We cannot improve something we do not measure. The effort to limit global warming to 1.5°C requires that we decarbonize our economy, and measuring emission levels and future levels is therefore paramount.

Gabriela

Not just how much we finance but what: Abatement, avoidance and sequestration in climate funding

Some analysts thought the energy crisis, exacerbated by the war in Ukraine (that in a few weeks will have been going for one year) was triggering a slowdown in the energy transition. They expected more investment into fossil fuels as a solution to the short term “energy trilemma,” but they are being proven wrong. The cleantech economy will write our (bright) future.

<p>The year started with global leaders and business executives attending the World Economic Forum in Davos. There, Al Gore delivered an exasperated speech while the President of the EU again showed the bloc has an unyielding commitment to the green agenda. Whether or not Churchill was the one that coined the phrase “History is written by the victors”, the point is that prevailing armies dictate policies and winning technologies. Al Gore reminded the Davos audience that we <a href="https://www.weforum.org/videos/we-have-the-tech-to-slow-climate-change-so-where-s-political-will-asks-al-gore">have</a> the technologies needed to deliver the 50% GHG reduction target by 2030, and called for more political will. The President of the EU Commission, Ursula Von der Leyen’s address in <a href="https://www.weforum.org/agenda/2023/01/davos-23-special-address-by-ursula-von-der-leyen-president-of-the-european-commission/">Davos</a>summarized the management of the energy crisis that was exacerbated by the war in Ukraine. In less than one year, the EU replaced 80% of Russian pipeline gas, brought down NatGas prices (that peaked at €350/MWh in August) and put in place more policies to accelerate the energy transition. At the same event President von der Leyen announced the Net Zero Industry Act, the EU equivalent to the US IRA (more on that below). In her words, “the story of the cleantech economy is still being written” but it is increasingly clear that cleantech companies will be victors.</p>
<h1>IRA positive externalities cross the US border, another boost to Cleantech</h1>
<p>The Biden administration’s green agenda will accelerate the energy transition in more profound ways than previously expected, with positive externalities reaching beyond the US border. For instance, Mexico is receiving direct foreign investments into EV and battery build up, as the IRA rules of North American content include production in the NAFTA member country. <a href="https://mexico-now.com/mexico-will-receive-investment-for-car-battery-production-in-2023/#:~:text=Mexico%20will%20receive%20investment%20for%20car%20battery%20production,informed%20Marcelo%20Ebrard%2C%20minister%20of%20Foreign%20Affairs%20%28SRE%29.">South Korean, Chinese and American</a> investments into battery supply chains shall see Mexican manufactured batteries being produced in 3Q24 while <a href="https://www.fitchsolutions.com/autos/autos-investment-round-mexico-leads-quarter-once-again-uss-ira-bolsters-ev-related-investments-12-01-2023">automakers</a> invest in new EV production sites. Across the Atlantic, the EU parliament also responded to the IRA Bill, deeming it discriminatory as it favours US-based climate tech manufacturers. <a href="https://www.greenbiz.com/article/heres-glimpse-eu-response-inflation-reduction-act">Currently</a>, the EU produces ca. 25% of all global EV production while the US produces 10% so a fear that US production would attempt to compete not with Chinese-based EV manufacturers but with EU-based ones instead is not unfounded. The EU’s new legislation attempts to address a range of issues such as the regulatory environment, funding, labour force skills. It also aims to tie up to key legislation, like the EU Critical Raw Materials Act that among other goals also elevates the importance of recycling minerals in batteries, one of the key solutions in iClima’s taxonomy. Specific <a href="https://commission.europa.eu/system/files/2023-02/COM_2023_62_2_EN_ACT_A%20Green%20Deal%20Industrial%20Plan%20for%20the%20Net-Zero%20Age.pdf">rules</a> on financing and “regulatory sandboxes” are being put in place to scale up solar and wind, as well as the deployment of heat pumps, clean energy storage, green hydrogen, green transportation and carbon storage. The EU Commission will present a reform of the electricity market in March, hoping to enable electricity users to benefit from more predictable and lower costs of renewable power.</p>
<h1>Europe did not burn as much coal for electricity in 2022 as feared and renewables take over NatGas</h1>
<p>The energy think tank Ember <a href="https://ember-climate.org/insights/research/european-electricity-review-2023/">analysed </a>the EU energy transition in 2022 and made very relevant points. Firstly, there was no “winter coal surge” with coal powered electricity generation dropping since September. Secondly, the importance of interconnection was emphasized, as the country that is usually the largest exporter of electricity in the bloc (France) last year became a net importer, as 2/3 of the drop in hydro and nuclear production in France was replaced by imports mainly from Germany, Spain, Belgium, Italy and the UK. Ember expects that NatGas and coal used for electricity production in the EU bloc will drop in 2023 and points out that in 2022 solar + wind represented 22% of the electricity mix, overtaking fossil gas (at 20%) for the first time and staying above coal power (at 18%). The right direction of the grid mix is not enough for Swedish activist Greta Thunberg. She was <a href="https://edition.cnn.com/2023/01/18/europe/greta-thunberg-released-germany-climate-intl/index.html">arrested</a> (for a short period of time) in Germany when protesting against the expansion of a coal mine.</p>
<h1>Passing the $1 trillion mark; a material milestone that puts to rest the debate on the impact of the energy crisis on the speed of the energy transition</h1>
<p><a href="https://about.bnef.com/blog/global-low-carbon-energy-technology-investment-surges-past-1-trillion-for-the-first-time/">BloombergNEF</a> just <a href="https://assets.bbhub.io/professional/sites/24/energy-transition-investment-trends-2023.pdf">published</a> their “Energy Transition Investment Trends 2023”. It states that in 2022 the total global investments into low carbon energy transition solutions reached $1.1 trillion, passing the $1 trillion mark for the first time. With the additional $274 billion invested in the power grid, energy transition related investment combined reached $1.38 trillion last year. The acceleration is good news, but we are quite far from the average $4.55 trillion of annual investments that BNEF’s Net Zero scenario calls for by 2030 (BNEF’s <a href="https://about.bnef.com/new-energy-outlook/">New Energy Outlook</a> estimates investment into green electricity, industry, buildings and transport of $194 trillion globally to 2050). The report points out that 2022 was the year when investments into green solutions equalled funding into fossil fuels. Interestingly, China accounted for $546 billion of the total global investment, followed by the US at $141 billion. If the EU were treated as a bloc, it would be the second largest green investor at $180 billion; otherwise Germany comes in at third. </p>
<p>Some analysts thought the energy crisis, exacerbated by the war in Ukraine (that in a few weeks will have been going for one year) was triggering a slowdown in the energy transition. They expected more investment into fossil fuels as a solution to the short term “energy trilemma,” but they are being proven wrong. The cleantech economy will write our (bright) future.</p>
<p><em>illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>


The Future of the Cleantech Economy is Bright: Passing the $1 Trillion mark and the IRA's impacts

The reduced supply of natural gas in Europe is being solved in the short term with an increased use of coal for energy generation. In June, Germany, Austria and the Netherlands announced an emergency restart of coal power plants, postponing the planned decommissioning of the heavy emitters (coal power plants emit more than twice as much as natural gas plants of the same size). The perils of such a trend represent a further reduction in our chance to limit climate change. At the end of October, the UN Environmental Program (UNEP) published its 2022 Emissions Gap Report, pointing out that after a COVID-induced reduction in 2020, 2021 emissions rebounded and reached 52.8 Gt CO2e, above 2019 levels. Yet again, world leaders reconvened to discuss solutions while scientists warned that we are running out of time.

