Climate Change Investor Newsletter #5

June 2021

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What I’m Watching: Green Tech in the Exponential Age

As I mentioned in the May newsletter, I’m a subscriber to RealVision, primarily for its macro analysis and cryptocurrency coverage. Recently, though, the website has launched a new project, called the “Exponential Age,” that got me thinking about how rapid adoption will affect the green technology space.

The basic thesis of the “Exponential Age” is that the world is on the verge of a tectonic shift, a technological revolution that will transform entire economies, based on Metcalfe’s Law, which says that networks get more valuable as they gain adoption. The more nodes in a network, the more powerful (and valuable) it becomes.

Facebook is a textbook example of the network effect in action. Bitcoin is arguably the archetypal behavioral economics representation of Metcalfe’s Law — the more people adopt it, the more value it accrues due to fixed supply, giving participants incentive to drive wider adoption. They both expanded exponentially.

Climate change remediation technology is following a similar path.

Put simply, most if not all of the main technologies related to remediating climate change are on a hockey stick-like trajectory, even as production costs continue to fall. In the case of solar panels, the price per watt of electricity has dropped precipitously in the last few years. So, too, has the cost of wind turbine electricity plummeted to mere cents per kilowatt hour, just as installed base — both onshore and offshore — has grown, even as they get bigger and more powerful. These technologies don’t follow Metcalfe’s Law exactly (it’s not consumer network adoption per se), but they are both without a doubt growing exponentially.

We can observe the beginning of the same trend in hydrogen fuel cells. Biomass, geothermal, and hydropower are all now cost competitive with fossil fuels and nuclear energy* (and even climate-friendly but controversial nuclear is in the midst of an innovation cycle to manage the energy transition envisioned by the Biden Administration). Carbon markets are in the early stage of likely exponential growth.

The folks at Real Vision get it. Whether they’re talking about the carbon market, or how EU climate targets will drive adoption of various technologies, they understand that this is all part of the same megatrend of exponential technology adoption. In many ways we’re not living in a linear world anymore.

Some people argue this swift adoption is a result of the coronavirus pandemic, while others say it’s a function of the Biden Administration’s return to the Paris Agreement. I tend to think it’s a little of both, plus a broader acceptance on the part of governments everywhere that climate change remediation is going to be an inevitable task that they need to begin.

Even the Biden Administration’s Climate Czar, John Kerry, admitted to the BBC’s Andrew Marr that he’s depending on innovation to save the world from climate change:

“But here’s the reality for you, and for anyone who’s thinking of the rapidity of this transition. I am told by scientists — not by anybody in politics, but by scientists — that 50 percent of the reductions we have to make to get to net zero by 2050 or 2045 as soon as we can, 50 percent of those reductions are going to come from technology that we don’t yet have. That’s just a reality. And people who are realistic about this understand that’s part of the challenge.” (emphasis added)

This megatrend will take us well into the next twenty years and beyond. Technologies we can’t even imagine right now will emerge to compete with our existing understanding of how to generate power. These won’t, by and large, come from governments — they will come from entrepreneurs, and they will be funded by governments and capital allocators of all sizes, in both public and private markets. It will happen faster than everyone expects, and create new business lines and opportunities. It’s time to get on the train; it’s leaving the station.

* I am long uranium miners CCJ and DNN.

IEA: No New Fossil Fuel Projects After 2050

On 18 May, the International Energy Agency released a stunning report providing a detailed roadmap to net-zero emissions by 2050. In the report, the IEA, not an organization given to hyperbole, stated unequivocally that the world is on the wrong track if we are to contain global temperature increases. Following the theme I provided above, the IEA’s models demand an exponential increase in governments’ and private companies’ efforts to move to net-zero carbon emissions.

The report also included this incredible sentence, essentially predicting (or imagining) the end of the hydrocarbon exploration industry in less than 30 years: “No new oil and natural gas fields are needed in our pathway, and oil and natural gas supplies become increasingly concentrated in a small number of low-cost producers.” (emphasis added)

The Agency warned that, while it wouldn’t be easy, it’s still possible we can reach the Paris climate goals. The IEA’s chief energy modeler said, “The way we see this scenario is that it’s a very, very narrow pathway, but it’s still feasible.”

The IEA’s statements matter to investors because the IEA has the ears of policymakers around the world. Far from being just an international think tank, the IEA develops detailed and highly technical models that inform capital deployment on every continent. Moreover, they’re not just modeling weather patterns & sea levels — they’re also estimating the likely economic effects that following their roadmap will cause. The report states that governments will need to plan for job displacements from traditional (hydrocarbon) energy companies and other industries.

In the foreword of the 200+ page report the IEA lays out the case for action in stark language: “This calls for nothing less than a complete transformation of how we produce, transport, and consume energy. The growing political consensus on reaching net-zero is cause for considerable optimism about the progress the world can make, but the changes required to reach net-zero emissions globally by 2050 are poorly understood.” (emphasis added)

The report also calls for massive increases in state-funded R&D: “Government R&D spending needs to be increased and re-prioritized [including] electrification, hydrogen, bioenergy, and carbon capture, utilization, and storage (CCUS).” Furthermore, the report notes (as Kerry previewed above) that a substantial portion of the response to energy demand by 2050 will come from technologies that don’t currently exist or are in prototype phase.

