One of the themes that we have focused on in our ESG and Climate work is the lack of realism in the Biden climate plan as it relates to power generation and the same with the plan in California. The more limited reliability factor in renewable power (because of its dependence on cooperation from the weather), means that you have to build a lot more new power capacity than you are replacing and you need to build a storage system for the power – batteries, hydrogen or hydraulic. This gets very expensive and will be more so if the push drives inflation in raw materials – which is already a factor YTD in 2021. Natural gas turbines are a cleaner and reliable source of power and cleaner still if combined with CCS. Politicians in the US are taking a considerable risk by promoting plans that could leave the power grid more vulnerable to some of the issues that we have already seen over the last 12 months (California and Texas). Of course, as the plans call for natural gas phase-outs in 10-12 years, none of those making the decisions today will be in the office to face the consequences!
The ESG investment shakeup could be one of the major events of this year, and as many of the headlines in our daily report suggest, there is a lot of work to be done, whether it is agreeing on a common set of measurement metrics – note the US and European differences discussed in one story – or the introduction of more empirical methods to judge whether what is labeled as an ESG investment fund is labeled correctly. There is also the issue of comparable disclosures, especially for companies in complex industries. It is interesting to note that in many analyses we see around carbon footprint or greenhouse gas emissions, and the potential routes to and cost of abatement, the chemical industry is omitted, except for ethanol and hydrogen. This is despite the industry accounting for 15% of the non-power emissions in the US industrial sector (similar in size to refineries). We believe that this is because the complexity of the industry makes it hard to model, and analysts choose to exclude it because they are not sure what they are doing.
There is an unusual number of interesting topics in today's report, versus the normal mix of small pet projects or broad and unsubstantiated announcements. The EU 2030 targets are worth highlighting and they are in part connected to the central theme of the ESG and climate report that we will publish tomorrow. The European targets are not coordinated with what is happening in the rest of the World and while we admire the ambition, we suspect that the goal is not achievable, simply because the challenges of replacing the power and fossil fuel associated with the emissions to be avoided are too great, given the timeline. The level of additional renewable power generation, EV adoption, and hydrogen production needed to offset so much CO2 are extremely high, and it will be hard to get substantially more CCS offset than already announced because of land rights issues in Europe and logistics. To get the power, EV, and hydrogen, the EU will be competing with other regions that have their own targets and we see scare resources bidding up the price of power, impacting all of the elements, power itself, the cost of running EVs (see the chart below – the EV story does not work of you are using coal as a marginal source of power), and the cost of hydrogen.
Senator Cramer’s proposed Bill to increase the value of the 45Q carbon credits for sequestration and use as well as remove the annual cap could be a game-changer in many ways. The threshold removal is necessary regardless of the credit value. In our view, the cap creates a potential competitive disadvantage for smaller companies competing with larger ones, especially in the chemical space. Should the Bill increase the tax credit enough to drive real investment in abatement but not remove the threshold we would expect to see litigation from smaller disadvantaged companies. The chart below shows the current expectations for 45Q. To date, the only real investment activity we are seeing is around sequestering CO2 from ethanol production in the US. This is because the CO2 stream is easy to separate in a fermentation process and because some of the ethanol can benefit from the much higher LCFS credit if the fuel is sold into California.
There are several headlines today that speak to one of the most pressing issues that we have with the pace of energy transition – the competition for renewable power and the likely inability of the industry to keep up with the competing needs, let alone do so without significant power cost inflation.
In our ESG and Climate report published today we focus on hydrogen and what we believe are some unrealistic cost/timing estimates for green hydrogen. One of our concerns is that the hope of cheap green hydrogen, and absent any other strong incentives, will put the brakes on other carbon abatement initiatives and if the cost of hydrogen does not fall we could reach 2030 having made little progress on any front.
We will cover the very comprehensive DoE hydrogen work in more detail in the ESG report next week, but a couple of the charts from that work are worth mentioning today. The first picture below accurately depicts all of the potential uses of hydrogen and shows that over time it could solve a lot of “hard to solve” CO2 emission problems, especially where electricity cannot do the job efficiently. The reason why so many countries and companies are so interested in hydrogen is because of its potential versatility and because of its minimal carbon footprint (there is some carbon leakage in the full lifecycle of the production coming from construction around the plants themselves and infrastructure to use the hydrogen).
We discussed the IEA report yesterday at some length, but in such a comprehensive report we missed a couple of things that are probably worth noting today. See more in our ESG Report today.
There are too many important topics to choose from today and we will cover many of these in our ESG and Climate report tomorrow. Here we focus on the IEA report published this week, which shows a path to net-zero on a global scale and looks at both the fossil fuel consuming sectors and the rate at which each must change (they are different by sector) and what fuel alternatives will be needed to replace them. Our review of the work would suggest the following:
The big news of the day is the massive grant that the Dutch government approved yesterday for an offshore carbon capture project that will be focused on the operations of Shell, ExxonMobil, Air Products, and Air Liquide. This looks to be focused within the Port of Rotterdam, where both of the oil majors operate large refineries, Shell also operates a large chemical site and the industrial gas companies have significant hydrogen capacity. The Dutch government believes that the country cannot achieve its emission goals without carbon capture as it has one of the largest refining and chemical footprints in Europe and the 2.4 billion grant (likely achieved through a series of subsidies) is an indication that the country is willing to invest to make its emission goals a reality. The grant is likely aimed to help close the gap between the current European carbon price – which is just over $60 per ton today and what is estimated to be the full cost of capture and storage under the North Sea, which the linked article suggests is closer to $100 per ton, but this likely underestimates the capture costs –see chart below - even if the CO2 streams are pooled and treated as one stream. Interestingly, despite the high level of subsidy, this project is estimated to store only 2.5 million tons a year and will only last 15 years (likely because of the capacity of the offshore reservoir).
Source: Global CCS Institute, C-MACC Analysis, 2021
This is another example of a grossly inflated project, in terms of costs and while it may be the best option for the Port of Rotterdam we would make the following observations.
- It will consume a fraction of the CO2 in the local area
- It might give the Dutch operators a competitive edge over other European companies – either because they can produce low carbon fuel or hydrogen or other chemicals (which may get a premium price), or because they avoid paying the carbon prices. This may cause issues within the EU
- It might artificially lower the European carbon price by creating (subsidized) credits – if this project and other government-backed projects (the UK and Scandinavia so far) overwhelm the credit market, they may depress carbon values and discourage other moves to lower CO2 footprints
- Note that we expect a potential fly up in European carbon prices near-to-medium-term, and these mega-projects will not come into operation for a couple of years
- Like the ExxonMobil proposal for Houston, the implied cost per sequestered ton of CO2 is extremely high and while it might reflect problems with land rights, pipeline “right of ways” and other constraints specific to The Netherlands, it is multiples of the cost that we would expect US for on-shore sequestration and we would encourage all to check out the plans (currently with the EPA) that Gulf Coast Sequestration has in Louisiana.