<p>World leaders reconvened in Egypt for COP27 from November 8th to the 17th. Last year COP26 in Glasgow kept alive the ambition of limiting global warming to 1.5° Celsius, but the energy crisis - exacerbated by the invasion of Ukraine - poses additional challenges to a faster reduction in fossil fuel emissions. The reduced supply of natural gas in Europe is being solved in the short term with an increased use of coal for energy generation. In <a href="https://www.euronews.com/green/2022/06/24/all-the-european-countries-returning-to-dirty-coal-as-russia-threatens-to-turn-off-the-gas">June</a>, Germany, Austria and the Netherlands announced an emergency restart of coal power plants, postponing the planned decommissioning of the heavy emitters (coal power plants emit more than <a href="http://www.global-greenhouse-warming.com/gas-vs-coal.html">twice</a> as much as natural gas plants of the same size). The perils of such a trend represent a further reduction in our chance to limit climate change. At the end of October, the UN Environmental Program (UNEP) <a href="https://www.unep.org/resources/emissions-gap-report-2022">published</a> its <a href="https://wedocs.unep.org/bitstream/handle/20.500.11822/40874/EGR2022.pdf?sequence=3">2022 Emissions Gap Report</a>, pointing out that after a COVID-induced reduction in 2020, 2021 emissions rebounded and reached 52.8 Gt CO2e, above 2019 levels. Yet again, world leaders reconvened to discuss solutions while scientists warned that we are running out of time.</p>
<h1><strong>The Bad</strong></h1>
<p>We have <a href="https://www.nasdaq.com/articles/there-is-no-decarbonization-without-china">emphasized</a> the importance of China in global decarbonization. On Tuesday November 8th, China’s special climate envoy, <a href="https://www.usnews.com/news/world/articles/2022-11-08/cop-27-china-climate-envoy-says-beijing-committed-to-carbon-neutrality">Xie Zhenhua</a>, reiterated the country’s commitment to peaking emissions by 2030. The problem is that <a href="https://www.nytimes.com/2022/11/03/business/energy-environment/china-coal-natural-gas.html">China</a>, too, is burning more coal, which drove the 6% increase in its emissions last year. China burns more coal than the rest of the world combined, which is the main reason why the country is responsible for a third of all anthropogenic global GHG emissions (more than the total from the EU, US and Japan). Therefore, there is only one path for the discussions in Egypt to be truly consequential, and that is for a real commitment to accelerate the phasing OUT of coal, but the 200 countries did not reach an agreement on this pivotal issue.</p>
<p>The <a href="https://www.ft.com/climate-capital?emailId=e053fb5d-3be1-43c5-9642-3b12065d8eb9&amp;segmentId=ccee9840-6c9b-2776-04de-b87d446b96a1">FT</a> analysed past and future CO2e emissions from the world’s current coal-fired power plants, concluding that if operated for typical lifetimes and utilisation rates, the world’s operating coal-fired fleet would emit 330 gigatons of CO2e between now and 2100. These future emissions are more than the past emissions of all power plants ever in operation and represent 2/3rd of the 500 gigatons that is our entire emissions budget if we wish to secure a 50% chance of limiting global warming to 1.5° Celsius.</p>
<p>There was a call for an acceleration of the energy transition to solve the energy crisis, with $4 trillion of annual investments to support the goal of cheap electricity from renewable sources, which are to provide 65% of the world’s total electricity by 2030. While over <a href="https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2022/Apr/IRENA_-RE_Capacity_Highlights_2022.pdf?la=en&amp;hash=6122BF5666A36BECD5AAA2050B011ECE255B3BC7">88%</a> of new capacity added in 2021 to the global electricity system was from solar and wind, the problem is that we are still adding coal fired power plants and natural gas ones, too. The word “coal” appears only once in the <a href="https://cop23.unfccc.int/sites/default/files/resource/Presidency%20non-paper2%20on%20cover%20decisions.pdf">first draft</a> of the cover text released a day before the end of COP, and it was in the sentence that refers to phasing down (and not OUT) of coal. But it calls for the phasing OUT of fossil fuel subsidies.</p>
<h1><strong>The (Potentially) Good</strong></h1>
<p>Two potentially very positive developments regarding coal are related to the efforts of President Biden. Firstly, President Biden and President Xi met in Bali on <a href="https://edition.cnn.com/asia/live-news/biden-xi-meeting-g20-summit-bali-indonesia/index.html">November 14th</a> during the G20 meeting. The three hour discussion was characterised as a <a href="https://www.bloomberg.com/news/articles/2022-11-15/kissinger-says-biden-xi-talks-kickstart-bridge-building-effort?cmpid=BBD111522_NEF&amp;utm_medium=email&amp;utm_source=newsletter&amp;utm_term=221115&amp;utm_campaign=nef&amp;sref=mjdszXHE">&quot;Bridge-Building&quot; effort</a>; a closer relationship between China and the US could have positive repercussions to the energy transition. President Biden also met with Indonesia’s president <a href="https://www.bloomberg.com/news/articles/2022-11-15/biden-jokowi-unveil-20-billion-deal-to-wean-indonesia-off-coal?sref=mjdszXHE">Joko Widodo</a> on November 15th and agreed a $20 billion climate finance deal to support the country pivot away from coal. Indonesia is committing to capping emissions from electricity at 290 Megatons by 2030, when renewable sources must represent at least 34% of all power generation.</p>
<p>No conclusion was reached on the implementation of Article 6, but a <a href="https://www.reuters.com/business/cop/un-carbon-market-talks-drag-beyond-cop27-deals-elusive-2022-11-17/">draft</a> document was discussed with key language on how the international compliance carbon market would work, with discussions to continue in 2023. The new development on carbon tax at this COP was the idea brought up by US climate envoy, <a href="https://www.jdsupra.com/legalnews/updates-from-week-one-of-cop27-article-5007281/#:~:text=Article%206%20Negotiations%20As%20expected%2C%20during%20the%20first,market%20under%20Article%206%20of%20the%20Paris%20Agreement.">John Kerry</a>, to use a voluntary carbon offset market to fund the acceleration of the energy transition for developing countries.</p>
<h1><strong>The Broad</strong></h1>
<p>In Glasgow last year, the energy crisis was already showing signs of escalation, which undoubtedly escalated even further with Russia’s invasion of Ukraine in February. The energy trilemma in the short term is being solved with a focus on security of supply, and EU countries are burning coal and extending the useful life of nuclear plants marked for decommissioning. This is the context of COP27, which we believe will be known for the year when adaptation, climate resilience and regeneration were elevated. In other words, the annual UN gathering this year saw the broadening of the issues, beyond GHG mitigation. Elevating adaptation goals means raising awareness and ambitions on water related problems, as <a href="https://www.gwp.org/en/About/more/news/2022/our-five-key-conclusions-from-cop27/">80% of</a> adaptation strategies are water related. Loss and damage were also centre stage in Egypt, an acknowledgment that we have not mitigated enough and need to focus on adaptation, but that we may not adapt and build resilience fast enough and therefore need to repair loss and damage as well.</p>
<p>Elevating adaptation and loss &amp; damage for the most vulnerable was a clear, positive outcome of this COP. The countries agreed to launching a fund to support loss and damage in developing countries. The much-used terms were “avert”, “minimise” and “address” referring to – respectively - mitigation, adaptation and to loss that at this point cannot be avoided. Although adaptation and loss &amp; damage are now being elevated, specific goals for adaptation measures will only be discussed at COP28. The agreement for this COP27 is to at least double the financing for adaptation. The current levels of international adaptation-related finance flows, in particular to the most vulnerable in developing countries, is “insufficient and inadequate” to respond to climate change impacts. Loss and damage in the context of the current temperature at an additional 1.2° Celsius of warming already leaves the most vulnerable countries significantly affected.</p>
<p><em>Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>
<h6><em>Cover photo: <a href="https://www.flickr.com/photos/unfccc/">UNclimatechange on Flickr,</a> <a href="https://creativecommons.org/licenses/by-nc-sa/2.0/">(CC BY-NC-SA 2.0)</a>​ </em></h6>


Good COP, Bad COP, Broad COP

World leaders reconvened in Egypt on November 8th for COP27, which runs until the 17th.  At his opening speech, UN Chief Antonio Guterres reminded the world that climate change mitigation is the fight of our lives, and sadly it looks like we are losing the battle.

<p>World leaders reconvened in Egypt on November 8th for COP27, which runs until the 17th. At his opening speech, UN Chief Antonio Guterres reminded the world that climate change mitigation is the fight of our lives, and sadly it looks like we are losing the battle. Last year at COP26 in Glasgow, the ambition of limiting global warming to 1.5° Celsius was kept alive, but the energy crisis - exacerbated by the invasion of Ukraine - poses additional challenges to a faster reduction in fossil fuel emissions. The reduced supply of natural gas in Europe is being solved in the short term with increased coal use for energy generation. Germany, Austria and the Netherlands announced an emergency restart of coal power plants in <a href="https://www.euronews.com/green/2022/06/24/all-the-european-countries-returning-to-dirty-coal-as-russia-threatens-to-turn-off-the-gas">June</a>, postponing the decommissioning of the heavy emitters (coal power plants emit more than <a href="http://www.global-greenhouse-warming.com/gas-vs-coal.html">twice</a> as much as natural gas plants of the same size). The perils of such a trend is a further reduction in our chance to limit climate change. At the end of October, the UN Environmental Program (UNEP) <a href="https://www.unep.org/resources/emissions-gap-report-2022">published</a> its 2022 Emissions Gap Report, pointing out that after a COVID-induced reduction in 2020, emissions in 2021 rebounded and reached 52.8 Gt CO2e, already above 2019 levels.</p>
<h1>China, coal and a preposition</h1>
<p>In Glasgow, great discussion was had on the use of a single preposition, and unfortunately an agreement was reached to phase ‘down’ as opposed to phase ‘out’ coal. This issue is now more urgent than ever, and on November 14th officials will agree on more aggressive action in the pre-2030 ambitions discussion. On the same day, nature-based solutions will also be discussed, as climate change discussion evolves from a focus on Global Greenhouse Gases (GHG) towards a broader ambition on sustainability.</p>
<p>In a previous article, I <a href="https://illuminem.com/illuminemvoices/04ba0b56-4cdd-4ff1-b2ed-c65c65e9bfa6">emphasized</a> the important role China plays in global decarbonization. On November 8th, China’s special climate envoy, <a href="https://www.usnews.com/news/world/articles/2022-11-08/cop-27-china-climate-envoy-says-beijing-committed-to-carbon-neutrality">Xie Zhenhua</a>, reiterated the country’s commitment to peaking emissions by 2030. The problem is that <a href="https://www.nytimes.com/2022/11/03/business/energy-environment/china-coal-natural-gas.html">China</a> too is burning more coal, which drove the 6% increase in their emissions last year. China burns more coal than the rest of the world combined, contributing to why the country is responsible for a third of all global anthropogenic GHG emissions (more than the total emissions from the EU, US and Japan). Therefore, for the discussions in Egypt to be truly consequential, a commitment to accelerate the phasing out of coal will be necessary.</p>
<h1>Time Value of Money and the Decarbonization Investment Cycle</h1>
<p>We often use the metaphor of a road trip to outline the pressing need for a tangible metric such as Potential Avoided Emissions (PAE). We want to get to the 2030 milestone of cutting emissions by half, but without a thoughtful map we may not reach the destination. PAE measures the megatons of CO2e that are never emitted into the atmosphere because a new product or service replaces a much higher emission Business as Usual (BAU) product – e.g., driving a Tesla from point A to B versus driving an Internal Combustion Engine (ICE) car. We have finite financial resources to support this journey and also face the risk of running out of cash prior to reaching the destination.</p>
<p>Relevant solutions - from EVs, to smart meters and thermostats, better insulation for energy efficiency, plant-based burgers and milk alternatives, telepresence, heat pumps, larger offshore wind turbines, to name just a few – give our economies a chance to replace high emission BAU products. However, without a more quantitative approach that clearly measures progress against the stated goal, we are in danger of never reaching our destination. It is paramount we quantify the relevant solutions from a PAE perspective, thinking about the solutions using a time value of carbon concept (giving priority to what can make a difference in the short term) while computing the carbon return of the possible investments. Investing in the solutions that are price competitive makes robust economic sense and will allow us to build resilient and sustainable economies. Who could argue against that?</p>
<h1>Underwriting the right investments and the need for disclosure</h1>
<p>The concept of PAE, alongside carbon returns (megatons of CO2e never emitted per $ invested) and the time value of carbon could be utilised to maximize the climate change mitigation outcomes of all the capital the world will be deploying. Different financial institutions should report similar figures and underwrite investments with a similar methodology, using PAE as their metric. Analysis should include an indication of PAE pre-2030 (addressing time value of carbon), and investment amount per PAE. Capital markets can make a great impact towards the 2030 goal if properly channelled, and secondary-market investors can also use this approach to target the most impactful, potentially lucrative companies.</p>
<p>At COP26, former Bank of England Governor, Mark Carney, launched the Glasgow Financial Alliance for Net Zero (GFANZ) campaign. The new group started with representatives overseeing more than $130 trillion in assets, a figure that grew to over $150 trillion. They estimate that the private sector could provide over 70% of all the global investments required. A year later, Mr <a href="https://www.edie.net/mark-carney-defends-gfanz-after-a-turbulent-season/">Carney</a> was in front of the UK Parliament providing an update and defending the efforts of the Alliance, while hearing heavy criticism that many of the GFANZ members still support coal investments and to a larger extent investments into oil and natural gas. The Alliance members have made commitments on both sides, phasing down (hopefully out) financing to fossil fuel related investments while pledging to accelerate the funding for the assets that actually solve the issue.</p>
<p>Disclosure is key. Banks need to disclose what energy transition assets are being financed, the impact of the projects that back the real climate change solutions – from mitigation to adaptation – in terms of time value of carbon, carbon returns and Potential Avoided Emissions. To win this fight we need capital markets to be a real source of good.</p>
<p><em>Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>


COP27, The “Fight of our Lives” and Time Value of Money

Recent political developments cast a shadow over global Net Zero goals, as there is no decarbonization without China.

Being a heavy emitter of greenhouse gases, with so many coal fired power plants in operation, China’s own efforts to decarbonize their grid and economy are paramount to global targets. When it comes to the development of new green solutions and technology, from electrolysers for green hydrogen, to battery manufacturing, to EV assembly, to solar panel production, China leads by both volume and IP. 

