The Sustainable Investor weekly (issue 43)
7th October 2022
Topics - could enhanced geothermal be a big thing; insurance as an enabler of climate adaptation; forest, land and agriculture emissions standards; Queensland bets big on pumped storage hydro; and Torres Islands case opens up new human rights legal thread
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This week’s blog has a bit of a long-term electricity storage angle. In our top story, we highlight research that suggests that using technology from the O&G industry could massively expand geothermal, for both electricity generation and for longer term storage, but it involves the fracking word. We then look at work suggesting that a good plan for insurers would be to work with their customers to reduce risk, rather than just putting premiums up. Next, we switch to looking at SBTi standards for forestry, agriculture and land management, before considering the implications of the recent plan for Queensland to use pumped storage hydro to back up renewables, as they look to switch out of coal-based electricity generation system. We finish with coverage of the Torres Islanders’ win in the legal case involving climate damage and their right to enjoy culture and family life, opening up yet another avenue for legal challenge on human rights.
Electricity generation - can geothermal be a much bigger part of the solution ?
Flexible dispatch of geothermal power (Applied Energy)
In a nutshell - what does the story say
Researchers at Princeton have published analysis of how geothermal systems, making use of advanced drilling and well stimulation techniques, have the potential to provide tens to hundreds of gigawatts of clean electricity generation in the United States by 2050. With near-zero variable costs, geothermal plants have traditionally been thought of as providing “baseload” power, generating at their maximum rated output at all times.
However, as variable renewable energy sources (VREs) see greater deployment in energy markets, baseload power is becoming increasingly less competitive relative to flexible, dispatchable generation and energy storage. Optimized operational strategies indicate that flexible geothermal plants can provide both short- and long-duration energy storage, prioritizing output during periods of high electricity prices.
Our take on this
Why is this important ?
One of the big mid term challenges around low carbon electricity generation is that of storage, having electricity available when the variable sources such as wind and solar are not producing. Li Ion batteries and flow batteries are making progress, but outside of pumped hydro, we really lack viable longer term storage options that can work at scale. One possible solution is enhanced geothermal.
We know that geothermal is a great source for electricity generation. But, and sadly this is a big but, to be cost effective the location needs three attributes to all be present. Obviously, we need hot rocks. Over 360 degrees F (182 degrees C) is best. And we also need permeable rocks and a fluid. In places where all three can be found, we can build either dry steam or flash steam power plants. Obvious locations for these are close to tectonic plate boundaries. So, think Iceland (as in the image above), New Zealand, the Rift Valley in Africa, the Philippines, plus of course the West Coast of the US.
Away from these places, lots of locations have hot rocks, but in the absence of the two other factors, the economics of base load geothermal seldom stack up. Until now. The analysis in this research indicates that by using rock fracturing technologies (creating the permeability) and careful mapping of the reservoir geology, not only can the number of locations where geothermal makes sense be increased, but it can also become a cheap energy storage “machine”.
How - by varying the rate at which high pressure fluid is injected, it can provide a large and effectively free (in an operational sense - obviously we need to drill the bore holes) energy storage capacity, with round-trip storage efficiencies comparable to those of leading grid-scale energy storage technologies. Nothing in this is groundbreaking, its largely using existing technology from the oil & gas industry, combined with known above ground technologies from existing dry steam or flash steam power stations. As always, it’s how you put these apparently unconnected things together that is powerful.
The good news, the US Department of Energy has recently declared enhanced geothermal energy (which is what this is called) as a topic for one of their moonshots, focusing resources across the Federal government to “tackle the key remaining technical challenges to reaching U.S. climate goals while creating jobs and economic opportunities for U.S. communities”. Their aim here is to dramatically reduce the cost of EGS—by 90%, to $45 per megawatt hour by 2035.
The not so good news. You and I know rock fracturing as fracking - the technology that is widely used in the US gas industry, but that has a bad press in many countries. It will be really interesting to see if fracking (we clearly need a rebranding) for geothermal produces the same objections as its use in oil and gas production. I hope not.