The investing implications are clear: the governments committed to this pathway, including that of the United States, will deploy literally trillions of dollars and euros to green technology over the next 30 years. That will create thousands of new companies, many of which will eventually enter the public markets.

What I’m Reading About: Ammonia as a “Battery?”

One of the greatest challenges the world faces in a carbon-free world is not so much how to produce energy (we can generate more types of green electricity now than ever), but how to transfer and store it. The fluctuation of power availability (the wind doesn’t always blow, the sun doesn’t always shine) thus presents a supply problem for renewable energy producers. This is currently solved by coal-fired and natural gas power generation plants, but of course these emit carbon dioxide (though gas emits a fraction of the amount coal does).

Hydrogen is one way to “store” energy, but it is volumetrically low density, which means it requires more space to hold and move. Therefore hydrogen fuel cells need to be densely compressed, and the technology required to do that is itself energy intensive and hard to scale.

Ammonia, however, with a chemical composition of one nitrogen atom and three hydrogen atoms, is nearly twice as energy-dense as hydrogen. And ammonia is already one of the top three industrial chemicals produced worldwide, mainly for the use in fertilizer. It’s currently manufactured via electrolysis powered by natural gas (in fact, the process accounts for roughly 1% of global greenhouse gas emissions), but it could easily be produced using the same process using “green hydrogen,” which would result in a carbon-free energy “storage” technique. Ammonia is already handled and transported safely at scale, and about 180 million tons are produced yearly.

Besides its agricultural uses, ammonia can also be burned in an engine or gas turbine to produce energy or further processed on-site to produce hydrogen for fuel (the downside to burning ammonia is that it emits nitrous oxide, which is a greenhouse gas, though experts say this could be mitigated). Ammonia, therefore, could be used to bridge the gap in periods of time when solar and wind are producing less power. Siemens* has already developed a process to produce “green ammonia” (link to PDF). And a US-Austrian group signed an MOU in May to begin a project to produce “green ammonia” in Chile.

Norwegian state-owned energy (oil) company Equinor* (formerly Statoil) is already exploring the use of ammonia to power large cargo ship engines. Since the global shipping industry accounts for about 3% of worldwide yearly carbon emissions, this is a significant and necessary step. By one estimate, a quarter of all cargo ships could be fueled by ammonia by mid-century.

* I have not evaluated these companies as investments.

Chart of the Month

What I’m reading about: First Large-Scale Offshore US Wind Farm

So this is kind of a big deal.

On 11 May, the Biden Administration approved the United States’ first large-scale wind farm, to be located off the coast of Massachusetts. It will be powered with turbines produced by General Electric (GE).*

Via NPR: “The $2.8 billion project, known as Vineyard Wind 1, will consist of 62 turbines spaced about a mile apart, each standing about 837 feet above the water’s surface. Cables buried beneath the ocean floor will connect the power from these turbines with the New England grid onshore.”

Massachusetts’ US Senator, Ed Markey, released a statement about the project:

“With this record of decision [putting] Vineyard Wind on the books, the era of American offshore wind is no longer on the horizon — it’s here, now, off the coast of Massachusetts, and the answer to America’s energy future is blowing in the offshore wind.

Vineyard Wind will be the first of many offshore wind projects to come, and we can use our Bay State know-how to show the rest of the country how to get steel in the water, zero-emission energy on the grid, and union jobs to American workers.”

The decision was not met with universal acclaim, however. The fishing industry opposed the project and requested the federal government provide accommodations.

There are already dozens of offshore wind farms in Europe and several in China. Most of the windmills are manufactured by either Siemens, GE, or Vestas (VWDRY).* The largest proposed project, in South Korea, will reportedly produce 8,200 MW of power and create 120,000 jobs.

* I have not evaluated GE as an investment. I am long wind-related companies VWDRY and DNNGY.

What I’m Reading About: Oil Companies Plan Carbon Capture

Another, “whoa, if true” development: the South Korean state oil company, Korea National Oil Corp. (KNOC), plans to use a soon-to-be empty natural gas well to store spent carbon dioxide underground. They plan to store 400,000 tons of carbon underground every year for the next 30 years. Until fairly recently, this was not considered economically feasible (and questionable from an engineering standpoint).

Carbon capture and storage (CCS) is a relatively nascent industry; there is currently only 40 million tons of installed capacity in the world. The CCS market is small but expected to grow to over $10 billion by 2026, according to a research report from Polaris Market Research, expanding at a CAGR of 11.5% from 2020 to 2026.

Most of the current players in the CCS market are, perhaps ironically, the major oil companies. According to the report, “Aker Solutions, Halliburton, Honeywell International, Fluor, Siemens, Shell Global, Mitsubishi Heavy Industries, and Maersk Oil are some of the prominent players present in the global market.” Equinor is planning to bring a second carbon-capture natural gas-fired power plant on line in Scotland online by 2026.

