The decarbonised economy: backing climate change solution providers.
- Wind and solar energy are not only cleaner than fossil fuels but set to be less costly too
- Batteries and hydrogen will also play a role in storing and transporting renewably-generated energy
- But we also need ways to remove carbon dioxide from the atmosphere, creating opportunities for innovators such as Climeworks
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There’s no shortage of wind in Orkney. When you visit, you don’t just feel it whip at your skin but notice the many wind turbines spinning across the islands.
They aren’t limited to the large-scale wind farms you might be familiar with. Orcadians have installed more than 500 micro-turbines in their gardens to generate electricity for their own use and to sell to energy companies. That’s the equivalent of nearly one for every 20 of the islands’ households. And these are supplemented by about 350 solar power installations.
Earlier this month, investment manager Paulina McPadden visited the blustery islands 14 miles off Scotland’s north-east coast, ahead of her Disruption Week webinar.
“It’s a fascinating community. At one point, they had 20 per cent of the UK’s small wind turbines despite only having 0.2 per cent of the population,” she says.
“They’ve now been told they can’t build any more because the grid can’t take it. What’s mad is that many residents own electric vehicles and could theoretically use them as batteries to increase storage capacity, drawing on them to power the kettle and the like. The chargers can do that, but the regulator won’t let them.”
WATCH: Investment manager Paulina McPadden discusses decarbonisation opportunities in her Disruption Week briefing
Orkney provides a taste of what the world might be like after the transition to renewables is complete.
“Every barrel of oil pumped out of the ground is heating the atmosphere and making the world worse for our children,” says McPadden.
“From an investment perspective, the exciting thing is that the renewable alternatives will be fundamentally cheaper. The wind blows and the sun shines for free. You don’t need to pay to extract them, and the technologies involved are constantly falling in cost.”
About 2 per cent of the solar energy that reaches the earth is transformed into wind. That might not sound like much, but it equates to more than 166 times humankind’s annual energy use and about 37 million times the amount of wind energy we harvest today.
Not all of it is easily accessible. We are unlikely to build wind farms in the middle of the Atlantic Ocean, for example.
But they can be built far enough away from land that they aren’t easily seen. Offshore developments are more expensive to develop and maintain than their onshore equivalents. But they have several factors in their favour:
higher wind speeds
lack of size limitations – bigger turbines generate more electricity
avoidance of complaints and planning objections over spoilt views
Ørsted, for example, has built the Hornsea One project about 75 miles off England’s east coast. Its wind turbines are more than double the height of most UK land-based counterparts. That helps them produce enough energy to power over one million homes.
Other companies benefiting from this trend include Vestas, Siemens Gamesa and Xinjiang Goldwind. But it’s a select club.
“As you make turbines bigger and bigger, the technology and investment need to go up substantially,” says McPadden.
“Companies have dropped out for that reason. There’s only a very small number now capable of making them.
“So there should be a pathway to the remaining firms making profits in a more durable way.”
Solar price cuts
That’s not to say all the action is offshore.
The world’s solar capacity has doubled every 20 months since 2004. And an observation known as Swanson’s Law has tracked related equipment falling in price by 20 per cent for each such period.
We have already reached the point when subsidy-free solar has become cheaper than using coal, which should encourage large energy providers to make the switch. And soaring oil and gas prices are also encouraging homeowners and businesses to fit panels to their roofs as the break-even period shortens.
McPadden suggests that for Swanson’s Law to hold, further price savings will most likely come from finding ways to make the solar wafers and modules used to make solar panels at a lower cost.
“Scale could give a company an edge in this segment of the supply chain.”
Solar and wind energy projects also have predictable running costs, unlike fossil fuels, which is an additional competitive advantage on top of environmental and carbon accounting benefits.
“Companies are increasingly signing power purchasing agreements with renewable energy generators for up to 15 years,” McPadden explains.
“That gives them assured electricity supply at a pre-determined price, which appeals as businesses want certainty even if it costs them slightly more. The energy generator is also assured of getting that price, so they're not exposed to the volatility of the wholesale market, making it a win-win.”
One recent example is the supermarket company Tesco committing itself to buy electricity from a wind farm in the north-east of Scotland for 13 years.
“I don't think you'd have seen Tesco sponsoring an oil platform in the North Sea.”
Decarbonising electricity production will only go part of the way to meeting 2050’s net zero goals.
“Sometimes the wind doesn’t blow. Sometimes the sun doesn’t shine. So you need some form of storage to balance out those ups and downs,” says McPadden.
“Batteries are perhaps the most obvious solution.”
So batteries storage facility operators are one investment opportunity. McPadden predicts their business case will be based on an ability to arbitrage the cost of electricity: buying it when it’s cheap because renewables are producing more than can be consumed, and selling it back when the reverse is true.
She highlights Neoen as being a leader in the field. Last year it switched on Australia’s biggest grid-connected battery, capable of providing 250MW of additional peak capacity. It’s primed to play a key role in helping the state of Victoria reach its 50 per cent renewable energy generation target by 2030.
“The issue with infrastructure owners and developers, however, is that they are very labour intensive and can’t scale quickly,” McPadden adds.
“So the equipment suppliers might be more interesting in a sense – battery makers like CATL, LG Energy and Northvolt.”
‘Green hydrogen’ production is also an emerging energy storage solution.
It involves using renewable energy to produce the fuel from water via electrolysis.
“Some industries cannot decarbonise through electricity production alone,” McPadden explains.
“Cement production is one, where the kilns require extremely high temperatures. Steel manufacture is another: you cannot reduce iron into iron briquettes without some form of gas.”
The cement-maker CRH and Fortescue Metal Group are experimenting with the nascent technology, although McPadden cautions that it only offers part of the solution.
“Cement production also emits CO2 from the chemical process used, so even shifting to hydrogen to generate heat doesn’t fully decarbonise the process.”
Hydrogen also has a role to play in long-distance, heavy-duty transport.
“Cargo ships, for instance, have massive energy demands,” says McPadden. “You can produce green hydrogen, turn it into ammonia and then use that as a fuel source. Freight trucking is another example.”
Two companies set to capitalise on this are ITM Power and Nel. Both make advanced electrolysers, as well as being pioneers in hydrogen refuelling stations.
Reducing the amount of carbon dioxide entering the atmosphere should slow global warming. But to reverse it, you first need to remove it.
That’s where Climeworks comes in with its direct air capture technology.
It works by using renewable energy to power big fans, which blow air across a solid ‘sorbent’ filter that binds with CO2.
When it can’t contain any more, engineers remove the sorbent and heat it to release the gas, which is then locked away in basalt rock formations, allowing them to reuse the filter.
The firm launched its first large-scale plant in Iceland last year.
“Unlike other forms of carbon capture, it’s not just making an existing process carbon neutral. It’s actually carbon negative,” says McPadden.
“So companies like Microsoft are willing to pay quite a lot of money per tonne to be able to say: ‘We know exactly how much carbon we’ve removed from the atmosphere, and we know that’s going to be stored forever.’”
Solutions like this are capital intensive. They will require patience to achieve either significant impact or sizeable returns.
But as McPadden notes, “the transition from fossil fuels is an opportunity to transition to a fairer, cleaner, more pleasant world to live in,” as well as being a way for our clients to benefit from enabling companies to achieve that goal.
Words by Leo Kelion
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Paulina joined Baillie Gifford in 2013. She has worked with regional and global equity teams and is an analyst in the International Growth Team and co-manager of International Concentrated Growth. Paulina graduated MA (Hons) Arabic & Politics from the University of Edinburgh in 2013 and is proficient or fluent in Arabic, French and Polish.