<p>There is a lot at risk with the recent political developments to come out of China. Xi Jinping not only secured a third five-year term, in what many Western observers characterize as a power grab, but he is also giving signs that he will flex China’s muscles and force a reunification with Taiwan, while putting more regulatory pressure on Chinese private enterprises. On October 16th <a href="https://www.theguardian.com/world/2022/oct/16/xi-jinping-speech-opens-china-communist-party-congress">Xi Jinping</a> opened the week long 20th Chinese communist party congress, a key event that takes place every five years gathering 2,000 delegates who together represent 100 million members of the Communist Party. The event solidified his leadership and set Xi Jinping up for a third consecutive term as President, with the six Standing Committee members now being all loyalists to him. On October 24th, the same day that Rishi Sunak became the first Asian born UK Prime Minister, and after Xi got a third term as Chinese president, <a href="https://www.reuters.com/world/china/china-q3-gdp-growth-rebounds-faster-pace-risks-loom-2022-10-24/">China’s GDP</a> figures were released. Although the figure of 3.9% economic output growth over the same quarter in 2021 was not as bad as some economists feared, the consensus is that zero tolerance Covid policy will remain in place until 2024, which will continue to disrupt production and economic activity. A Reuters poll shows that China&#x27;s growth is expected to slow to 3.2% in 2022, a figure materially below the official target of 5.5%, the slowest economic growth in the country for the last 50 years. Capital markets priced in all of these developments and foreign investors sold massive positions. The <a href="https://www.bloomberg.com/news/articles/2022-10-24/china-markets-set-for-cautious-start-after-leadership-overhaul?leadSource=uverify%20wall">Hong Kong</a> stock market had its worst day since the 2008 financial crisis, with the Hang Seng Index down 7.3%.</p>
<p>Being a heavy emitter of greenhouse gases, with so many coal fired power plants in operation, China’s own efforts to decarbonize their grid and economy are paramount to global targets. When it comes to the development of new green solutions and technology, from electrolysers for green hydrogen, to battery manufacturing, to EV assembly, to solar panel production, China leads by both volume and IP.</p>
<h1>From driving the deflationary curve to making solar panels out of solar energy</h1>
<p>Often at webinars and events that talk about how solar energy has come down in prices dramatically, presenters like to show a graph that summarizes Swanson&#x27;s law, the empirical observation made by former SunPower founder Richard Swanson, that the price of solar PM modules drops ca 20% for every doubling of cumulative shipped volume. What is not often mentioned is that China is the reason that we have been able to materially increase the volume of manufactured solar PV panels. The International Energy Association (IEA) recently <a href="https://www.iea.org/reports/solar-pv-global-supply-chains/executive-summary">pointed out</a> that since 2011 China has invested over $50 billion in new solar PV manufacturing capacity, ten times greater than Europe, created 300,000 new jobs and now has a share of the total production chain (from polysilicon to ingots, wafers, cells and modules) that adds to more than 80% of global capacity. It is also often not emphasized that China themselves demand half of all the solar panels they manufacture. Solar energy and its deflationary trends, combined with batteries (also a deflationary technology benefiting from Chinese foresight), are the key solutions enabling the energy transition. We have China to thank for them.</p>
<p>Naysayers often like to point out that most Chinese solar PV is manufactured using electricity from coal fired sources and therefore has a material scope 2 carbon footprint. While that remains true, there have been remarkable improvements. For example, Jinko Solar Holding Company (JKS) is one of the largest producers of solar PV panels, and is based in China. The company <a href="https://www.pv-magazine.com/press-releases/jinkosolars-second-factory-in-china-powered-by-100-renewable-energy/">announced</a>that its second factory (they operate seven plants) in China is now powered 100% by renewable energy, a material milestone in the transition to solar panels made exclusively using solar energy. Jinko had committed to the Climate Group’s RE100, a global initiative of companies that have pledged to use 100% renewable energy. It is important to note that part of the clean energy of the second facility comes from on-site solar PV arrays installed on the plant’s large rooftop.</p>
<h1>Offshore wind advances have predominantly been in China</h1>
<p>Offshore wind is another extremely relevant energy transition solution where China is also further ahead in accelerating adoption. World Forum Offshore Wind <a href="https://www.offshorewind.biz/2022/09/07/china-dominates-offshore-wind-rankings-global-operating-capacity-at-55-gw-wfo/#:~:text=This%20growth%20was%20mainly%20driven,2022%2C%20according%20to%20the%20report.">recently released a report</a> that points out that6,759 MW of offshore wind capacity began operation in the first half of 2022, a fourfold increase over the 1,627 MW commissioned in the first six months of 2021. Of all the new offshore wind added this year, 75% is in China. China added 5,100 GW across 25 different offshore wind farms (the total number of offshore farms added in the first half of the year came to 33 discrete projects). The new additions bring the <a href="https://wfo-global.org/wp-content/uploads/2022/09/WFO_Global-Offshore-Wind-Report-HY1-2022.pdf">global</a> installed capacity of offshore wind in operation to 54.9 GW, of which 24.8 GW are in China, followed by 13.6 GW in the UK, 7.7 GW in Germany and 3.0 GW in the Netherlands.</p>
<p>Of the top 10 <a href="https://blog.bizvibe.com/blog/energy-and-fuels/top-10-wind-turbine-manufacturers-world#:~:text=Top%2010%20Wind%20Turbine%20Manufacturers%20in%20the%20World,%20%207.37%20%206%20more%20rows%20">wind turbine manufacturers</a> in the world in 2022, six are Chinese. European Vestas (VWS.CO) and Siemens Gamesa (SGRE.MC) are still the two largest wind turbine names with 9.6 GW and 8.8 GW of annual production capacity, but are now followed by Chinese Xinjiang Goldwind (2208.HK) that has an annual capacity of 8.25 GW. Goldwind has been <a href="https://www.evwind.es/2022/04/10/chinas-wind-turbine-costs-have-bottomed-out-says-goldwind/85591">relentless</a> in bringing down the cost of wind turbines from $700,000 per MW in 2020 to the current $370,000 per MW.</p>
<h1>A remarkable leader in Electric Vehicles</h1>
<p>It is well known that the largest EV market is that of China, where sales have benefited from a fiscal stimulus promoting EV adoption. Our own iClima <a href="https://www.iclima.earth/article/the-electric-vehicle-revolution-the-race-to-paris">forecast</a> back in Autumn 2021 was that 55% of all passenger vehicles to be sold in 2030 would be BEVs. Now BloombergNEF forecasts EVs to represent <a href="https://seekingalpha.com/article/4544546-ev-company-news-for-september-2022">60%</a> of all new units sold in 2030. Data <a href="https://auto.hindustantimes.com/auto/electric-vehicles/global-electric-car-sales-surge-60-in-august-2022-41664885071645.html">recently released</a> showed global BEV sales in August were 66% over August 2021 (exact figure was 622,000 BEVs sold in that month), with 5.7 million EV units sold in the first eight months of the year and 10 million units still expected to be sold in 2022. Sales of EVs in <a href="https://seekingalpha.com/article/4544546-ev-company-news-for-september-2022">China</a> were up 92% year over year and in August the country accounted for 30% of all global sales.</p>
<p>Three pioneering Chinese EV companies have their stories tied to the remarkable entrepreneurship of their founders. XPeng Inc. (XPEV) was founded in 2014 by Xia Heng and He Tao, two automotive veterans with experience in R&amp;D. The founders wanted a technology company that made electric cars, and XPeng just <a href="https://seekingalpha.com/article/4544678-tesla-nio-xpeng-li-auto-byd-deliveries-winners-losers">reported</a> 8,500 vehicles delivered in September and 29,500 units delivered in third quarter, 15% up year over year. Another example of Chinese entrepreneurship is that of William Li whofounded NIO (NIO), also in 2014. William is now referred to as the “Godfather of the Chinese EV industry”. The battery swap EV maker reached sales of 10,900 cars in September and 32,000 in the third quarter, a 29% year over year growth. Lastly, BYD (BYDDF) that was founded by Wang Chuanfu in 1995, as a maker of batteries for mobile phones. The company is known for having Warren Buffett’s Berkshire Hathaway as a shareholder. BYD is the largest EV maker in China and in <a href="https://www.arenaev.com/byds_1_millionth_car_this_year_is_chinas_most_popular_suv-news-678.php">early September</a> the company celebrated 1 million units (including PHEVs) produced in the year.</p>
<p>The successful story of EVs in China is down to a variety of reasons, but a major factor was clearly the determination, vision and commitment of the now billionaire founders of Xpeng, NIO and BYD. Since <a href="https://foreignpolicy.com/2021/08/25/china-xi-jinping-common-prosperity-billionaires/">August last year</a> President Xi Jinping’s call for “common prosperity” has resulted in attacks on some of China’s richest businesspeople, especially in technology. It is unclear what repercussion there could be from potential closer oversight of the Communist Party in the business activities of these EV companies.</p>
<h1>Recent Infrastructure Plan is a sign of commitment to green build up</h1>
<p>Last summer, China <a href="https://edition.cnn.com/2022/08/25/economy/china-stimulus-infrastructure-power-shortages-drought-intl-hnk/index.html">announced</a> 19 new measures with a huge focus on infrastructure growth. Covid lockdowns and a property downturn triggered by the Evergrande default earlier in the year may be part of the impetus to revive the Chinese economy, with a new deal infrastructure package that will generate economic growth and employment. Having suffered a persistent drought in the worst heat wave in the last 60 years, the Chinese infrastructure plan elevated water infrastructure as a climate change adaptation strategy to deal with “the worsening of both floods and droughts”. Projects that move water around China represent a third of the water budget, while ca. 30,000 water conservation projects are also seen as a way to employ over one million workers.</p>
<p>Bloomberg estimates that ca. $1 trillion of Chinese government funds will be available to support the several infrastructure projects, with the total capex reaching three times that amount when considering bank lending and corporate funding on top of the $1 trillion. North Chinese deserts are to host an unprecedented amount of utility scale solar and wind, with a first phase of 100 GW of both wind and solar being added by 2023 and a second phase with over 450 GW starting as early as late 2022. Ultra-high voltage transmission lines are to be built to connect the new green electricity to demand centres in the more populated Eastern region. High speed rail has already been elevated in China and the country currently has over 40,000 km of high-speed rail that Bloomberg estimates to be more than twice that of all other countries combined. Yet, this plan considers an additional 30,000 km of high-speed rail to be in operation by 2035. The new infrastructure plan in China is evidence of further acceleration of the energy transition in the second largest global economy, but China had already been focusing on the relevant solutions. Another indication of that comes from the inauguration, also in August, of what is now the largest building integrated PV (BIPV) system. A 120 MW multi-roof solar project built across 11 different locations, covering 665,000 m2 of rooftop space and capable of supplying 100% of the industrial park’s electricity needs.</p>
<h1>All Eyes on China</h1>
<p>To structurally solve our current energy crisis, we will need to see the material acceleration of adoption of utility scale solar and wind energy, the electrification of transportation and heat. Germany is the largest economy in Europe and is determined to move away from the reliance on Russian fossil fuels. President Biden in the US has passed supportive climate legislation with the IRA, and the demand destruction of high fossil fuels will make American consumers – buyers of EVs and solar rooftops – embrace the solutions.</p>
<p>China is the third large economy that will very much dictate our global fate, particularly the success in accelerating adoption of decarbonizing solutions. As we saw, the country has a fundamental position both in the supply side of the key components and technologies, but also in the demand and adoption of lower emission alternatives that decarbonize their own economy. Despite Xi’s autocratic stance, the ten years he has been in power saw China advance its green agenda. Our future ability to decarbonize the planet in line with the Paris Agreement is very much tied to China.</p>
<p><em>Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>


There is no decarbonization without China

Public and private equity investments can converge at times. That happens when both venture capital and private equity benefit from great inflow of capital and robust valuations based on the promise of hypergrowth future cash flows. This is usually for companies in specific “hot” segments. While that seems currently to be the case for venture capital funding flowing into CleanTech, the opposite is the case for shares of listed companies in the same exciting spaces, as public CleanTech has been suffering from a prolonged sell off.

