John Kerry might be right, but who is going to build the energy supply system of the future?

On May 17, the BBC carried a story describing the reaction to remarks by US President Biden’s Climate Envoy, John Kerry, who painted an optimistic picture about the potential for cleantech to deliver climate action. In an interview with the BBC, Kerry said “You don’t have to give up quality of life to achieve some of the things we have to achieve. I’m told by scientists … that 50% of the reductions we have to make … by 2050 … are going to come from technologies we don’t yet have. That’s just a reality” Kerry then went on to highlight the effort and success of delivering Covid-19 vaccines within a year, putting man on the moon and the Internet to bolster his claim that “we know how to innovate.”

In its coverage of Kerry’s comments, the BBC chose to highlight contradictory views to the US envoy, including from a Cambridge University expert, who decried Kerry’s opinion – “It’s virtually impossible for new energy infrastructure technologies to have a significant effect on global emissions in the time we have left to act.” Several other experts were also cited, generally disagreeing with America’s focus on technological breakthrough.

As a semantic point, this is another case where there was not right and a wrong. In his remarks, Kerry chooses his words very carefully, as you would assume a lifelong politician would. One does not need to give up steak (or other parts of our lifestyle) to deliver some of the things we need to do. But, you probably do need to swear off eating meat if you want to deliver them all. And, although 50% of the reductions might need to come from technologies that we don’t yet have, the corollary to this is that 50% come from technologies that are already here and deployable today, even if that’s uncomfortable in America.

And as Mundus Nordic Green News reported earlier this week, the IEA has given the world a very different take from the Kerry view, in a bombshell report, where it said that an immediate end to fossil fuel development was necessary to remain consistent with the Paris Agreement. Another 400 or so actions were offered en route to 2050 net zero emissions. One of these was a fourfold increase in the deployment of wind and solar this decade, requiring an investment of around a trillion USD every year during the 2020s. That is eyewatering. Clearly, the IEA is not saying that this is likely to happen, but is identifying that it needs to happen to be consistent with a 1.5°C scenario.

What it takes to develop a project?

At this point, your editor can add some experience of what it takes to develop a project from earlier experiences in his career.

As a starting point lets remember that the role of the firm within our capitalist system is to deliver goods and services efficiently, and to make a profit for itself, in doing so, while acting within the rules and framework defined by government. While this is probably obvious, its worth restating, because every firm operating today anywhere in the world’s energy system should be asking itself how it will be making a profit today, next year, in 2030 and 2050. The incumbents, for instance the large oil companies, BP, Shell etc have profitable cash flows today, but the IEA has warned them that any future investment runs a big risk of being a sunk cost within a few years. Having worked for one of these companies, your editor is confident that they will be very wary of making investments worth billions, which only payback over several decades, only to risk losing much of the value of the investment if the rules change. That is why the likes of BP and Shell are greening their business models. These oil multinationals have the balance sheets and the management capacity to do so. However, coal producers and power generators using coal are often in a worse situation – most of them are in emerging economies, and many will lack the ability to pivot their business model on a dime. In some cases there may be local political reasons for coal companies to be more positive, but many must now consider delaying or even cancelling further investments.

Meanwhile, cleantech start-ups face an uncertain future. On the one hand they feel that that future should be theirs’. But, outside of some sectors – solar in sunny countries and wind, the risk adjusted return on their projects looks poor. Even if under certain conditions the project might make a profit, any venture capitalist looking at it as an investment, will consider other possible scenarios where the project will lose. And for a bank looking to loan the project money, it must look at what is supported by government policy and business conditions today in order to payback a loan. Venture capital might be willing to bet on the future looking different for a technology. That is happening today on an industrial scale in the hydrogen industry. Money is rushing in, because it feels that the politics is saying that it will support the industry. But for technologies not having won a politician’s beauty contest, it will remain hard work. And for technologies that require debt financing it will be a mountain to climb to secure a bank loan.