Finishing up on the potential, as of 2019, worldwide geothermal power capacity amounted to 15.4 gigawatts, of which 24% or 3.7 GW is installed in the United States. It’s a tiny percentage of most countries’ generation base. How big could it become ? The Princton article talks about the potential in the US for tens to hundreds of gigawatts of clean electricity generation by 2050. This could be a really big deal.
Insurance - the calm before the storm
Calm before the storm: Climate and insurance (The Journal Magazine)
In a nutshell - what does the story say
Insurers should incorporate climate risk into underwriting and portfolio strategies to mitigate liability for litigation brought by customers pursuing climate-related claims as well as to be enablers of decarbonisation, according to insurance, climate and biodiversity risk experts Zaneta Sedilekova and Praveen Gupta. Insurers as managers of investment portfolios owe strict fiduciary duties and may be challenged if they “fail to comply with these duties and, for instance, put their beneficiaries’ money at high risk by neglecting to consider risks inherent in the transition to the net-zero economy.”
Since 2015 when the Paris Agreement on climate change was signed, climate litigation, which started sporadically in the 1980s, has surged in the US, from 800 cases between 1986 and 2014 to over 1,200 in the past eight years. Litigants' focus has shifted from targeting governments to corporations, and cases in the food and agriculture, transport and finance sectors have all seen an increase in strategic climate cases since 2020. Climate risk may be mitigated and managed in a number of ways beyond climate harms exclusion clauses through collaboration and knowledge-sharing with the insured; engagement rather than divestment.
Our take on this
Why is this important ?
We discussed the issue of environment insurance in issue 39 of The Sustainable Investor weekly, examining the case of a fossil fuel firm suing its insurer for refusing to cover a climate lawsuit in a case that could affect the wider industry’s ability to defend itself from litigation. If financial institutions start factoring climate risk into their decisions this will inevitably increase the cost of capital for high emitters. And in some cases, mean projects cannot go ahead.
What other issues does this raise you need to be aware of
The article focuses on the role of insurance companies as investors and on the insurance equivalence of divestment - not underwriting environmentally unfriendly activities such as coal mining, the Adani Carmichael mine in north-eastern Australia being the highest profile. However, the energy crisis precipitated by the Russian invasion of Ukraine has driven anti-ESG sentiment in certain quarters bringing into conflict fiduciary duty with sustainability objectives.
Are there other avenues for insurance companies to influence positive change whilst still producing a financial return? Let’s first take a step back and look at how the insurance business model works. How do these companies make money? All activities have some level of risk. The risk is that if something goes wrong, one incurs a cost. If the risk is low, or the potential cost is low, one might just wear that risk, but most would rather pay someone to take that risk on for them.
Insurance companies take on risk from lots of people and organisations into a pool in return for payment (premiums). So long as the majority of risks do not materialise and result in a payout, they make money. In addition, the premiums are also invested to make a return, ideally ensuring that there is adequate money available to cover eventualities. Uninsurable risks are those that would result in payouts so large that they could bring down an insurance pool. Some of the more extreme impacts of climate change would fall into this category. We covered this recently when we looked at hurricane insurance in Florida.
Insurance companies can use the data better in assessing the risks they take on by, for example, identifying actual real time behaviour by car drivers – the so-called black-box insurance. Plus, as well as understanding risk better, insurance companies can directly intervene in an activity, thereby actively reducing the risk of the event being insured happening. Some health insurers reward customers with free cinema tickets if they are active each day or score well on health metrics. They are incentivising their customers to be healthier thereby reducing the likelihood that they will get ill and in turn reduce the risk of the insured event. Volante Global, which provides cyber insurance, launched a ransomware technology product to help protect its customers but also actively reduces the risk of a payout on the policy.
Finally, insurance companies could fund research into practical applications that can reduce risk overall. The electric grid is a key vulnerability point during extreme weather conditions such as Hurricane Ian which hit Florida recently. Recent upgrades to strengthen the electric grid allowed the transmission system to fare better than they otherwise might have and whilst there was still damage, overall costs were lower than they might have been. Research into grid resilience including physical infrastructure and digitalisation can help in the future, as could insurance companies insisting on customers investing in improved grid resilience, in return for lower premiums.