<p>Public and private equity investments can converge at times. That happens when both venture capital and private equity benefit from great inflow of capital and robust valuations based on the promise of hypergrowth future cash flows. This is usually for companies in specific “hot” segments. While that seems currently to be the case for venture capital funding flowing into CleanTech, the opposite is the case for shares of listed companies in the same exciting spaces, as public CleanTech has been suffering from a prolonged sell off. Valuation levels now are clearly not pricing in a robust future of green cash flows. This year is proving to be a very difficult one for publicly traded companies in the green space, but that does not seem to be the case for venture capital investments. What does this dichotomy indicate? <strong>That the duration of the strategy determines what an investor prices in.</strong> Investors with a horizon longer than five-years are finding exciting opportunities in long duration energy storage solutions, software and AI based platforms for renewable energy asset optimization and monetization, new battery recycling solutions, and new pyrolysis processes for green hydrogen production. These continue to attract tremendous attention.</p>
<h1>How long is your green horizon? Short versus Long Term, Private versus Public</h1>
<p>The inflows into private Climate Tech have increased, and private and public valuations are seeing opposing trends. Investors pricing shares in the equity capital markets are only looking at the very near future. Like drivers on a road with thick fog, they can only see what is right ahead. Future cash flow is currently deeply discounted, and fossil fuel surplus is seen as a “safe” way to invest. However, if we look at the private market, a different dynamic is at work. The numbers for CleanTech VC investments showcase the discrepancy. Venture capital funding continues to flow towards Climate Tech, <a href="https://financialpost.com/pmn/business-pmn/this-climate-tech-boom-is-recession-proof">Bloomberg Green</a> estimating that over $35 billion was deployed last year, a figure almost twice that of 2020. There is no world where the relevant solutions in green energy, green transportation and sustainable products do not benefit from the material tailwind of climate action and price deflation. The US IRA provides an additional $370 billion in climate spending, with incentives for solar and wind, but also for emerging technologies like long-duration energy storage. Investors with a short-term focus are selling cleantech and valuations are depressed, while investors with a longer-term horizon like those that invest in VC, find in green solutions a very robust investment strategy.</p>
<p>When it comes to clean energy storage, there are two listed companies with very relevant solutions for the behind- the-meter and the in-front-of-the-meter (utility scale) segments. <strong>Fluence Energy </strong>(FLNC, down 58.97% from January to September) focuses on long duration energy storage that can solve renewable energy intermittence. As grids get close to 70% of solar and wind penetration it is of paramount importance to have a way to firm the electricity generated from renewable sources. Fluence reiterates <a href="https://ir.fluenceenergy.com/news-releases/news-release-details/fluence-energy-inc-reports-third-quarter-2022-results">guidance </a>of $1.1 billion of revenue for the year and the company currently trades at ca. 2x revenue, with a cash position of ca. $700 million and the potential to reach positive EBITDA in the next 12 to 18 months. Guidance was maintained despite the force majeure of Chinese battery <a href="https://ampvideo.bnnbloomberg.ca/fluence-declares-force-majeure-over-battery-supply-chain-woes-1.1765082#:~:text=Fluence%20Declares%20Force%20Majeure%20Over%20Battery%20Supply-Chain%20Woes,forcing%20them%20to%20look%20elsewhere%20for%20alternative%20sources.">supplier</a> earlier in May, an event that triggered the selloff in its shares. The IRA stimulus gives further support to Fluence’s regionalisation push, starting with a <a href="https://www.energy-storage.news/fluences-new-utah-manufacturing-facility-part-of-regionalisation-drive-europe-site-planned-for-2024/">new Utah manufacturing facility</a> that begins operation later this year. A significant milestone was the recent <a href="https://ir.fluenceenergy.com/news-releases/news-release-details/worlds-largest-storage-transmission-project-announced-fluence">announcement</a> of their largest “storage as transmission” 250 MW battery based storage system in Germany, designed to alleviate pressure on the grid.</p>
<p><strong>Stem</strong> (STEM, down 29.68% from January to end of September) has a revenue that is ¼ that of Fluence, but currently trades at a $2.2 billion market cap, above that of Fluence. San Francisco based Stem leverages its IT platform Athena to provide smart battery storage solutions that take them beyond energy storage assets, into microgrids, utility bill optimization, and commercial EV charging. In December last year, Stem <a href="https://www.stem.com/stem-to-acquire-also-energy-holdings-inc/">acquired Also Energy</a>, a solar asset management company for $695 million (75% cash, 25% equity), broadening its offering to include solar asset management. Both companies need to demonstrate an acceleration of revenue in the next quarters, while maintaining SG&amp;A and keeping operating expenses under control, therefore having a clear path to profitability. While supply chain issues remain, the speed of growth of their markets could not be more robust.</p>
<p>Meanwhile, LDES continues to gain a lot of attention from private investors. According to <a href="https://www.energy-storage.news/mercom-energy-storage-corporate-funding-for-first-half-of-2022-nearly-equals-2021-total/">Mercom Capital</a>, in the first half of 2022 energy storage companies raised almost as much capital from private investors as in the full year 2021. Large deals in the period included US based <a href="https://www.eolianenergy.com/">Eolian Energy</a> with a $925 million VC funding raise earmarked for energy storage, like previous investment into portfolio company <strong>Able Grid.</strong> Another large transaction was $250 million invested into compressed air energy storage <a href="https://www.hydrostor.ca/">Hydrostor</a>.</p>
<h1>Solar Gains Monumental Momentum, Pipeline of projects tells a clear story</h1>
<p>Higher fossil fuel prices and investments into LNG processing and midstream assets are being misinterpreted as a lack of acceleration of the renewable energy transition. When analysing the pipeline of renewable projects, for example in the US, we see a very different story; it is abundantly clear that renewable energy is scaling up. Bloomberg referred to the US pipeline of PV investments as <a href="https://www.bloomberg.com/news/articles/2022-09-30/there-s-a-mind-bending-amount-of-solar-in-the-us-pipeline?sref=mjdszXHE">a “mind bending&quot;</a> amount of solar PV and clean energy storage projects.</p>
<p>Lawrence Berkeley National Laboratory gathered data at the end of last year from seven independent system operators and 35 utilities to see what solar PV projects are waiting for grid connection. The pipeline under these entities represents ca 85% of the US electricity load. This research found that nearly 1,000 GW of potential new utility scale solar PV generation or storage capacity had requested grid connection to the network. <strong>In the Solar Studies Report by the US Department of Energy, their fastest scenario of decarbonization + electrification estimates US 1,000 GW of solar to be added by 2035.</strong> As Lawrence Berkeley found out, the current pipeline is already in line with this long-term ambition. The Inflation Reduction Act will accelerate the development and adoption of solar PV. <a href="https://www.bloomberg.com/news/articles/2022-09-30/there-s-a-mind-bending-amount-of-solar-in-the-us-pipeline?sref=mjdszXHE">Bloomberg</a> points out that the vast majority of the 1,450 GW of new power generation under development in the US is renewable. Of this large pipeline of 1,450 GW (including energy storage projects), 46% is solar PV. In other words, around 667 GW of utility scale solar in the US is under development and waiting for grid connection. Not all of these projects will be built, but the size of the existing pipeline showcases that the 2035 DoE forecast of 1,000 GW of solar, while ambitious, is within reach. Of this pipeline of in front of the meter solar, 42% represents projects that are hybrid and have integrated clean energy storage assets alongside generation.</p>
<p><strong>In Europe, solar rooftops are expected to represent the largest share of solar PV in the EU.</strong> The <a href="https://www.solarpowereurope.org/advocacy/eu-solar-strategy">REPower</a> EU strategy has increased the bloc’s ambition for solar energy. If the European Union Solar Rooftop Initiative yields its full results, the countries will be adding 58 GW of “local solar” by 2025. A key part of the push is a solar rooftop mandate for all new public and commercial buildings by 2026, all existing public and commercial buildings by 2027 and all new residential buildings by 2029. That brings us to the end of the decade. By 2030, the share of wind and solar energy in Europe will have doubled from the current total of 33% to 67%. By then, <strong>solar installed capacity in the block will be ca. 600 GW</strong>, representing the largest electricity source in the EU - with <strong>more than half coming from rooftops</strong>. If we consider the <a href="https://www.iclima.earth/article/when-will-the-grid-be-green-and-how-much-storage-will-that-require">U.S. Department of Energy</a> Solar Studies report, the U.S. could be adding ca. 1,000 GW of solar to its grid by 2035, of which over 25% could be “local solar.&quot; Between 300 GW of solar rooftops in Europe and 250 GW in the U.S., <strong>the world will have reshaped its grid by 2035, with over 500 GW of solar capacity installed at the point of consumption.</strong> Yet, the share price of the companies leading the decentralization, digitalization and decarbonization of the grid do not seem to take into account this “mind bending” growth.</p>
<h1>Green Growth as a Recession Proof Strategy</h1>
<p>The equity sell off is unlikely to stop until the US Fed stops increasing interest rates. Repricing future cash flows is a harder exercise when the level of risk-free rates is itself unclear, and how negative the implications of inflation and higher interest rates will be for global economies’ demand for goods. If NatGas and crude prices remain high, it will continue to create demand destruction and accelerate the adoption of green alternatives, even if that means an economic scenario of prolonged inflation (or “<a href="https://www.iclima.earth/article/fossinflation">fossinflation</a>”). If hydrocarbon prices subside in a case where the central banks’ hawkishness causes a deeper global recession, interest rates will remain at a low level and growth will again be top of mind. In either scenario, green growth is to decouple from broad growth. Monumental growth is not priced in.</p>
<p><em>Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>


The dichotomy between private and public markets, renewable energy pipeline and Current Installed Capacity

“It was the best of times, it was the worst of times, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.” Our energy trilemma looks unsolvable - energy security with or without Russia seems unattainable, affordability seems a distant fantasy with crude and NatGas at records high, and decarbonization goals are being wilfully ignored as Europe returns to burning coal at dated power plants.

