable investing therefore has an important role to play in alleviating shortages and accelerating energy transition, not by pulling capital out of energy and materials sectors (is this ‘socially responsible’?) but by responsibly supporting capital investment to de-bottleneck current bottlenecks in the chain.”
Pragmatism, particularly regarding nuclear power or transition fuels such as natural gas, will be key. The debate around nuclear has moved fast in places like Japan and Europe. Policymakers have also begun to alter their view on gas, and the current debate will shift from one of “renewables versus gas” to “renewables and gas”. The EU has added gas to its green taxonomy, but only if CO2 is sub-270g/kWh, which is a stringent hurdle. The alternative is coal, which is 2-3x more CO2 intensive while even the methane emissions from coal production are higher than methane leaks from gas production. Expediting FIDs on large gas projects is the best prospect for curing energy shortages which could otherwise persist into the 2030s. For US LNG (liquified natural gas), in particular, there is a strong pipeline. US LNG was 70Mtpa (million tonnes per annum) in 2021. Thunder Said’s base case is 170MTpa in 2030 (more than replacing Russian gas), while a more aggressive case could see 370MTpa. Each MTpa of US LNG avoids 5MTpa of CO2 from continued use of coal. This presents a major opportunity within the portfolio for Baker Hughes.
Beyond this, the longer-term solution is of course to expand renewables and alongside this securing energy supplies has been placed higher up the list on matters of national security. There will be a major infrastructure boom to support the build-out and re-shoring of industries linked to energy transition – currently China produces 50% of the metals required, 60% of wind, 70% of solar and 80% of battery inputs respectively. The transition will require integrating renewables over long distances to reach growing demand centres, i.e., a huge build out of power transmission. High-voltage (HVDC) cables, in which portfolio holding NKT is a market leader for offshore, show incredible technical capabilities at scale – low cost at 2-3c/kWh and with power losses of just 2-3% per 1,000km, which is far superior to battery and hydrogen economics. Under a €1bn contract, NKT is currently producing the world's longest underground HVDC, to carry 2GW of wind power at 525kV over 750km, from North to South Germany.
The costs of connecting a utility scale wind or solar project into the power grid can range from 10-100% of the project itself – so finding lower cost solutions with low power loss, like HVDC cables, is critical
 Final investment decisions
 The global HVDC market is around $10bn per annum in 2021, growing at 7-11% per annum, with the goal of inter-connecting large renewables projects and stabilizing larger grids for the energy transition.
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R&M Global Sustainable Opportunities Fund
A global equity fund which combines valuation discipline and contrarian thinking with sustainability integration (SFDR Article 8).