Climate change : FLAG(ging) land-intensive sectors
SBTi launches method for land related emissions and removal (SBTi)
In a nutshell - what does the story say
The Science Based Targets initiative (SBTi) has launched Forest Land and AGriculture (FLAG) guidance giving land-intensive sectors a standard method for companies to set science-based targets that cover land-based emissions (and removals) such as those from forestry, agriculture, land management and changes in land use.
Companies signed up to SBTi and involved in land-intensive sectors or ones with land-related emissions comprising 20 percent or more of their total emissions must set FLAG science-based targets. As well as targets for the next 5 to 10 years, companies are also asked to develop long-term net-zero FLAG targets to get to align with the SBTi Net-Zero standard or at least 72% reductions by 2050 off a 2019 base year.
The top priority is to reduce emissions from deforestation and enhance carbon sinks as 80 percent of the mitigation from land use change comes from deforestation. More than 50 percent of the mitigation potential in the land sector comes from GHG removals including forest management improvement and soil carbon sequestration.
Our take on this
Why is this important ?
Agriculture, forestry and other land use represents about 22 percent of global GHG emissions. These have been “largely ignored to date” according to the co-lead of the SBTi FLAG project, Christa Anderson who is also a director at WWF. The Paris Agreement put in place the global objective to limit the temperature increase above pre-industrial levels to 1.5 degrees Celsius. The FLAG industries are important as they can improve the emissions efficiency of activities as well as enhancing their carbon sink abilities (i.e. ability to sequester carbon). How land is used therefore is very important, this is a topic we are going to cover more over time.
What other issues does this raise you need to be aware of
The ‘bioeconomy’ (use of biomass as a replacement product) is seen as an important transition tool away from fossil fuel reliance. Social, ecological and economic factors need to be taken into account when deciding to use them and when we change land-use to facilitate the ‘bioeconomy’. The bulk of biomass is mostly composed of cellulose held together by lignin, a glue-like material. These can be separated, with the cellulose used to produce fuels, plastics and chemicals and the lignin used to produce glues, adhesives and binders. Where biofuels and bioplastics have similar performance characteristics to their fossil fuel derived counterparts and where waste materials are used rather than new crops, the bioeconomy can have a lower overall environmental impact. The danger is where the above does not apply, they become a burden not a support.
Burning wood pellets, a biomass, is classed as renewable energy in Europe, with waste sawdust turned into pellets and new trees planted to ultimately capture the CO2 emitted from burning the pellets. The Drax power station in Yorkshire produces approximately 12 percent of the UK’s renewable electricity by burning wood pellets in a converted coal plant. However, a BBC Panorama programme claimed that some of that wood originates from primary/old forests. This is important as a University of Hamburg study found that between 69 percent and 80 percent of all the carbon stored in trees is accumulated in the last half of their lives - i.e. older trees are better at storing carbon.
Land use also has an important social aspect providing employment and supporting local communities and culture. Farming land has been historically converted to other uses when farming it has become uneconomical. Solar farms are one example as an alternative use case. Evidence has suggested that not only can solar and agriculture coexist (called “agrivoltaics”), but they can actually mutually benefit each other. A study found tomatoes produced double the fruit when under the shade of solar panels compared to those unshaded. In addition, because of the reduced water evaporation, water usage is improved too.
Within agriculture, farming methods and innovations as well as dietary changes (impacting what actually gets cultivated) can have meaningful impacts on sustainability, including emissions. For example, regenerative agriculture in certain circumstances can be both more environmentally friendly (using less external fertilisers and pesticides) and profitable. A study from South Dakota State University and the Ecdysis Foundation found that “regenerative fields had 29% lower grain production but 78% higher profits over traditional corn production systems.”