Pumping carbon dioxide into old gas wells could also have a salutary effect — it might stabilize the geology of empty wells, a potential solution to problems caused by fracking, particularly in the United States.

What I’m Thinking About: America’s Messed Up Carbon Market

This article is nominally about how Tesla is making overtures to the Biden Administration about entering the carbon credit market, but I read something different in it: the piece illustrates graphically how messed up America’s carbon market is (especially compared to Europe).

The list of competing special interests resisting creation of a functional U.S. carbon market — corn (because of “alternative fuels”) and oil producers, car manufacturers, the EPA bureaucracy — is long and the process will be fraught with challenges.

I have no doubt that the administration want to eventually stand up a functional national carbon market, and there is certainly plenty of support for it.

But it won’t be an easy road.

Stocks I’m Looking at:

Nextera Energy Partners (NEP)

From its website: “NextEra Energy Partners, LP, is a growth-oriented limited partnership formed by NextEra Energy, Inc. NextEra Energy Partners acquires, manages and owns contracted clean energy projects with stable, long-term cash flows.” With a near 30% operating margin and a 3.6% yield, this is a solid company generating cash. 80% of the stock’s float is owned by institutional investors, it trades at a relatively low 13 P/E, and the average analyst price target is nearly 20% above its price as of late May. My main source of hesitation is that it’s very similar to BEP, which is already in the portfolio and has outperformed NEP.

Charah Solutions (CHRA)

Via CNBC: “Charah Solutions provides environmental services and byproduct sales to the power generation industry.” One of the things it does is take fly ash* from coal plant operators and convert the ash into cement for building materials. This results in less of the ash making it to landfills. As the energy transition takes hold, the remaining coal-fired plants will be looking for ways to reduce their carbon footprint and Charah provides that service. However, it disappointed on recent earnings and was subsequently downgraded, and Zacks rated it a “strong sell,” so I’m holding off on CHRA for now.

*ash created by burning thermal coal that is collected to be later put in tailing ponds

Sunpower (SPWR)

Like RUN (below), Sunpower is one of the less-known members of the solar industry. It trades at a 8.7 P/E. Analysts have cooled on the stock, however, and given that I picked up RUN, I don’t think I need additional solar exposure in the portfolio right now (I also own SEDG).

What I Bought in May

Sunrun (RUN)

Sunrun makes, installs and services solar panels for residential homes and businesses. On 19 May, the company announced it had partnered with Ford to provide charging systems for the electric version of the company’s popular F-150 pickup truck. That caused the stock to jump abruptly, but I was attracted by the 66% jump in institutional ownership in the company in Q4 2020. It missed significantly on recent earnings but is making progress improving on its understandable 2020 loss. Crucially, though, Keybanc, Credit Suisse, Evercore, Piper Sandler, RBC Capital, and Goldman Sachs all maintain positive analyst ratings of the company, and the average analyst price target is ~40% above its May low.

Enphase (ENPH)

I provided my investment thesis for ENPH in the May newsletter. I added to my position on share price weakness.

Vestas Wind Systems (VWDRY)

Vestas is the world’s largest manufacturer of windmills for power generation, so it’s kind of surprising that I couldn’t find a single instance of analyst coverage of the stock (this is an ADR). As noted above, the United States’ first offshore wind farm will go up off the coast of Massachusetts, and it will be far from the last one. Along with

Ørsted (DNNGY), the biggest developer of wind projects in the world, Vestas will be a key part of my energy transition “picks and shovels” investment thesis.

Tellurian (TELL)

I provided my thesis for TELL in the February newsletter. I added to my position on share price weakness.

I am Long…

CWEN, SEDG, TELL, MP, TPGY, TTCF, ABXXF, SLV, GLD, BEP, FCX, AEM, ESM, CCJ, DNN, ENPH, RUN, VWDRY.

Conclusion

Really interesting things have started happening in the energy transition investing space as the Biden Administration gets its footing. The re-opening of the economy as vaccinations increase is a rising tide that will lift all boats, including the renewable energy and technology sectors. If the Biden Administration can come to an agreement with Congressional Republicans (far from a guaranteed outcome) on an infrastructure bill, they have promised that much/most of that will be linked to investments in technology which remediates climate change, which will help the sector further.

The future is looking bright! 😎

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About

The Climate Change Investor is published by Marc Johnson, an investor with over 25 years of experience investing in public and private markets. An avid consumer of financial research and new technologies, he believes that remediating climate change is both a moral imperative and an incredible business opportunity.

Disclaimer

Marc Johnson and the Climate Change Investor Newsletter are not registered investment, legal, or tax advisors, nor are they broker/dealers. No content contained herein should be considered financial advice. All opinions are based on research by the publisher of the newsletter and are intended as educational and entertainment material only. Although best efforts are made to ensure the information is accurate and current, occasional unintended errors and misprints may occur. Conflicts may be hidden or obscured. Neither Marc Johnson nor the Climate Change Investor Newsletter have received outside compensation for mentions of any stock, company, or project herein unless otherwise noted. Do your own research. Consult a financial professional on all investment decisions. © 2021 Marc Johnson