We struggle with both of the charts below, as we see the rate of potential renewable additions as far too optimistic, not because of a lack of capital, but because of a lack of materials and the knock on effect that this could have on capital if project costs increase meaningfully or if timelines extend. The solar expansions planned for Texas for example all require solar modules and there is simply not enough capacity to make these modules and in many cases not enough raw materials. All of these projects are not planned for the same year, but regardless, when you add the Texas plans to plans all over the World, you have an annual rate of addition that the equipment makers will not be able to meet. Today, many of the projects are in the planning and financing stage and the installers have yet to go looking for equipment – when they do, they may have to rethink.
One piece of big news early this week was ExxonMobil’s announcement that it is developing plans that will drive net-zero emissions by 2050 and the company shared a detailed overview. We have picked some charts from the report, some of which can help us draw conclusions for ExxonMobil, but others are more general. The company is banking on a lot of emission reduction and CCS to get to the 2030 target and a large part of the goal is likely to come from the plans for the Permian and the previously stated net-zero target that the company has for 2030 – detail on how this will be achieved is shown in the Exhibit below, see more in today's ESG report.
The first chart below has been included in a similar form in prior work and is a good summary of what is needed to decarbonize the LNG market to the greatest degree possible. There is a lot of resistance to the idea of endorsing natural gas as a transition fuel, but so many developed and developing countries need natural gas – often in the form of LNG – to displace or avoid (additional) coal use. If the LNG industry does not start to pursue the paths suggested in the exhibit, and reasonably quickly, it will stand very little chance of winning, or perhaps surviving, a PR battle that is very much stacked against it.
In last week's ESG & Climate report titled The Evolution Of the Plastic Industry Could Stall in 2022, we introduced our “new materials” stock index, and we have included our hydrogen index in this week's report titled, Hydrogen – Hype, Hope, and Headlines. We have created these for several sectors and each week we will add the chart below showing one-week and one-year performance for each index. Note that these are simple averages for each group and are not market cap-weighted. If we did a market cap weighting, we would have a couple of sectors where one stock dominated all - EVs for example. The steep decline in the EV index in 2021 was largely due to the negative performance of the Chinese EV companies that trade in the US and are included in the index. Note that all sectors have had a bad start to this year. We have chosen to include a water category as we have noted since we began this service that water is an area that we believe will be in greater focus going forward and will be considered an ESG topic.
It should not be surprising that 2021 has seen a rebound in emissions as nothing has changed fast enough over the last 24 months in terms of renewable power additions and carbon abatement to offset more than the underlying growth in power demand, and based on what we are seeing in European and Asia LNG markets, we have fallen short of demand growth. The wind capacity chart below has one main conclusion – not enough. One of our main inflationary fears for 2022 is that both wind and solar installation rates need to step up meaningfully from current levels to make a difference – the IEA suggests that installation rates need to double (at a minimum). It has already proven difficult to meet installation targets in 2021, in part because of supply chain issues but also in part because of material shortages, all of which have led to rising installation costs, against the longer-term run of falling costs because of learning curve gains. We believe that costs will rise again in 2022 and 2023 as installers/projects compete for limited solar module and wind turbine components
In yesterday's ESG and Climate report, we looked at an extreme example of how the right support for clean fossil fuel use through a long period of energy transition, could create economic growth, support job growth, and not require subsidies – coal gasification to produce low-cost hydrogen. With the opposition to the “Build Back Better” bill, there is a clear opportunity for the fossil fuel industry to step up and suggest compromises, and we are seeing increasing interest in large scale CCS, despite its cost, in part because it is a path that will allow natural gas and other fossil fuels to meet increasing demand in a way that has a much lower carbon footprint, and in part, because it will still be cheaper than some of the heavily subsidized ideas to try and accelerate investments in renewable power that will inevitably fall foul of equipment and material shortages – something we have written about at length in past research – linked here. The EIA has already noted that coal use in 2021 has risen globally and it is likely that it will rise again, given the increasing demand for electric power and the lack of supply elasticity in the renewable power and natural gas-based systems – coal is a large part of the swing capacity these days. Many of the CCS projects proposed for the US are not much more than proposals today, but we are seeing some initial investment to prove that subsurface storage opportunities are feasible.
While we would generally avoid quoting work from a company that we might consider a peripheral competitor, we are happy to do so when it backs up one of our central themes – in this case, inflation in renewable power costs. The quote is taken from the Wood Mackenzie report flagged article linked here and discusses a view on how challenges that renewable power installers have faced in 2021 will extend into 2022. The quote talks about shortages of renewable power equipment, and the obvious consequence will be higher prices for that equipment, especially as raw material prices for components remain high and possibly move higher. In our ESG and Climate report today, we talk about the need for some commonsense oversight such that impractical ESG investing targets do not limit the ability of producers of critical fuels and materials to operate.
International natural gas prices are hitting new highs this week, both on an absolute basis and relative to the US - see both charts below. At the same time, we see new contracts being signed for US LNG to move to China and Europe, but mainly China. This is happening despite significant renewable power investments globally in 2021 and it would appear that many have underestimated energy demand growth in projections and policy. The other net effect of the supply/demand imbalance this winter and possibly through 2022 will be increased coal use in Europe and the US, with local governments unable to meet near-term climate goals, especially in Europe, but also in parts of Asia and, at the same time keep the people warm and the lights on. In our ESG and Climate piece tomorrow we will focus on one highly unpopular but likely very practical opportunity for coal as part of a planned energy transition program, and it is likely that, while climate goals may not need to change, some socially unpopular decisions around the use of fossil fuels will be needed to prevent even more socially unpopular inflation or absolute shortages.
We have spent a lot of time over the last few weeks talking about polymer recycling and renewables and the chart below is another look at where plastic waste is coming from. Packaging is the big piece and it is also the area where customers, i.e. the packagers, are looking for the largest increase in the use of recycled materials quickly. As we noted in our ESG and Climate piece this week, increasing volumes of this packaging waste is moving into different use applications, such as building products and durables, and even more could potentially flow into chemical recycling – note that there are 7 headlines on chemical/advanced recycling in today's daily report. The packagers have little chance of meeting their near-term recycling content goals in our opinion, but they have zero chance if they do not accept chemical recycling as part of the mix. It will be important to accurately audit the chain of custody of chemical recycling to avoid double counting. The separate challenge with chemical recycling is the now increased focus on carbon footprints, as the pyrolysis process is energy-intensive, whether direct heat from burning fossil fuel or electric power-based heat.
The carbon credit schematic below helps understand the mechanics, but the diagram does not sufficiently emphasize the critical importance of the “Verification and Validation” step. This is a great example of a mechanism that should work logically, but if the input is wrong the output will be also. Potential buyers and sellers of carbon credits understand the process well, but they are more concerned about what goes in the front end as the value of the credit will be very dependent on the quality. Today the only “sure thing” carbon offset is direct air capture, as all of the agriculture-based offsets need much tighter definitions. See research - Carbon Prices – Inequitable and Uncertain – Not What We Need