Indeed, a shift in focus from “total farm productivity” to “total resource productivity” could be what is needed to ensure the global population as a whole has sufficient nutrients. We discussed this as well as changes to how animals are fed in an earlier edition of The Sustainable Investor weekly. The shift in diets, as developing economies become wealthier, leading to a greater diversity in diets and a shift in the balance of macronutrients (fats, carbs and protein) impacts the demand for certain agricultural products and hence the land use requirements. Over the years, different social trends have taken prominence with the 1950s to 1970s “protein gap” driving a meat heavy diet that still continues today. More recently the emergence of veganism and flexitarianism as mainstream diets is likely to shift demand again, reducing overall meat consumption proportionally and hence land use.
Electricity generation - Queensland bets on pumped hydro for storage
Queensland's new energy & jobs plan (Queensland Government)
In a nutshell - what does the story say (direct quotes in this case)
By building a transmission super grid we can export North Queensland’s sunshine and wind energy to power more jobs and households. We can connect renewable storage with our established regional centres. The investments in the super grid will support 22 gigawatts of new wind and solar power. That is eight times more renewables by 2035.
We can’t reach net zero without storing renewable energy to make it reliable. Put simply the sun sets and the wind dies down. And with climate change there will be more unseasonal rain and other weather events that impact on the reliability of renewables. These events can last for days - current battery technologies can’t at scale. That’s why more pumped hydro energy storage is needed.
The first will be the Borumba Pumped Hydro located west of Gympie with a target to complete the project by 2030. It will deliver 2 gigawatts of 24-hour storage. Or for the majority of us who don’t talk in gigawatts, stored renewable power for around two million homes.
Today I am also announcing the second preferred pumped hydro site 70 kilometres west of Mackay for renewable energy storage. It will formally be known as the Pioneer-Burdekin pumped hydro project. I prefer to call it the battery of the north. It will be the largest pumped hydro energy storage in the world, with 5 gigawatts of 24-hour storage, enough to power five million homes, and the potential for stage 1 to be completed by 2032.
Our take on this
Why is this important ?
To quit coal and move to renewables, Queensland needs large-scale energy storage, which is where pumped hydro comes in. Queensland’s plan involves shifting from a coal-dominated electricity grid to 80% renewables within 13 years, using 22 gigawatts of new wind and solar. The plan relies on two massive new pumped hydro developments to store electricity, including the biggest proposed in the world. While grid-scale batteries such as Victoria’s Big Battery have drawn plenty of media coverage, they are better at storing smaller amounts of electricity and releasing it quickly. Pumped hydro is slower to start feeding back to the grid, but big facilities can keep generating power for days. And, to give the projects context, Queensland has around two million households. So just the first dam can power all of the state for 24 hours.
What might people worry about. When dams are built badly, they can trash the environment, which means many people understandably object to any project that has the word dam in it. But there are good reasons to be less worried about pumped hydro. The dams can be built away from rivers, if they fail then the area flooded is generally an order of magnitude smaller than conventional hydropower. And, pumped hydro doesn’t need much extra water once filled, as the water cycles around. A little topping up to replace losses from evaporation and seepage is all that’s needed.
But they are expensive. The cost of the giant Snowy Mountain scheme, which includes a new 2,000MW power station to provide up to 350,000 megawatt-hours of pumped hydro energy storage capacity, is now likely to exceed AUS$10 billion. And it’s running late, very late. But then the often-supported alternative, nuclear, also has cost and lateness issues. Finland's long-delayed Olkiluoto-3 nuclear reactor, which recently was finally connected to the grid, was 12 years late and cost E12bn, up from the original estimate of E3bn. And on top of this we need to add decommissioning costs. In the much larger France system these have been estimated to be as high as E58 billion, and this is just for the management of the spent fuel.
Finally, there is reported to be massive potential for pumped storage hydro around the world. A recent study from the Australian National University estimated that there were 530,000 potential pumped-hydro sites worldwide. According to one of the report’s authors, the prospective short-term off-river pumped-hydro energy storage (STORES) sites combined had a global potential storage capacity of 22 million Gigawatt-hours (GWh) - which is hundreds of times more than the amount needed to support a global 100 per cent renewable electricity grid. Can someone remind me again why we are not pushing pumped storage hydro ?
