Sustainability, Clean Energy, Recycling & ESG

The steel analysis below is interesting because it is likely that a significant bifurcated market will develop for steel as the demand for green steel is likely to be significant, although probably not at any price, while there will also be a few opportunities to make low-cost green steel and the lucky few could make a lot of money. Anecdotally, we are helping a client look for the best use of what could be a substantial tranche of low-cost renewable power in a location that is not heavily populated, and consequently, there is a limited local demand for the power or anything you might make from it, such as hydrogen. Green steel has come up as possibly the best use of the power in a couple of conversations so far. This adds another wrinkle to the question of whether we can build renewable power fast enough – especially to meet some of the green hydrogen expectations. The challenge will be fending off potentially higher bidders for the power, and green steel is a real contender – more so if a reasonable premium can be gained in the market for the steel. See more in today's daily report.

Source: EIA – Today In Energy, March 2022

The IEA CO2 emissions data is not a surprise as it has been telegraphed for a while by several commentators that the world went backward in 2021. There were several causes, not least of which was an economy which, with the benefit of hindsight, was overstimulated, pushing up demand for resources in general, including energy. There has also been an overestimation of the rate of investment in renewable power, something which is finally gaining attention more generally, triggered by the energy supply fears that have emerged from the Russia/Ukraine conflict. It will take time to make the very large investments needed to abate the CO2 associated with industrial and consumer activity and there is no overnight fix. Accommodative policies are needed today for investments that will start a decline in emissions several years from now.

The Texas hydrogen hub is getting a lot of press and we also cover the idea in our ESG and Climate report today. We see this as not a lot more than intent today and would be surprised if any part of the project would be up and running, assuming it gets built at all, before the end of the decade. Green hydrogen economics do not (yet) make sense and some considerable efficiency learning curves need to emerge before any project could expect to make economic sense without significant subsidy. We have talked at length about the inflationary effects of material shortages and this is the core topic of our ESG report again today, where we suggest that a global recession may be the best thing for the renewable industry as it would slow other sectors' demand for critical materials. But the other wild card is renewable power demand, and how many industrial and materials companies along the Gulf Coast have their eyes on the same renewable power capacity to meet 2030 emission reduction goals. No one must buy renewable power today, because no one has 2022 emission goals. So, renewable power demand is likely understated and it is why the premium to buy renewable power in Texas today is quite low. Fast forward to 2030 – when promises have been made – and we will likely see demand spike and prices rise relative to conventionally generated power. This would materially impact the economics of the green hydrogen hub in Texas even if the electrolyzer costs could be reduced. Given the abundant pore space both onshore and offshore, blue hydrogen makes much more economic sense for Houston.

We include a couple of headlines and charts in today's daily report that step into the central theme of this week’s ESG and climate report, which will be published tomorrow (see here). The offshore wind ambitions and the EIA solar and battery projections both assume that the materials are available to build the capacity. In the case of the offshore wind leases, the winning bidders do not need to be in the market for all of the projects today and while the opportunities will lead to a step-change in demand for turbines in the US, the timing is less clear today that it will be in a few months and that timing may be adjusted to reflects equipment timing and costs, etc.

It is interesting to note both 3M and Michelin addressing water in their ESG narratives - Exhibits below. Water is not getting a lot of air time from the ESG crowd yet, but it is very much on our radar and we will publish our first water index in tomorrow’s ESG and Climate report.

We view the hydrogen tax credit discussed in today's daily report as potentially very harmful, as it could give life to projects that will further increase demand on a renewable energy industry that has finite limits to its rate of growth. The credit could encourage inherently uneconomic projects – even with a longer-term “abundant power” view. If the incentives are used to back clean rather than green projects it would make more sense as blue hydrogen could be produced in very large quantities without breaking the bank and would allow constrained renewable power investments to focus on other harder to decarbonize power needs. If the hydrogen subsidy could be added to the 45Q sequestration credit we would likely see a wave of blue hydrogen investments in the US – primarily aimed at decarbonizing industrial applications and refining.

The linked Siemens Gamesa news could not have been a more clear example of one of our key research themes of the last year – backlog up, suggesting strong demand for new wind power capacity – deliveries and profits down because of material shortages – price inflation and logistic issues. While the company is getting squeezed because of higher costs on contracts that have limited opportunity to pass through the cost, at the same time slide 8 of the earnings release deck shows that selling prices rose in fiscal 1Q 2022. This breaks a declining trend in pricing and one of the core assumptions behind many energy transition plans – that renewable power prices can keep falling. Onshore wind orders are falling, but offshore orders are rising – and these come with higher costs and the need for more materials as we showed in a chart in yesterday’s daily. The added costs burden of more offshore wind projects may only serve to tighten markets for materials further, leading to further increases in installed costs.

The materials chart in the exhibit below from today's daily report, is worth noting as it highlights all of the materials that are needed to advance the production of equipment required to drive renewable power production and demand. We would make one change to the chart in that lithium should also be added to the wind and solar categories to account for storage that needs to be built, although this could be done through hydrogen production or hydraulically, depending on location. One of our primary concerns concerning renewable power projections is the availability of some of these materials and we have written about the topic at length – most comprehensively in - 2022 – Policy Key, But Inflation Will Distract – Maybe Beneficially.

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.

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.