Energy and Investment: a Conundrum

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A conundrum? When you cannot reconcile two apparent realities that you know to be true. Yes indeed, energy investment is a conundrum. On the one hand, we all want to invest in a positive and sustainable future, consistent with renewable energy and a reversal of climate change that will harm us irrevocably if left unchecked. On the other hand, we cannot see a global energy industry in the next decade or more which is not dependent on finite fossil fuels, consumption of which has been so heavily responsible for global warming. How can we reconcile these two mutually exclusive truths?

This article is an attempt to explain how this might be possible, although we must start by showing how very difficult it will be.

Energy Generation: Current Status

First, we must be clear as to the current global energy mix. For all the positive statements emerging from COP26, our world is still overwhelmingly using fossil fuels to meet its energy needs. This applies to all sectors, nearly all nations, and is increasing rather than declining.

We can see here how Oil, Coal and Gas account for the vast majority – over 84% – of global energy consumption, and are still on a growth trajectory. Other than small dips in the recession of the early 80s and the financial crash in 2008, this growth has been unbroken since the 1960s. During this time period of less than 60 years, the volumes of fossil fuels consumed have more than trebled, from 40,000 TWh to over 130,000 TWh. Even coal, which we have almost phased out in the UK, has continued to grow globally.

Energy Associated Carbon Emissions

The consequences of this dependence on fossil fuels for energy generation is graphically illustrated by the breakdown of emissions by sector, where we can see that energy is accountable for almost three quarters (73.2%) of the greenhouse gases causing global warming.

This means we start with an enormous problem. Carbon emissions are the cause of the increasing carbon concentrations in the atmosphere, which in turn are the cause of the global warming patterns, which in turn are the cause of the changes in the climate we are witnessing. Carbon concentrations in the atmosphere prevent the reflected sun’s rays from escaping the Earth’s atmosphere. They have been our friend for 10,000 years, in which temperate climates in many parts of the world have provided the conditions for human civilisations to thrive, grow and prosper. During these millennia, we have seen a stable concentration of carbon in the atmosphere at 300 particles per million. This started to change with the carbon emissions caused by the Industrial Revolution, and the burning of coal at an industrial scale. Since the Second World War, and the population boom, the increase has mushroomed. We are now above 420 ppm. At this level, carbon concentration in the atmosphere is no longer our friend. It is causing the globe to warm and the climate to become intemperate and hostile to humans, as well as animal and plant life on the planet as we know it, and have known it throughout our civilisation. Energy not only has been the problem, as the data above reveals energy is and remains the dominant source of continued global warming.

Plans to halt Energy-related emissions?

How did COP26 deal with this problem? COP26 was the world’s leaders’ opportunity to agree together on how best to sort out Climate Change. If Energy is the source of the problem and the cause of its ongoing escalation, then what plans have they made to sort it out? The answer to that question is frustrating. World leaders reached a series of compromises that do not alter the basic trajectory, rather they affect the speed of travel. We reach a point when fossil fuel consumption peaks rather earlier than had otherwise been the case. For example, China has brought forward the target for peak emissions from 2030 to 2028. This means the next seven years will see a continuous increase in emissions from the world’s largest source, accounting for more than a quarter of total global emissions, almost 28% in 2019. Does this help? No, quite clearly, it makes the problem worse.

Here are some other examples of energy-related outcomes from COP26:

  • Three big European power companies have raised their 2030 targets. Enel aims to have 154GW of renewable and battery storage capacity in place by then, up from 145GW, and has brought its net zero target forward to 2040, from 2050. SSE has cut its targeted Scope 1 and 2 emissions for 2030 to about half of what it previously planned, while trebling renewables output. RWE aims to add 2.5GW of renewables capacity per year out to 2030, up from a previously planned 1.5GW.
  • Germany will move up its coal phaseout “ideally” to 2030, from 2038, under a coalition government agreement. It also aims to end gas-fired power by 2040. Meanwhile, Portugal shuttered its last coal-fired power plant nine years before its 2030 phaseout date.
  • Nigeria has become the first major developing economy to commit to set annual carbon budgets in line with a new goal for net zero emissions by 2060. Africa’s biggest oil producer will also set five-year carbon budgets and set up a climate change committee, through a law modelled on the UK’s 2008 Climate Change Act.
    (Source: Nigel Topping, High Level Champion for Climate Action at COP26)

Do you notice the common thread throughout all of these laudable commitments to improve their performance? They are all predicated on the assumption that energy-related carbon emissions will continue. What does this mean? It means that climate change is going to get worse. It means they are all planning that it will get worse. If a concentration of 420 ppm is capable of causing the damage we are already seeing around the globe from the changes in the climate, the onslaught of extreme conditions we have never known before and are ill-equipped to survive, what will 450 ppm do? What about 500 ppm? These plans agreed at COP26 mean the concentrations are going to reach these levels, because these outcomes ensure that our energy producers will continue to emit carbon.

The Progress of Renewable Energy

Now let us examine the progress of renewable energy sources in global consumption, and the trends these are following. According to Our World in Data, “we see that in 2019, almost 16% (15.7% to be precise) of global primary energy came from low-carbon sources. Low-carbon sources are the sum of nuclear energy and renewables – which includes hydropower, wind, solar, bioenergy, geothermal and wave and tidal. 11.4% came from renewables; and 4.3% came from nuclear. Hydropower and nuclear account for most of our low-carbon energy: combined they account for 10.7%. Wind produces just 2.2%, and solar 1.1%.” It is also true to say that wind and solar are growing quickly on a global basis. But their rate of growth is from such a low base that it is a mistake to exaggerate their role.