Human Rights - scope and potential impact increasing
UN finds Australia violated Torres Islanders' human rights (ABC.net)
In a nutshell - what does the story say
During the September 2022 session the UN Human Rights Committee found that Australia violated the rights of Torres Strait Islanders' to enjoy culture and family life. The joint complaint was filed by eight Australian nationals and six of their children. All are indigenous inhabitants of Boigu, Poruma, Warraber and Masig, four small, low-lying islands in Australia’s Torres Strait region. The Islanders claimed their rights had been violated as Australia failed to adapt to climate change by, inter alia, upgrading seawalls on the islands and reducing greenhouse gas emissions.
In their complaint brought to the Committee, the Islanders claimed that changes in weather patterns have direct harmful consequences on their livelihood, their culture and traditional way of life. The Islanders indicated that severe flooding caused by the tidal surge in recent years has destroyed family graves and left human remains scattered across their islands. They argued that maintaining ancestral graveyards and visiting and communicating with deceased relatives are at the heart of their cultures. In addition, the most important ceremonies, such as coming-of-age and initiation ceremonies, are only culturally meaningful if performed in the community's native lands.
Our take on this
Why is this important ?
One of the comments we frequently hear is that it’s hard to integrate human rights issues into an investing framework. It’s important to be clear what is meant by this. The people we talk with don’t mean that they think that human rights is not an issue they need to be aware of, and that breaches of human rights, by countries and by companies, are somehow unimportant and can be ignored. It’s much more specific than that. Put simply, it relates to how do they use this information in their day to day investing decision making.
Starting with first principles, unless they are instructed otherwise by their clients, their task as investors is to deliver the best investment returns within the constraints of a particular mandate. There are many mandates that operate human rights exclusions, so for breaches deemed material, the investment cannot be made, or the position must be sold. That’s clear and easy. It’s all the other mandates where the challenge arises. Putting it rather bluntly, to make decisions about generating the required investment returns, investors need to be able to connect human rights breaches with some form of either share price decline or a deterioration in future value generation potential.
So why the long intro ? Because we think this Australian case, especially when taken in the context of other examples, is part of trend that could make the direct impact of human rights breaches on future value generation much more visible. Some of this could be via compensation, but perhaps more importantly, countries could be “forced” to take action against companies, either banning some operations altogether or at a minimum, imposing limitations of their operation.
Our view is that we are heading for a situation where first countries and then companies, will see a very tangible negative financial impact if they don’t consider these issues in detail. And this goes deep down into their supply chains. Watch this space.
What other issues does this raise you need to be aware of
It is important to recall that the entity being held accountable here is the Australian State. States are the duty-bearers that can be held accountable in front of the Committees. What has been adjudicated is that the Australian government did not live up to its obligation to protect the Islanders from adverse effects of actions by a number of actors - including addressing greenhouse gas emissions by private companies.
It is a landmark decision because the right to enjoy culture and family life has up until now not been used to hold entities accountable for environmental impact. The choice of which right to base the complaint on is extremely interesting because it extends beyond what has up until now been the most common approach which has been to link environmental degradation to violations of the right to life, exploitative work, land and property and housing. But there are also some limitations in this decision. The Committee took into account the Islanders’ close, spiritual connection with their traditional lands, and the dependence of their cultural integrity on the health of their surrounding ecosystems.
What happens next. The Australian government now has 180 days to report on the measures taken to implement this decision. Some of the actions could be straightforward, including seawall protection, but others could require material changes to the countries environmental and net zero plans and actions. It’s also not clear what happens if no or insufficient action is taken.
This case opens up interesting new avenues in terms of grounds for litigation against any entity which causes environmental degradation or does nothing to prevent it. In turn this is likely to make States more willing to take action against companies who may be infringing on rights which up until now may have been seen as marginal to the environmental debate.
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