<p>Charles Dickens’ famous novel starts with words that seem to have been written to describe the world’s current crossroads: “It was the best of times, it was the worst of times, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.” Our energy trilemma looks unsolvable - energy security with or without Russia seems unattainable, affordability seems a distant fantasy with crude and NatGas at records high, and decarbonization goals are being wilfully ignored as Europe returns to burning coal at dated power plants.</p>
<p>In August we saw the energy crisis deepen and analysts worry about the hard choices facing us in the winter months ahead. Since then, Russia has stopped gas flows to Europe, catalysing fears of rationing and more inflation in the winter months ahead. What started as a <a href="https://www.cnbc.com/2022/08/31/russia-temporarily-halts-gas-flows-to-europe-via-nord-stream-1.html">temporary halt</a> to the Nord Stream 1 NatGas pipeline at the end of August now looks like a permanent curtailment. Spare fossil fuel capacity is short everywhere - OPEC’s is the lowest on record - so the group will be cautious to use it. LNG and coal production are at a maximum. Russia is exploiting Europe’s dependence by weaponizing fossil fuels, blowing on the fire of inflation. Price caps are only a palliative to the problem. To solve this supply crisis, we need to lower physical demand for fossil fuels. Are we to drill more and disregard climate change mitigation goals?</p>
<h1>EU, US and China give impetus to the energy transition</h1>
<p>Despite the obvious struggles, in August we also saw the three largest economic blocs in the world put forth legislation and plans to structurally solve our energy trilemma. The US Inflation Reduction Act (“IRA”) bill, legislation in Germany and across the EU and a new infrastructure plan in China provide much needed impetus to solve the problem. This means accelerating ‘the new’, the real short-term solutions to the crisis – energy efficiency and solar rooftops – as well as longer term investments in the green economy.</p>
<p>The EU has been leading the legislation on energy transition acceleration measures, while the US finally delivered on Biden’s campaign promises for climate related support. Additional good news came from the world’s second largest economy, which announced a new infrastructure plan in August. China <a href="https://www.msn.com/en-us/news/world/from-energy-to-drinking-water-china-has-lots-to-fix-in-its-economy/ar-AA115jvA">unveiled</a> 19 new measures with a huge focus on infrastructure growth. Covid lockdowns and a property downturn triggered by the Evergrande default earlier in the year may be part of the impetus to revive the Chinese economy, and it is hoped that this new deal infrastructure package will generate economic growth and employment.</p>
<h1>China tackles adaptation and mitigation</h1>
<p>Having suffered a persistent drought, the Chinese infrastructure plan elevates <a href="https://www.reuters.com/world/china/after-long-drought-china-plots-ambitious-water-infrastructure-push-2022-09-01/">water</a> infrastructure as a climate change adaptation strategy to deal with “the worsening of both floods and droughts”. Projects that move water around China represent a third of the water budget, while ca. 30,000 water conservation projects are also seen as a way to employ over one million workers. <a href="https://www.bloomberg.com/news/features/2022-08-25/how-china-will-spend-1-trillion-on-infrastructure-to-boost-economy?sref=mjdszXHE">Bloomberg</a>estimates that ca. $ 1 trillion of Chinese government funds will be available to support the several infrastructure projects, with the total capex reaching three times that amount when considering bank lending and corporate funding on top of the $ 1 trillion.</p>
<p>North Chinese deserts are to host an unprecedented amount of utility scale solar and wind, with the first phase of 100 GW of both wind and solar being added by 2023 and a second phase with over 450 GW starting in 2022. Ultra -high voltage transmission lines are to be built to connect the new green electricity to demand centres in the more populated Eastern region. High speed rail has already been elevated in China and the country currently has over 40 ,000 km of high-speed rail that Bloomberg estimates to be more than twice that of all other countries combined. Despite this, the plan considers an additional 30 ,000 km of high -speed rail to be in operation by 2035. The new infrastructure plan in China is evidence of a further acceleration of the energy transition, but the country had already been focusing on the relevant solutions. Further evidence of commitment to new green solutions comes from the inauguration, also in <a href="https://www.pv-magazine.com/2022/08/26/china-sets-bipv-record-with-120-mw-multi-roof-solar-project/?utm_source=dlvr.it&amp;utm_medium=linkedin">August</a>, of what is now the largest building integrated PV (BIPV) system. It is a 120 MW multi -roof solar project built across 11 different locations, covering 665 ,000 m 2 of rooftop space and capable of supplying 100 % of the industrial park’s electricity needs.</p>
<h1>It&#x27;s in the name: Solar panels = inflation reduction</h1>
<p>As the US was behind the legislative efforts of the EU, it was able to leverage successful policies from European countries. Research shows that <a href="https://iopscience.iop.org/article/10.1088/1748-9326/ac7df3/meta">&quot;not all subsidies are equal&quot;</a>, as consumers have a strong preference for point-of-sale discounts as opposed to fiscal stimulus via annual tax return filings. The IRA bill earmarks a total of <a href="https://www.democrats.senate.gov/imo/media/doc/summary_of_the_energy_security_and_climate_change_investments_in_the_inflation_reduction_act_of_2022.pdf">$369 billion</a> in investments into energy security and climate change, as follows: $161 billion as fiscal stimulus for clean electricity; $100 billion to make clean technology and solutions more affordable; $75 billion for environmental conservation and ca. $33 billion to support US-based clean-tech supply chain development. The <a href="https://www.cnbc.com/2022/07/27/inflation-reduction-act-climate-change-provisions.html">bill</a> could put the US on track to cut CO2e emissions by 40% by 2030. Some of the key <a href="https://www.rewiringamerica.org/app/ira-calculator">incentives</a> are:</p>
<ul><li><strong>For clean vehicles:</strong> Lower or middle-income individuals can get up to a $4,000 consumer tax credit to buy used clean vehicles, and up to a $7,500 tax credit to buy new clean vehicles in 2023, with a direct upfront discount starting in 2024;</li></ul>
<ul><li><strong>For residential clean energy:</strong> Credit applies to American homeowners and renters for the next 10 years, with a 30% tax credit towards rooftop solar, geothermal heating and battery storage;</li></ul>
<ul><li><strong>For energy efficiency home improvements:</strong> Up to $2,000 per year tax credit for heat pump dual systems (heating and cooling), up to $2,000 per year tax credit for heat pump water heater; and up to $1,200 for improvements in insulation, air sealing and ventilation;</li></ul>
<ul><li><strong>For High Efficiency Electric Home Rebate (HEEHRA):</strong> Upfront discount for heat pumps, electric stoves, heat pump clothes dryers, electric panels, basic weatherization and electric wiring;</li></ul>
<ul><li><strong>For Sustainable Aviation Fuel (SAF):</strong> R&amp;D <a href="https://www.canarymedia.com/articles/air-travel/the-new-climate-bill-could-help-clean-up-air-travel">support</a> of $300 million and $1.5 per gallon of tax credits for sustainable fuels with 50% less GHG emissions;<br/></li></ul>
<p>The IRA will transform the US buildings sector, as retrofits and new developments will converge energy efficiency, mobile and stationary clean energy storage, and vehicle electrification. In terms of consumers, the IRA puts individuals as the key decision maker in the adoption of the solutions and the immediate savings as the main driver prompting the transition to lower emission alternatives.</p>
<h1>Consumers centre stage</h1>
<p>The new policies in the US, China and Europe incentivize consumers to adopt deflationary clean solutions. We expect to see the acceleration of adoption of two key consumer led indicators, namely solar rooftop installations and EV purchases. As of July 2022, <a href="https://www.californiadgstats.ca.gov/">California</a> had 1.5 million solar rooftops installed (12,944 MW of distributed solar generation, a 10-fold increase over the 1,232 MW of capacity back in 2012). According to the US Census Bureau, <a href="https://www.mercurynews.com/2022/01/24/rooftop-solar-war-intensifies-as-regulators-pull-reform-proposal/">there are</a> 13.2 million households in CA, so the current penetration in the market with the highest adoption of local solar is ca 11%. Shortly after the IRA was signed, <a href="https://www.bloomberg.com/news/articles/2022-08-29/us-homes-add-rooftop-solar-at-a-record-clip-to-cut-power-bills?sref=mjdszXHE">BloombergNEF</a> predicted that US households will install a record amount of solar amounting to about 5.6 GW by year end, a figure three times higher than the capacity being added by commercial users. California, Texas, Florida and the Midwest will lead in terms of adoption.</p>
<p>According to the <a href="https://www.canarymedia.com/articles/electric-vehicles/chart-which-countries-buy-the-most-evs?utm_campaign=canary&amp;utm_medium=email&amp;_hsmi=224808694&amp;_hsenc=p2ANqtz-_p6xD7kqYb6VqtbywmDIs8WVplFV7sJUvvUkH_DhUfOM7Pk6A8hHYbEguBVvm-EHmJKBWvp_CqjhDvDSkuxE5eOKZyJA&amp;utm_source=newsletter">IEA</a>, in 2021 the ten largest markets for EVs as a percentage of overall car sales were Norway (at 86%), Iceland (at 72%), Sweden (at 43%), Denmark (at 35%), Finland (at 31%), Netherlands (at 30%), Germany (at 26%), Switzerland (at 22%), Portugal (at 20%) and the UK (at 19%). China was 13th with 16% of all auto sales while the US was 19th at 5% of all sales. China is expected to lead on the manufacturing side, producing 8 million units in 2028. The adoption of EVs in the US is accelerating, and again California is leading the way. Shortly after the IRA was put in place, California <a href="https://www.cnbc.com/2022/08/25/california-bans-the-sale-of-new-gas-powered-cars-by-2035.html#:~:text=California%20passes%20law%20that%20bans%20sales%20of%20new,step%20in%20the%20state%E2%80%99s%20battle%20against%20climate%20change.">banned the sale</a> of new gasoline cars after 2035, requiring 35 % of all new vehicles sold by 2026 to be zero emissions (EV or H 2 power), rising to 68 % by 2030.</p>
<h1>Light at the end of the tunnel</h1>
<p>Fiscal stimulus in the US, EU and China will encourage global adoption of low emission solutions, as consumers embrace the alternatives that are cleaner, generate savings and guarantee supply at an unprecedented pace. Fossil fuel companies may be generating abnormal cash flow right now, but their days are numbered. The light at the end of the tunnel becomes brighter, we can see a future of abundant and inexpensive clean energy, enabling Net Zero buildings, transforming cars into sustainable computerized power plants on wheels, allowing us to split the water molecule and create a new green hydrogen economy, solving renewable energy intermittency and building grids that are 100% green. The best of times is ahead.</p>
<p><em>Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>


A "Tale of Two Cities" and The Energy Crisis

Keeping a core material allocation in broad indices that represent so many companies with products and services being replaced and disrupted (e.g., internal combustion engine producers competing with electric vehicles) is risky. There are also challenges in the clean energy space, but a deeper look at how innovations are likely to unfold can give us greater insight into the risks and opportunities for green investments.