One example is e-methanol, an electrofuel. The technology is scientifically proven, but until now it has not been industrialised. Liquid Wind, a Swedish company, is trying to do so. The company has been around for several years, having done a good job of financing itself via crowdfunding and small capital injections to the point which it is now starting to receive significant commercial interest, with larger investors. But the firm does not have the sort of deep balance sheet that would enable it to focus on its project, demonstrating commercial feasibility and allowing a mass economic uptake. Instead it needs to dedicate a significant amount of its attention to bringing in new funding to the point where it can pay for the engineering design of its plant. It is only at this point that its project is “shovel ready” and it can approach financiers for the balance of the funding needed to build the plant. Even at that stage it chances are not that good. Typically large plants worth hundreds of millions are financed mainly by debt, which is much cheaper than equity. The debt must be provided by banks, who want to minimize their risk of the loan failing. Therefore they ask the project to prove that it has guaranteed future cash flows underpinned by a promise from a customer to take the product at an agreed price for the duration of the project. But how many customers will be willing to lock-in to a promise to buy e-methanol for the next 10 years? One final point. Liquid Wind says that it has plans to deliver another 499 such plants after its first plan – FlagshipOne. Under current policies it will take a long time until these are delivered.

What’s worse this problem is not faced just by small start-ups such as Liquid Wind. H2GreenSteel was launched with much fanfare earlier this year. Its press room confidently proclaims that production will begin in 2024. But look closely at the press release and it states that the company has been launched with just €50 million in capital. This enough to pay for the salaries of its executive and engineers, but many multiples of this will be required to build a full-scale steel mill. If customers are not willing to guarantee their offtake, then the project will not proceed (Given that one of the founding shareholders is truckmaker Scania, we think it looks good that it will find buyers, but this is not guaranteed). And even oil companies with deep pockets have only limited appetite to invest equity capital into very expensive ventures. Debt-financing is key, and that requires a lot more certainty than many emerging technologies can deliver.

A flood of companies is hitting the market, but their impact will be small for years

In recent months Mundus Nordic Green News has reported on dozens of start-ups coming to the Nordic market. In April alone we covered Minesto, a wave technology firm, Einride, a driverless electric truck manufacturer, Rototec, a geothermal provider, P2X Solutions, amongst others. Its great news that the sector is now receiving investor attention. However, with the exception of Einride, which raised USD100 million, the amounts invested are still relatively low.

Squaring the circle

There is nothing wrong in principle with this financial process for developing new technology. It takes time, but it eventually delivers products that have a market and allow for a good use of economic capital. But the problem is if the world needs to rely on this to survive the next 30 years. It simply wont deliver the sort of carbon reductions required. Those who sit in the “we must take action now” camp are aware of the lead times to take a promising technology and industrialise it. They are also aware that the sort of mass adoption that could deliver huge economies of scale in supply chains is unlikely to develop spontaneously. Only government policy has a hope of overcoming the inertia in the system that sustains fossil fuels.

John Kerry sits with a very different problem. He knows that the Biden administration wont get through Congress the sort of market-based reforms that are needed to shift the dial on the way that the game is played. But what they can deliver at the moment is a good story around moonshots that might create technologies that can be delivered at some point in the future. This also has a value, and in the future the politics might change, allowing for their adoption.

More sectors with the capability to deliver energy this decade are looking un-investable, with consequences for consumers

One rule in finance is the risk-trade off. As a project’s risk rises, it needs to offer a greater return to attract investors. The problem at the moment is that many technologies that could deliver energy later this decade are seeing their perceived risks rise (with the exception of hydrogen, whose perceived risk has dropped). Few governments are doing enough to create market incentives to pull through a new generation of cleantech technologies. But for those looking to invest in fossil assets, there is surely a greater sense of unease that they can not assure themselves that their project will keep its license to operate for the lifespan that is required to get a good return. One consequence of this is not much at all will be built. That may not be that big a problem today with a pandemic raging and energy demand down 5-10%. But in a few years’ time that could result in fewer projects of any sort coming into production. The world would witness a lack of supply, which would mean higher energy prices across the board. Energy shortages may soon be on the way.

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