Back to the future
At the beginning of 2019 we set out the RSM Renewables team’s predictions for the cleantech sector stealing shamelessly from the Top of the Pops format. In what has now become an 'instant tradition', we have undertaken a similar exercise for 2020, this time themed around the Oscar nominations.
Wind and solar only generate electricity about 30 per cent of the time and therein lies the rub. Absent decent storage capabilities of the electricity generated, they cannot be the sole source of electricity for this country. These energy sources require extensive land usage and we are not a land rich island. For example, a solar farm requires approximately 450 times more land to generate the same electricity as a nuclear plant.
However, the general public and - as we have seen from Germany’s retreat from nuclear - some governments do not like nuclear. Whilst this is understandable (due to historical disasters) it is illogical from an empirical perspective. The Lancet published a study a year ago concluding that nuclear power is the safest form of energy on the basis that 7 million people die annually from air pollution. A nuclear scientist, James Hanson, looked at this and calculated that nuclear power has saved almost 2 million lives to date.
Despite all the objective evidence to the contrary, nuclear power has a task similar to Sisyphus in becoming the electricity provider of choice. We do not envisage nuclear power providing the lion’s share of the UK’s baseload in the next few years, partly because of the innate distrust of nuclear and the time and costs associated with building a nuclear power plant.
An inconvenient truth
It is hard to ramp up and down a nuclear plant. Therefore, if nuclear is to provide electricity when renewables cannot there is an implicit subsidy in the renewable supply as the nuclear plant will continue to incur costs of production regardless of whether the electricity is used. Whereas you can manage the intermittency of supply associated with renewables by using natural gas as a 'back up'. This concept is well understood by the oil and gas majors, which is why they have invested in renewables which require a baseload that can be turned up when the sun is not shining or the wind is not blowing.
What Dreams May Come
Waste to energy projects will continue to flourish in 2020 and beyond. Technology continues to develop and investment in this subsector is on an upward trajectory.
Interestingly, it is the gate fees that create the vast majority of the revenues for these businesses (about 70 per cent) as opposed to the sale of the electricity generated. They can pretty much give that away for free and still make a tidy profit.
Regardless of the motivation and profit model, these businesses are dealing with an environmental problem in that they are disposing of waste in a more sustainable way than filling landfill sites or shipping overseas.
The Green Mile
Impact investing and the rise of Environmental, Social and Governance (“ESG”) in the minds of investors, large corporates and society as a whole will be huge in 2020.
This aligns perfectly with the strengths of renewables, albeit ESG is not limited purely to the renewables sector.
Earlier this month the world’s largest fund manager, Blackrock, announced sweeping changes in its portfolio management and assessment in an effort to position itself as a leader in sustainable investing. Amongst other plans, Blackrock have announced that it will cut companies that derive a quarter or more of their revenues from thermal coal from its actively managed portfolios, as it aims to increase its sustainable assets 10-fold to $1tn within a decade.
Blackrock’s Chief Executive, Larry Fink, warned that climate change represented a risk to markets like no other previous crisis stating “Companies, investors, and governments must prepare for a significant reallocation of capital. Climate change has become a defining factor in companies’ long-term prospects. I believe we are on the edge of a fundamental reshaping of finance.”
A Beautiful Mind
Blackrock is certainly not alone in including impact investing criteria in its evaluation procedures.
As a result of market pressures, large corporates may soon have a regulatory requirement to publish their ESG policies, similar to the group tax strategy which became a requirement for large businesses in 2016.
Many are already doing so and this could help increase their market attractiveness ratings.
We have seen a shift in the last year in the mindset of investors, more of whom have been persuaded that prioritising ESG considerations will drive stronger returns rather than requiring financial trade-offs.
Eternal Sunshine of the Spotless Mind
Citizens across the world have begun to acknowledge that we need a stable and sustainable planet.
Ecoanxiety has entered the lexicon, with some people expressing high levels of stress over climate change. Symptoms include panic attacks, obsessive thinking, loss of appetite, and insomnia.
Ecoanxiety was even referenced in TV series 'Big Little Lies', an indication that this is becoming a recognised phenomenon.
Driving Miss Daisy
2020 will be the sweet spot for the electric vehicle (EV) and the year we see the hybrid largely consigned to the scrap heap.
The hybrid is fine as a concept if you are travelling 20 miles or so but after the big heavy lithium battery has run out of charge you are then increasing air pollution by expending fuel on pushing that big heavy deadweight around.
The tax efficient benefits in kind of low emissions vehicles will make the EV the car of choice for employees in a car scheme, which in itself will drive more companies to provide on-site charging points.
Good Will Hunting
In 2020, we will also begin to see increasing consolidation in this fragmented industry. More big players, in the style of Greencoat, will continue to buy renewable assets from small local operators and then benefit from economies of scale to improve the bottom line.
With the increase in electricity providers guaranteeing 'green' energy, the demand for renewables will continue to grow driven by both the consumer and Governments seeking to meet their net zero targets.
However, not all is rosy in the clean tech garden, particularly when it comes to decommissioning.
With the increase in offshore wind and the continued advances in technology, older turbines will become obsolete. There is then the cost of decommissioning these massive feats of engineering.
Similarly there is no regulation nor legislation on how to deal with solar panels at the end of their 20 / 25 year life. Experts are now concerned about where the solar panels will be disposed of considering the level of toxic elements present in the archaic panels.
Walk the Line
To understand and compare the cost of each source of energy we have to compare like for like – subsidy free and with decommissioning costs fully accounted for.
Nuclear is a beneficiary of subsidies so again we are not comparing apples with apples when considering the relative costs of production of the various sources of energy. It's likely that the cost of decommissioning will have to be brought into the accounting mix at least with respect to wind and solar. I suspect this will not be in 2020 but certainly over the next decade.
The Blind Side
This leads to the other elephant in the room….the cost of running an electric vehicle.
EVs are very much the direction of travel for the automotive industry. Nonetheless, caveat emptor applies, as the operating model for the unwary consumer will certainly have to change over the next 5 years or so.
As tax revenues from fuel duties decrease with the phasing out of petrol and diesel cars in favour of EVs, the Government simply cannot afford to forfeit the £35bn or so generated from fuel duty per year. The deficit will have to be found elsewhere. Feasibly, we could move to a tax on road usage with 'dirty' petrol and diesel cars attracting a higher levy than EVs.
The Theory of Everything
In conclusion, public opinion, the money markets and governments globally appear to be aligned and companies that benefit from the fight against climate change will do particularly well in the years ahead. The Venn diagram of the areas that are covered and influenced by renewables will increase.
A lot of countries are legally committing to decarbonisation and this will create growth companies in areas of which we are yet to conceive in the form of new technologies, processes and services.