<p>Jack Bogle, founder of Vanguard, revolutionized the investment management industry when he created index funds back in 1975, bringing to market price competitive strategies that allowed retail investors to follow broad indices like the S&amp;P 500 or Dow Jones. Besides being an inexpensive product, funds tracking these benchmarks have added diversification to portfolios. Since then, passive investments have increased in popularity and in the past 40 years have competed for capital flow with the active strategies that try to beat the market and deliver excess returns. Index funds following broad markets have been a very popular strategy.</p>
<p>After the oil shocks of 1973 and 1979, fossil fuels became inexpensive and used extensively in industries from electricity to transportation and fertilizers to plastics. This also enabled a rapid increase in the mass-produced materials like cement and steel, to the great benefit of the new equity indices that represented a broad range of companies. However, what worked in the past now poses a lot of risk, as global economies begin to transition at differing speeds towards Net Zero.</p>
<p>For example, the S&amp;P500 currently has about 20% of its weight represented by companies that are heavy carbon emitters, predominantly names in oil &amp; gas, plastic packaging, automakers, gas utilities, trucking, gas distribution, and air freight.</p>
<p>Although in 2022 the strategy of investing in “brown value” is paying off, the same high prices have started to cause demand destruction, thus accelerating the energy transition over the long term. This peculiar coexistence of “green growth” and “brown value” is being misinterpreted by many analysts as the revenge of the old economy. The acceleration of the energy transition is triggering a process of profound, structural changes that will undoubtedly create many winners and many losers.</p>
<p>Keeping a core material allocation in broad indices that represent so many companies with products and services being replaced and disrupted (e.g., internal combustion engine producers competing with electric vehicles) is risky. There are also challenges in the clean energy space, but a deeper look at how innovations are likely to unfold can give us greater insight into the risks and opportunities for green investments.</p>
<h1><strong>Clean Energy Technologies, Supply Chain Developments and Potential Disruption</strong></h1>
<p>Solar panels and batteries are not fuels, they are technologies. Producers of both equipment have become more efficient as scale increases, which has been consistently driving down prices. The energy transition is moving economies away from extractive activities like oil and gas exploration, therefore looking at how new solutions are likely to develop is paramount to understanding where the risks and opportunities in the path towards a clean grid are.</p>
<p>The best framework I have seen on this potential evolution was put together by a solar energy enthusiast that I have had the pleasure of speaking to several times. Bill Nussey is a venture capitalist, successful entrepreneur, an experienced engineer as well as the author of “Freeing Energy,” a book published in 2021 predicting the rise and fast adoption of what he beautifully calls “local solar.”</p>
<p>In explaining the profound and transformative potential of solar energy, Bill elaborates on the evolution of technologies and supply chains, which he refers to as “the five orders of cleantech innovation.” They are Components (first order), Integrations (second order), Services (third order), Platforms (fourth order) and Disruptions (fifth and last order).</p>
<p>In the first order we see the foundation of the entire industry. In clean energy, the producers of solar cells, solar panels, batteries and inverters fall into this category. Manufacturing these key components is capital intensive, takes a lot of time to achieve scale and the products are somewhat commoditized, so price competitiveness is a must. Canadian Solar (<a href="https://www.nasdaq.com/market-activity/stocks/csiq">CSIQ</a>), Enphase Energy (<a href="https://www.nasdaq.com/market-activity/stocks/enph">ENPH</a>) and Jinko Solar (<a href="https://www.nasdaq.com/market-activity/stocks/jks">JKS</a>) are examples of successful first order companies.</p>
<p>Second order innovation is characterized by the integration of first order components into a new product or market. Bill Nussey sees solar installers as the quintessential example of Integration in the clean energy space. Sunrun (<a href="https://www.nasdaq.com/market-activity/stocks/run">RUN</a>) and Sunpower (<a href="https://www.nasdaq.com/market-activity/stocks/spwr">SPWR</a>) are two examples of second order companies. Sunrun is the market leader in installation for residential solar rooftops in the U.S. (the company is embracing third and fourth order businesses as we will see below, but Sunrun is still fundamentally an installation company). On the clean energy storage side, second order solutions integrate the different components into a single system. Flow batteries, thermal storage and mechanical storage providers are other examples of second order companies. Energy Vault (<a href="https://www.nasdaq.com/market-activity/stocks/nrgv">NRGV</a>) uses kinetic energy as a low-cost utility scale alternative to lithium-ion batteries.</p>
<p>As solar rooftops are a powerful short-term solution to the energy crisis, allowing users to save money from day one (in particular with the benefits that the Inflation Reduction Act is promoting in the U.S. market), “solar everywhere” is materializing as a milestone in the energy transition. This will combine with long duration energy storage (“LDES”) for a much bigger transformation. So higher up in the value chain comes the third order of innovation, where companies turn second order assets like solar panels and batteries into a service.</p>
<p>These companies provide a pay-as-you-go, or subscription model service that is an alternative to the traditional model based on an upfront installation fee. Microgrid services or energy storage solutions fit into this category. Two great examples are Stem (<a href="https://www.nasdaq.com/market-activity/stocks/stem">STEM</a>) and Fluence (<a href="https://www.nasdaq.com/market-activity/stocks/flnc">FLNC</a>); neither manufactures the equipment, instead they deliver, install, and operate clean energy storage as a service.</p>
<p>The fourth order of innovation is characterized by new innovative platforms that increase the value of services and assets in a commission-based revenue model. Nussey points to Uber and Airbnb as quintessential examples of Platform businesses that gave an opportunity to asset owners of cars and properties to optimize and monetize their value. That is what we are observing in Vehicle to Grid (“V2G”) and Virtual Power Plant (“VPP”) solutions that have optimization software at the heart of their Platforms.</p>
<p>A great example of a company in this space is Nuvve (<a href="https://www.nasdaq.com/market-activity/stocks/nvve">NVVE</a>), the only pure V2G listed company that enables owners of EV fleets to use the mobile batteries inside the electric cars to provide frequency regulation and peak shaving to the benefit of the grid. Sunrun has been investing into the more potentially lucrative fourth order innovation and already operates a VPP in California. Another exciting name is Voltus, a company that was supposed to go public via a SPAC merger and could become the only listed pure player in the demand response distributed energy space.</p>
<p>Lastly, the fifth and most profound innovation, that of the Disruptors. Nussey sees green hydrogen as a transformative industry that can decarbonize a broad range of other industries, from cement to fertilizers and steel producers to hard to abate transportation in the maritime space to, of course, LDES solutions. While no pure green H2 players have emerged yet, current proxies for the disruptive potential of clean hydrogen are originally first order component manufacturers of the two key technologies (also moving into more elaborate third order Services): fuel cells and electrolysers.</p>
<p>Bloom Energy (<a href="https://www.nasdaq.com/market-activity/stocks/be">BE</a>), the California based manufacturer of solid oxide fuel cells for behind the meter electricity production, and PlugPower (<a href="https://www.nasdaq.com/market-activity/stocks/plug">PLUG</a>), focusing on proton exchange membrane (“PEM”) fuel cells for transportation applications, are both examples of companies enabling the creation of a hydrogen economy.</p>
<h1><strong>Economic Intuition and the case for green growth</strong></h1>
<p>A portfolio designed to represent a comprehensive set of clean energy solutions across the five degrees of innovation described above allows an investor to gain exposure to the companies solving the bottlenecks at the base of the supply chain, while benefiting from the overall revenue growth that all providers of the key solutions will benefit from, without being overexposed to the riskier (but potentially very rewarding) more disruptive fourth and fifth order businesses of newer business models.</p>
<p>We have developed and proposed investment themes that represent key opportunities across the five orders of innovation, from batteries to solar panels, to aggregators of distributed energy assets like V2G and VPP. Our approach is to provide enough diversification, as it is yet premature to call winners and be overexposed to a few companies or hold too concentrated portfolios. At this point investors should hold the most exciting developments across distributed renewable energy, in LDES, and in new models of a circular economy, as well as solutions to allow us to adapt to an already warming planet.</p>
<p>Therefore, thematic index funds, an innovation that followed the broad indices first designed by the late Mr. Bogle, will continue to compete very well with active portfolio managers trying to anticipate who will be the “climate champions” and attempting to capture the favourable momentum of clear long-term winners behind clean solutions. We believe comprehensive green indices should not be used as satellite allocation, but rather as core, in conjunction with a lower exposure to the traditional but not future proof broad indices. The case for green thematic investing as a way to capture the unprecedented value creation that the energy transition triggers is extremely strong.</p>
<p><em>This article is also published by <a href="https://www.nasdaq.com/articles/why-green-investors-should-think-thematically">Nasdaq</a>. Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.</em></p>


Why Green Investors Should Think Thematically

In his 2014 book titled ‘Clean Disruption’, Stanford lecturer in entrepreneurship, disruption and clean energy Tony Seba likened nuclear energy to a zombie: “not quite alive but not dead either”. Seba points out that nuclear energy has consistently failed to deliver, with the industry characterised by cost overruns, massive delays in construction and life-threatening accidents. A researcher on clean energy, he points out that nuclear is one of the few industries with a negative learning curve, with the cost to build a reactor now more than ten times the cost in the 1970s. Serhii Plokhy, a Harvard history professor and leading authority on the nuclear age points out in his recently published book “Atom and Ashes” that hundreds of accidents have happened in the history of the nuclear industry and explains in detail the category 7, highest level accidents at Chernobyl (Ukraine, 1986) and Fukushima (Japan, 2011) that released large quantities of radioactive material with severe environmental and health consequences. What is more, Vladimir Putin is currently demonstrating the geopolitical dangers that large nuclear sites bring. Plokhy summarizes nuclear energy as not only risky to operate but also impossible to count on as a long-term solution to climate change. The energy crisis seems to be giving new space for nuclear energy enthusiasts to defend the technology as a non-fossil fuel solution to the energy transition.

