“Carbonomics” is a term used by Goldman Sachs to describe the broad investment and economic implications for clean tech as world economies strive to reach carbon neutrality. We may not agree with all of the bank’s forward looking assumptions (in particular the conspicuous absence of any nuclear contribution to emissions reductions) but we like Carbonomics as a catchy term to encompass all things related to the clean economy.
While the outline for a new energy deal in the U.S. remains loose and hypothetical (for the time being), the European Green Deal (“EGD”) is further along, and has set out clear (albeit lofty) goals and policies to attempt to reach net zero carbon emissions by 2050.
All the dirty details of how the EGD’s emissions targets will be achieved are beyond the scope of this brief post. There are, however, two key topics we would like to question here as they are top of mind for the Segra team and how we think about investment opportunities in the coming decade:
1) Consensus expects that upwards of 90% of European power generation could come from renewables by 2050. The good news for investors (and analysts/policy makers/environmentalists who care to pay attention…) is that the continent has a model for renewables transitions and the impact on emissions and electricity prices. How does the German model serve as a helpful analogue?
Most readers with a pro-nuclear bias are likely familiar with what comes next, but to recap… Energiewende or “energy transformation” is the key part of Germany’s energy policy which aimed to phase out fossil fuel and nuclear power generation in favor of renewables. The policy was revisited and implemented in its current form after the Fukushima incident in March 2011. The general idea was (or maybe still is?) that a lack of spending and investment in renewable energy was the impediment to making it a growing piece of the clean energy puzzle. With some record breaking spending, the country could finally phase out the long-hated nuclear contribution to the energy mix (by 2022) along with a slower shift away from coal. Here are the highlights almost a decade into the transition:
- A price tag of ~$600 billion[1]
- Current carbon dioxide emissions of ~860 million metric tons versus the stated 2020 goal of 750 million metric tons, a level approximately flat to 2011 emissions despite the investment[2]
- 25% wind and solar generation
- The highest electricity prices in Europe (EUR 30.88c/kWh) versus European average of (EUR 20.5c)[3]
- Grid instability stemming from a greater proportion of intermittent energy sources (solar and wind) has been remedied by the import of nuclear power from France
- On May 30th, 2020, Germany opened the 1,100MW Datteln-4 lignite coal plant despite the plan to phase out fossil fuels
We leave it to our readers to decide on the feasibility of a 90% renewables grid in the face of the example above.[4] Most facts surrounding the German energy experiment are well known, we only repeat them here to draw attention to the assumptions driving sell-side forecasts going forward. Is the delta between current renewables penetration and the future expectation of 90% exploitable? We believe that if new energy deal targets remain in place, the discount currently given nuclear is at an extreme which will normalize as Carbonomics forecasts move from fantasy to reality.
2) Electrification of the economy is a key component of the EGD 2050 goals. Transport, the second largest contributor to European emissions (~20% of total)[5] is the most topical for investors. Electric Vehicles (“EV”) and all elements of their supply chain offer the biggest thematic opportunity set today.
Segra was an early participant in the long Lithium investment thesis (circa 2015 – 2017) before the rapid escalation in new exploration and development skewed supply/demand balances through the mid 2020’s. We have not been involved in any battery metals investments since then, but it has been interesting to watch the sector go from resource investor euphoria (2017) to consensus New York hedge fund short (2018-present?)
We always found battery metals demand forecasting to be particularly tricky given that extremely small shifts in EV penetration rate assumptions change consumption dramatically. Going back five years, there was much less clarity on new energy policy and the consequences for EV demand. Any approximation was a finger in the air. On the supply side, capital markets activity and associated capital expenditure exploded, largely around loose ideas of our EV future (and not a small number of Tesla headlines). Hence the consensus short thesis.
With global auto manufacturers now giving increasing guidance on their EV buildout and policymakers offering the market more tangible top-down targets (see EGD), the medium-to-long term case for the battery supply chain is perhaps more certain than ever before. At the same time, the boom/bust in the supply side has significantly curtailed future investment. For now, we’ll let our readers stew on lithium/cobalt/graphite/nickel requirements under conservative EV penetration assumptions (you’ll have to dig a lot deeper to find sell-side analysis than back in 2018!). Could battery metals be a contrarian long again?
We will be back with more thoughts.
Thanks for reading,
Segra Capital Management
[1] We would be remiss not to mention the fact that had Germany invested this amount in Nuclear, the country would be at net negative emissions from power generation http://environmentalprogress.org/big-news/2018/9/11/california-and-germany-decarbonization-with-alternative-energy-investments
[2] Segra Capital, UBA
[3] Eurostat
[4] https://www.forbes.com/sites/michaelshellenberger/2019/05/06/the-reason-renewables-cant-power-modern-civilization-is-because-they-were-never-meant-to/#6089c68cea2b
[5] Eurostat