Q4 2019: towards a greener world

There is more carbon dioxide (CO2) in our atmosphere at present than at any point in the past 400,000 years, and its upward trajectory looks set to continue. The total energy consumed in the world stood at 160,000TWh in 2018, and it grows by about 2% each year. Decarbonisation is one way to counter this, but the path isn’t as straightforward as just producing less energy. According to one expert: “I think we’re in for a really dangerous 20-30 years ahead of us if we pursue some of the decarbonisation strategies that are being talked about by the divestment movement or by some policymakers.” If electricity supplies are restricted or made more expensive, or even capital denied to energy companies, there could be energy shortages or a reduction in political will to carry on this path. 

There are other ways of reducing carbon emissions. One industry that shows great potential for decarbonisation is refining – it releases about 1 billion tons/year of CO2. Although carbon capture technology exists, it is prohibitively expensive: “If you were to capture all of the CO2 from a refinery with today’s carbon-capture technologies, it would cost you about USD 300/ton of carbon sequestered to do the entire refinery and that would hit your refining margin by USD 4/barrel, which is a pretty significant number when you think global refining margins on a net basis are about USD 1.50/barrel.” But next-generation catalyst technology could be a gamechanger, and catalysts are being developed that can take 100-300℃ out of what is a 450℃ process, which is equivalent to removing about 15% of emissions. BASF has commissioned the world’s largest supercomputer to predict what catalysts will be needed next, while “Shell, Exxon [and] Chevron also have some phenomenal catalysts that are coming through from the patents”.

China is the world’s largest emitter of CO2. But it is also making huge strides in its renewable capacity, particularly solar. As well as being the leading manufacturer of solar photovoltaics globally, China has 175GW of installed solar power, far more than any other country. However, last year China did not install as much as some specialists thought, with these estimates ranging from 40GW to 50GW. Instead, just 16GW was completed in the first three quarters of 2019, according to data from China’s National Energy Administration.

There is strong demand abroad, though. China exported 58GW worth of solar modules in January-August 2019, jumping from 41.6GW in 2018 as a whole. As mentioned in a Forum Interview, the Chinese manufacturers seeing most success in the international markets “are Longi, Trina Solar, and Risen Energy”, while “JA Solar and JinkoSolar are doing quite well too”. International demand rose by approximately 20% in 2019 year on year, according to our specialist’s estimate. But there was a shift in which countries were sourcing solar: “demand mainly came from Spain, Ukraine and emerging markets, such as Vietnam… in 2018 and the Middle East and South America [generated] huge demand in 2019.” New regulations and targets are also boosting trade, particularly in Europe. The specialist gave Ukraine as an example: “Due to its dispute [about the] natural gas supply with Russia, Ukraine decided to generate electricity by other clean energy.” Chinese companies are already on the case. China Machinery Engineering Corporation and Donbas Fuel and Energy Company (DTEK), the largest energy holding firm in Ukraine, built a 200MW solar plant near Nikopol last year. It is the second developed by DTEK in the country and one of the largest in Europe.

How renewable energy is regulated is an important factor in facilitating its use. Australia is one country with ambitious renewable energy targets – it is already on track to generate 50% of electricity from green sources by 2030. But it is facing problems with marginal loss factors (MLFs). Between the electricity being generated and making its way to the end-user, energy is lost owing to resistance or conductors heating up. There is a formula to calculate the MLFs for projects, generally amounting to 10%, which then affects the state pool price for each MWh generated. They are adjusted each year, making it tricky for asset owners to predict future revenue. Although these affect all electricity generated, they are a particular issue for renewable projects.

Last year, the Australian Energy Market Commission released its Indicative Marginal Loss Factors for the 2020-21 Financial Year. At about the same time, a group of 20 investors called for changes to how they are calculated, saying that “long-term MLF reductions materially impact the revenue of projects, many of which were commissioned or committed to many years ago, when such reductions were unforeseen.” Instead, they have proposed moving to an average MLF, instead of location specific. A specialist Third Bridge Forum interviewed thinks that this move could improve MLFs by 10-15% for some sites. However, this “will take away the incentive for project proponents to identify areas that are of improved or better location to connect into the grid.” 

Alternatively, in order to attract projects to certain areas, the Australian Energy Market Operator listed 21 renewable energy zones (REZs), which are “favourable both from a demand stance or a forecasted demand growth.” In November 2019 New South Wales (NSW) announced that it would be setting up the country’s first REZ, and two more will follow in the state. NSW is looking for investors to fill 3,000MW worth of projects as it seeks to lessen its reliance on coal.

Although there is explosive renewable uptake around the world and innovative solutions are being brought to market, there is still a long path to go in combatting climate change. However, with this comes opportunities for investors to back transformative projects.