<p>In his 2014 book titled ‘Clean Disruption’, Stanford lecturer in entrepreneurship, disruption and clean energy Tony Seba likened nuclear energy to a zombie: “not quite alive but not dead either”. Seba points out that nuclear energy has consistently failed to deliver, with the industry characterised by cost overruns, massive delays in construction and life-threatening accidents. A researcher on clean energy, he points out that nuclear is one of the few industries with a negative learning curve, with the cost to build a reactor now more than ten times the cost in the 1970s. Serhii Plokhy, a Harvard history professor and leading authority on the nuclear age points out in his recently published book “Atom and Ashes” that hundreds of accidents have happened in the history of the nuclear industry and explains in detail the category 7, highest level accidents at Chernobyl (Ukraine, 1986) and Fukushima (Japan, 2011) that released large quantities of radioactive material with severe environmental and health consequences. What is more, Vladimir Putin is currently demonstrating the geopolitical dangers that large nuclear sites bring. Plokhy summarizes nuclear energy as not only risky to operate but also impossible to count on as a long-term solution to climate change. The energy crisis seems to be giving new space for nuclear energy enthusiasts to defend the technology as a non-fossil fuel solution to the energy transition.</p>
<h2>Nuclear energy density may be high but its modularity is very low</h2>
<p>The US <a href="https://www.energy.gov/ne/articles/nuclear-power-most-reliable-energy-source-and-its-not-even-close">Office of Nuclear Power</a> points out that nuclear plants in America have an average capacity factor of ca. 92%, which is widely known to be above the capacity factor of intermittent renewable sources (ca. 35% for wind and 25% for solar). Moreover, proponents of nuclear like to point out that the high energy density of fission reactors means that a nuclear power plant has a power density of ca. 1,000 watts per m2, while the power density of solar is around 20 watts per m2. This, for example, drives Japan’s interest in the technology. Global giant China also has a policy to promote the technology, and the analysis of the outcome of 30 years of federal support in a country with little t public or political opposition is a very relevant exercise.</p>
<p>Energy specialist <a href="https://illuminem.com/illuminemvoices/a7cb961f-c820-40f3-b3fc-7048f6282a37">Michael Barnard</a> therefore did a study on China’s efforts to scale up wind, solar and nuclear. The country has had a nuclear development program since the 90s (the first commercial nuclear plant starting operations in <a href="https://cleantechnica.com/2019/02/21/wind-solar-in-china-generating-2x-nuclear-today-will-be-4x-by-2030/">1994</a>) and a wind and solar program from the mid-2000s. He tracked the annual deployment of these technologies in the last 11 years as well as their production. The graphs Barnard plotted show unequivocally that wind and solar were able to scale up successfully while nuclear was not. Energy density may be attractive in theory, but not even the support of the Chinese government was able to expedite the development of nuclear reactor construction. Complexities in engineering megaprojects abound and nuclear scalability has never been achieved (<a href="https://bentflyvbjerg.medium.com/four-ways-to-scale-up-136eb72a3fbd">falling into the slow speed and bespoke</a> category in Bent Flyvbjerg’s “Four ways to scale up” matrix ). That is the main reason why Barnard projects that solar and wind in China will produce four times more electricity than nuclear by 2030 (there will be 100 GW of nuclear in China by 2030, which is <a href="https://cleantechnica.com/2019/02/21/wind-solar-in-china-generating-2x-nuclear-today-will-be-4x-by-2030/">half</a> of the previous target, while by 2023 ca. 55 GW of nuclear will be online).</p>
<h2>No Breakthroughs</h2>
<p>Heat and drought have affected hydro generation in many regions, natural gas and coal are at historically high levels and there are continuing concerns over our ability to ramp up both renewable energy sources and long duration energy storage. This situation reignites the arguments for the high energy density of nuclear energy. That is why a country committed to decommissioning all its nuclear like Germany is <a href="https://www.businessinsider.com/germany-delay-nuclear-energy-plant-exit-russia-natural-gas-cut-2022-7?r=US&amp;IR=T#:~:text=Germany%20is%20considering%20keeping%20nuclear%20plants%20running%20beyond,flows%20to%20Germany%2C%20pushing%20it%20toward%20a%20recession.">considering</a> postponing the decommissioning of its three remaining nuclear plants, despite the fact that it has been phasing out the technology since the Fukushima disaster. Similarly, California’s governor is <a href="https://www.canarymedia.com/articles/nuclear/should-california-keep-its-last-nuclear-plant-open-the-battle-is-back">currently</a> considering whether to keep its last nuclear plant, Diablo Canyon, running for longer. Plokhy warns that the risk of accidents associated with keeping old nuclear plants in operation is material, but so is the risk of rushing the development of a new generation of reactors.</p>
<p>Bill Gates backs new cleantech via his Breakthrough Energy venture fund, but has also been supporting modular nuclear hopes since 2006 when he co-founded TerraPower to develop nuclear fission modular reactors that are to be safer and more efficient. A few weeks ago Gates led a round that <a href="https://www.geekwire.com/2022/nuclear-energy-company-co-founded-by-bill-gates-raises-750m-one-of-the-largest-rounds-in-seattle-tech-history/">raised</a> $750 million for the Seattle based venture. A first <strong><em>demonstration</em></strong> 500 MW reactor is to go into operation in 2028. According to the investment bank Lazard, who frequently calculate the Levelized Cost of Energy (LCOE) for different sources of electricity, nuclear is at $204/MWh (assuming no decommissioning costs) while utility scale solar is at $41/MWh in version 15 of their model. It is unclear what the cost would be to develop TerraPower modular solutions, but what is clear is that commercialization phase is unlikely to happen prior to 2030.</p>
<p>Shortly after COP26 I wrote an <a href="https://www.iclima.earth/article/mark-carney-your-aim-is-good-but-heres-how-to-hit-the-bullseye">open letter</a> to Mark Carney suggesting that we utilise three key metrics when looking at climate change mitigation solutions. The first is Potential Avoided Emissions (PAE) which entails estimating the volume of emissions that are precluded from entering the atmosphere by using a low carbon alternative to a heavy emitting technology or process, e.g. EVs versus Internal Combustion Engine cars. Secondly, the Time Value of Carbon, which is similar to the time value of money; i.e. CO2 avoided in the near term is worth more than that avoided in the long term. Finally, the carbon return on investment calculates the dollar per megaton of PAE. While nuclear energy theoretically has high PAE, it scores extremely poorly in terms of the time value of carbon and carbon return on investment, with plants costing large amounts and taking a long time to come on line, meaning any material impact would realistically be beyond 2030. The investment case is thus not strong.</p>
<h2>Not any cheaper, faster or safer</h2>
<p>Nuclear energy takes, rightly, many years to develop. The median construction time of the nuclear reactors in operation in 2020 was <a href="https://www.statista.com/statistics/712841/median-construction-time-for-reactors-since-1981/">seven years</a>, and the industry has a terrible track record of cost overruns. An <a href="https://energy.mit.edu/news/building-nuclear-power-plants/">MIT</a> team estimated that over five decades of nuclear plant development across 107 plants in the US, the average final cost of each plant was three times higher than the original budget. The <a href="https://www.gpb.org/news/2022/05/09/georgia-nuclear-plants-cost-now-forecast-top-30-billion">next</a> nuclear power plant to become operational in the US says it all. Plant Vogtle, being built in Georgia, is now estimated to cost over $34 billion. When approved back in 2012 the additional two reactors (of 1,113 MW each) were estimated to cost $14 billion. The new reactors are scheduled to start operation in 2023 at a cost of $15.3 million per MW. In stark contrast, <a href="https://about.bnef.com/blog/solar-10-predictions-for-2022/">BloombergNEF</a> predicts solar modules will reach $250,000 per MW by the end of the year.</p>
<p>China, the US, the UK, Japan and France are the key countries continuing to put effort into the development of nuclear energy. France is a particularly relevant case as it is the country with the highest share of electricity from nuclear plants, over <a href="https://www.statista.com/statistics/270367/share-of-nuclear-power-in-the-power-supply-of-selected-countries/">70%</a>. A look at the current troubles with its large utility provider EDF is also cause for concern. The company recently reported its <a href="https://www.edf.fr/sites/groupe/files/2022-08/2022-h1-half-year-results-transcript.pdf">2Q22</a> financial results which were marked by a 75% drop in EBITDA levels that “reflects the company’s difficulties in nuclear generation”. The company is facing corrosion problems in several plants, with only 30 reactors out of its 56 reactors in operation in April.</p>
<h2>Nuclear as an investment strategy – why bet on an overwhelming source of problems?</h2>
<p>Nuclear will not solve the current energy crisis, will not accelerate the energy transition, and will not provide abundant, inexpensive electricity for many countries on the planet. This last point is a key one. By contrast, distributed renewable energy can provide energy to over 700 million people in Africa, Latin America and Southeast Asia that still have no access to electricity. Distributed renewable energy and scalable and flexible wind and solar are much more relevant for the vast majority of countries (<a href="https://britishbusinessenergy.co.uk/blog/nuclear-vs-non-nuclear/">of the UN member countries</a> only 30 out of 193 have nuclear power plants). The risky decision to extend operations of older nuclear plants as a kneejerk reaction to the energy crisis is being erroneously interpreted by some analysts as a nuclear revival. There have been no breakthroughs in modular nuclear fission, and nuclear fusion continues to be in the experimental phase, decades away from any material commercial breakthrough.</p>
<p>There are several nuclear energy ETFs, marked by uranium miners as top constituents as well as large US utilities with material nuclear assets (like Duke Energy, Dominion Energy and Exelon Corp) as well as Japanese conglomerates (like Mitsubishi Heavy Industries). Betting on a nuclear revival looks like a strategy for investors that do not believe renewable energy and LDES will scale up fast and successfully. However, we firmly believe that nuclear energy will simply not compete with solar, wind and batteries, at least at any scale. The key to the renewable energy system is long duration energy storage (LDES), and many forms are rapidly emerging, from hydrogen stored in salt caverns, to pumped hydro, to compressed air and of course batteries. Countries like Germany, Italy, and Ireland that have Net Zero goals and a ban on new nuclear are putting a lot of resources into these technologies.</p>
<p>We have no time to waste. While the zombie may still have a long life in Japan the overwhelming majority of countries will be decarbonizing their grids with the sustainable, deflationary, digital, modular solutions that solar, wind and batteries have become. Nuclear may play a small role in some geographies and jurisdictions, but it simply makes no sense to widely rely on such a centralised, risky and expensive technology when there are so many win-win alternatives available.</p>
<p><em>Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.</em></p>


No breakthroughs in nuclear energy – not cheaper, faster or safer

COVID still afflicts economies, the war in Ukraine continues to put pressure on commodity prices, inflation remains out of control, and interest rate increases continue to be used as the solution to spikes in CPI. These forces are now overwhelmingly seen as potential precursors of a global recession. Equity markets in June reflected fears of a structural and prolonged shift from global growth promoting cheap capital  to more expensive funds and a stagnating macro environment. At the beginning of the month, the World Bank released a revised forecast for global growth, from the 4.1% estimated in January to 2.9%; a material reduction.

<h1>The end of cheap capital and the big repricing</h1>
<p>COVID still afflicts economies, the war in Ukraine continues to put pressure on commodity prices, inflation remains out of control, and interest rate increases continue to be used as the solution to spikes in CPI. These forces are now overwhelmingly seen as potential precursors of a global recession. Equity markets in June reflected fears of a structural and prolonged shift from global growth promoting cheap capital to more expensive funds and a stagnating macro environment. At the beginning of the month, the World Bank released a revised forecast for global growth, from the 4.1% estimated in January to 2.9%; a material reduction.</p>
<p>This big repricing has pushed the equity markets into bear territory. The S&amp;P500 had its worst first half since 1970, down 20.6% in the first six months of the year, and down 8.4% in June alone. The Dow Jones index was down 6.21% in June (down 11.14% in the first half), while Nasdaq tumbled 8.05% in the month, closing the first half of the year down 24.06%.</p>
<p>Pursuing long term investment strategies amid short term fears of economic retraction can be devilishly tricky. Stagflation has hurt growth companies in the first half of the year, as investors have overwhelmingly discounted future cash flows at expected higher rates. Raw materials price increases and labour cost spikes combined with lower consumer confidence and spending reductions are indeed reasons that are likely to cause a deterioration in sales growth and lower profitability for broader growth themes, from disruptive technologies to digital infrastructure to biotechnology. Old economy sectors, fossil fuel related companies in particular, had a strong first half of the year, with companies like Shell PLC (up 20.71% YTD), Exxon Mobil Corp (up 46.15% YTD), Marathon Oil Corp (up 38.19% YTD) benefiting from the extra cash flow that triple digit crude and natural gas prices generate in the short term.</p>
<p>However, the mid to longer term growth prospects of green solutions – from EV adoption to long duration energy storage – are extremely strong, led by German and EU efforts to replace Russian fossil fuels. That means that longer term investors have a unique opportunity to invest in the companies leading the energy transition at a steep discount. How fast that strategy will yield solid returns will depend on the fate of fossil fuel prices.</p>
<h1>The wide variety of pathways to replace fossil fuels makes it hard to price assets and companies</h1>
<p>Business as usual, e.g. oil and gas exploration and production, is benefiting from the short term unbalance between supply and demand, as demand remains high and supply has been flat. I have often heard energy analysts refer to the current energy crisis as a consequence of “ESG precluding new investments in exploration”, so supply not increasing is the cause of the current crisis. We can easily flip this narrative and ask if the problem is not that we have underinvested in renewables, being behind on the electrification of heat and power. The fact of the matter is that the demand destruction prompted by high NatGas, coal and crude prices is fuelling the need to replace these commodities with cheaper (and less volatile) alternatives. If the best solution to fossil fuel high prices is fossil fuel high prices, when are we to see demand collapse?</p>
<p>There are four possible scenarios that we expect markets could price in over the course of the next 24 months: A “green swan” case, where fossil fuel investments increase and expected production goes up, but the energy transition accelerates and prices from crude to gas collapse (as they did in the first lockdown, when 20% of global demand evaporated and crude for the first time ever traded at negative prices). Another possibility is an “Orderly” case, where a fast transition somewhat balances a lower demand for fossil fuels with a lower supply. A third case is a more conservative transition case where both green and brown stocks “Coexist”. The final scenario is the extreme case of the “Revenge” of the old business-as-usual economy. This last case seems to be what markets are pricing right now, not considering that the historically high fossil fuel prices could promote a demand destruction that only further prompts the substitution of hydrocarbon commodities.</p>
<h1>Rejected energy and the inefficiency of our centralized fossil fuel-based grid</h1>
<p>Our global power industry was built around large, centralized power stations, mostly coal and natural gas fired. Electricity is brought to users via long, high voltage transmission lines that are connected to substations that lower the voltage and connect to a distribution network. The US electric power grid, for example, is the world’s largest machine. Scale is needed for the very capital-intensive projects to achieve returns which usually happen in the long term. This complex machine is based on large scale power plants, and the reality of these installations is that much of the energy content of fuel sources like coal, diesel or natural gas are wasted by inefficiencies in the conversion of energy and later on in losses in the transmission and distribution processes.</p>
<p>The <a href="https://flowcharts.llnl.gov/sites/flowcharts/files/2022-04/Energy_2021_United-States_0.png">Lawrence Livermore National Laboratory</a> has been estimating the sources of energy production in the US and how much waste exists since the mid-1970s. Rejected energy is the portion of energy that goes into a process (to generate electricity and heat, or combusted in engines for transportation) but comes out as wasted heat. Their most recent estimate is for 2021, when 97.3 quadrillion British thermal units (BTUs) were consumed for energy needs, of which 65.4 quadrillion BTUs were wasted. In other words, out of the US’s total energy need, 67.21% was rejected energy, mostly lost as wasted heat. For electricity generation in particular, 36.6 quadrillion BTUs were needed, of which 64.75% was wasted as rejected energy. Therefore, when we talk about Germany replacing Russian fossil fuel commodities with renewable energy, the daunting goal becomes more achievable when taking into account that the vast majority of the natural gas imported from Russia goes to waste. As Michael Barnard summarized in a <a href="https://illuminem.com/energyvoices/42661613-2c0f-47ad-9a52-cb939786195c">recent article</a>, we “don’t have to replace all the primary energy we use today, we have to replace the energy used productively”.</p>
<p><em>The acceleration of the energy transition is inevitable and key milestones are now in sight</em></p>
<p>“Fossinflation” will likely persist beyond 2022. Investments in oil and coal have dropped sharply in the last 5-10 years as financial markets and investors have rightly put pressure on producers to cut carbon emissions. However, energy demand is still too reliant on burning fossil fuels which our planet cannot afford. The transition to clean energy on the demand side was not happening fast enough. As long as the supply of fossil fuel decelerates faster than demand, price inflation will have to continue to curtail demand growth. The risk is that if investments in alternative energy are too slow, the only way to reduce fossil fuel demand is to curtail economic growth.</p>
<p>Large economies like Germany are rejecting the current reliance on producers with poor track-records on geopolitical matters (Russia, Saudi Arabia and OPEC). Governments in the EU have concluded that the only long-term solution is to accelerate investments in alternative energy, freeing economies from their dependence on fossil fuels. Looking carefully at the supply challenges that the fossil fuel industry is facing, it is clear that the problem is structural and can only be solved by accelerating the pace of investments in clean energy. If in the next 12 months Germany executes on its plans and adds over 7 GW of solar and 3 GW of wind to their grid, the fast transition case will have reached a key milestone. All eyes are now on Germany.</p>
<p><em>Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.</em></p>


Repricing, Risk Aversion and Rejected Energy

For most individuals or families, the largest purchase they will ever make is a house, followed by a car. Nonetheless, this expensive item of transportation remains unutilized for most of its useful life. Even commuters who drive one hour a day to and from work leave their car parked and idle for far more than 90% of the time. We are therefore producing huge volumes of resource intensive assets which simply take up urban space. Add to this the emissions of Internal Combustion Engine (ICE) vehicles and our reliance on cars looks increasingly unsustainable.

<p>For most individuals or families, the largest purchase they will ever make is a house, followed by a car. Nonetheless, this expensive item of transportation remains unutilized for most of its useful life. Even commuters who drive one hour a day to and from work leave their car parked and idle for far more than 90% of the time. We are therefore producing huge volumes of resource intensive assets which simply take up urban space. Add to this the emissions of Internal Combustion Engine (ICE) vehicles and our reliance on cars looks increasingly unsustainable. Electric Vehicles (EV) are a solution to our pressing need to decarbonize transportation, but this new solution can enable much more, from further advancing sustainable transportation, to prompting the creation of cars-as-a-service, to supporting a greener grid. We are on the right path and the acceleration of adoption of EVs is the first ingredient in this transformation mix.</p>
<p>In 2021, global sales of EVs more than doubled. According to the <a href="https://www.ev-volumes.com/">EV Volumes Database</a>, global sales of Battery Electric Vehicles (BEV) and Plug in Hybrid Electric Vehicles (PHEVs) in the global light vehicles market (passenger cars and light commercial vehicles) passed 6.7 million units in 2021, representing 8.3% of all sales in this segment. This volume translates to 108% growth over 2020. China dominated sales with almost 3.4 million BEVs and PHEVs sold, more than 50% of the total, followed by Europe with over 2.3 million units and North America with 0.73 million units. Empirical evidence gathered since the 1970s shows historical decreases in the cost of lithium-ion batteries, currently the key chemistry in both stationary and mobile batteries. With long-term deflationary trends bringing the cost of BEVs down (short term supply chain and commodity price spikes notwithstanding), much lower maintenance needs, and the increasing price of gasoline at the pump, BEVs are set to increase market share due to price competitiveness. The forecast massive adoption of EVs will help address the pressing need to decarbonize transportation. The evidence that we are speeding up the replacement of the dated ICE fleet is irrefutable. But it is better than that.</p>
<p>The higher user experience, or UX, of BEVs is potentially the most exciting reason stimulating adoption. The powertrain electrification and the creative solutions developed by the disruptive new players in the space – like Tesla, Nio, BYD, Lucid Air - brings the potential for a much more personal and unique experience. These BEVs are already connected to data bases, powered by 5G and IoT, and are effectively powerful computers on wheels. Two key ongoing developments will bring the car of the future to another level: autonomous driving and bi-directional batteries enabling the development of vehicle to grid (‘V2G’) technology. The car of the future will be nothing like we know now and other new players in the space are further enhancing the sustainability of vehicles.</p>
<h1>New concepts emerge: Powered directly from the sun and designed to be shared</h1>
<p>Solar vehicles are powered by energy from the sun. They are equipped with photovoltaic cells that convert solar energy and then store it in the car’s battery. Solar cars benefit from range extension versus standard EVS, which helps overcome the issue of rapid discharging when on the road, thus minimizing the range anxiety that is still a main concern for buyers. German based Sono Motors, founded in 2016, has developed a new concept for this solar car, named the “Sion”. This new solar-powered electric vehicle was launched at the 2021 Consumer Electronics Show, a big tech event for global innovators. Beyond the 255km battery enabled range, the Sion benefits from an additional 34 km range on a sunny day, which is more than the daily distance driven by the average European driver. The Sion has a maximum speed of 140km/h and is designed with 248 solar cells integrated into its body, and has a target retail price of below €30,000.</p>
<p>However, it is two further features that make the Sion so unique. Firstly, it has bi-directional capability, making it V2G ready. The Sion will be able to use the car’s battery and push the energy stored there to power a house or the grid, or other devices and vehicles. During off-peak times it can charge itself, while during peak hours it will work as a temporary electricity reserve. Secondly, the Sion will come with an app for ride pooling and car-sharing; a built in, integrated car sharing functionality that enables multiple users to seamlessly share a Sion. The Sono app can be used to decide for how long and with whom you’d like to share the Sion. More usage, lower ownership cost and the monetization of the valuable grid-supporting battery means a much more sustainable product.</p>
<h1>Optimizing the valuable asset inside BEVs: the emergence of V2G</h1>
<p>The International Renewable Energy Agency, IRENA, makes projections for our global EV fleet. In their <a href="https://irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Global_Renewables_Outlook_2020.pdf">Global Renewables Outlook</a>, issued in 2020, they estimate that EVs could reach 379 million units by 2030, and potentially 1.1 billion by 2050. IRENA’s numbers are in line with other forecasts. For example, the pure V2G player Nuvve, a 10-year-old company based in California, estimates that by 2040 around 560 million EVs will be on the road globally. It is only when the idea of convergence of transportation and energy is quantified that we see the powerful transformation ahead: Nuvve points out that the batteries inside these BEVs could provide <strong>enough energy to power all homes in the U.S. for 1.2 years.</strong></p>
<p>Households are starting to invest into solar rooftops, stationary batteries and BEVs. As we decarbonize transportation and heat, the solutions will converge more and more. The new BEVs will represent more demand for electricity, but they are themselves part of the solution. Optimizing and monetizing local solar and batteries is not a concept, it is a solution already in place. Just like Uber and AirBnB allowed car and homeowners to generate cash flow out of those assets, V2G aggregators like Nuvve and distributed generation names like Sunrun are doing the same for solar rooftops, stationary batteries and batteries inside EVs. The car of the future will be autonomous, V2G enabled, solar enhanced and designed for maximum sustainability. The elements are all here and this new car will be driving past you within the next five years.</p>
<p><em>Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy &amp; Sustainability writers, their opinions do not necessarily represent those of illuminem.</em></p>


You can’t miss it!

Gabriela Herculano

Gabriela Herculano

Not just how much we finance but what: Abatement, avoidance and sequestration in climate funding

Recent publications

Readers also like

Want to know more about illuminem Voices?