These offer limited hope, but it is hope.

The Time for Investment

This is where we need to introduce the question of investment. Quite clearly, investment will continue into the companies providing our world with fossil fuels. They will continue to make money, and earn money for their investors. It is clear that the benefits of their success actually balance the damages, to some extent. The higher the price of a barrel of oil, the greater the carbon cost and hence carbon trading value. The market has been pegged in this way, and will continue to operate in this manner.

Perhaps that does mean disinvestment in the fossil fuel industry should be discouraged, although it is hard to make the positive case for investment in the Oil & Gas (O&G) industry. These are companies that have stood in the way of progress in the fight against climate change for so long, and with so many unscrupulous campaigns, that it is hard to argue they represent a principled or ethical investment. It is true too to say that, in many ways, you have to be brave today to invest in the O&G industry. The problem of stranded assets is getting closer and closer, fields which are recorded as assets on the books of the O&G giants, but which become unavailable for development, owing to the economic pressures associated with climate change policies. This, even more than a falling price for a barrel of oil, will make the returns on O&G investment harder and harder to come by.

Paradoxically, therefore, one of the first conclusions in answering the conundrum is that, for the good of our planet, we should continue to invest in the O&G sector. But we should only do that while investing more and with more support and encouragement, in alternative renewable energy sources. These require most of our attention, time and money. Consider the challenges of replacing traditional fossil fuels with renewable energy sources.

  • Domestic heat (10.9% of global emissions combined with cooling)
  • Domestic cooling/air conditioning (10.9% of global emissions combined with heating)
  • Refrigeration (10% of global emissions)
  • Automotive transport (11.9%)
  • Air transport (1.9%)
  • Concrete and Cement production (8%)
  • Iron and Steel production (7.2%)

The combined impact of all of these seven sectors is greater than 50% of global emissions. In each sector, we have a need to transform the means by which the energy required for the purposes is generated, transmitted and delivered. What do we need to make this transformation happen? Innovation.

What does Energy Innovation mean?

Innovation means various things, depending on the context. Here, we have a particular challenge. We know there is a static condition that will not change our requirement for energy. But the unstable condition is the consequence of our energy use. We need to use energy, but we now need to use energy in a manner that is different from before, and does not cause the harm that it has been causing. However, we have no ready-made alternatives to this, because we do not really know how energy can be produced and used in the quantities we need without doing harm. Without a ready-made solution, we must develop new ideas to deliver the change we need. This is what we mean by Energy Innovation – new ideas to make a different way possible.

The absolute dependence on innovation to make the adjustments to our energy usage has been well recognised and not only acknowledged, but predicted. In 2017, Dieter Helm, for many the prophet of the energy industry, published a book he called Burn Out: The Endgame for Fossil Fuels in which he concluded that “climate change is a solvable problem, but only with the steady march of new technologies…If climate change is the existential threat many scientists tell us it is, then the great new wave of inventions is a get-out-of-jail-free card”. (Burn Out, pp.245, 246, Yale University Press, 2017).

Dieter Helm recognised that change and innovation was already happening, and used this book to link energy transformation with the development of IT. He knew that delivery as much as generation and demand as much as supply, were capable of providing the drivers to change, because he could see the technology innovations already to hand. He was writing the book in the backwash caused by the Internet of Things wave, just as it was evolving into the Machine Learning and Artificial Intelligence wave. It is interesting to note how these have ceased to be the talismanic terms they were, because the technology has been absorbed into software development as a commonplace capability. It is also important to note that, by 2017, the roll-out and use of Smart Meters was already well established, wherein lay the seeds of a different form of energy draw-down. Since he wrote the book, much more has happened in the software industry in relation to Energy that has started to bear out his predictions.

But there is much, much further to go, we are still only in the foothills of innovation. Bill Gates, four years later, and less than a year ago from the time of writing, echoes and reinforces Dieter Helm’s refrain. In the five pillars of activity identified in his book, How to avoid a Climate Disaster, three of the five are energy-based – “How we plug in”; “How we get around”; and “How we keep cool and stay warm”. Throughout the book, Gates’ theme is innovation and the need for innovation. In discussing electricity, he spells out what this means: “These ideas are in various stages of development; some are relatively mature and well tested, while others are, frankly, nuts. But we can’t be afraid to bet on some crazy ideas. It’s the only way to guarantee at least a few breakthroughs.” (How to avoid a Climate Disaster, p. 84, Allen Lane, 2021).

Betting on “some crazy ideas” translates into start-up and early stage investment in innovation. The one requires the other, and if we are to do something effective about energy and carbon emissions, we have to do both – innovate and invest. Recognition of the crucial role of investment in making innovation happen at the level both Helm and Gates know is required brings with it the full force of an economic imperative. We must invest if we are to solve this problem. Here, again, is Dieter Helm: “These new technologies are an exciting prospect for entrepreneurs, innovators and scientists, and they are resulting in the emergence of many new companies, supported by tech investors.” (Burn Out, pp.245, Yale University Press, 2017)

What are the Energy Investments we need?

And so the second conclusion must be that investment is not just desirable or potentially profitable, it is essential in the technology innovations that will enable these sectors to transform. Unless we are able to realise the engineering potential of alternative energy applications to all these activities quickly and at scale, our hopes of curtailing and eliminating carbon emissions will be thwarted, and an increase in the fatal concentration of carbon in the atmosphere resulting in the warming causing climate change will be inevitable.

Not only is investment essential, it is also an enormous opportunity. It has become a repeated mantra, but was shocking when Mark Carney and Al Gore first referred to Climate Change as the biggest investment opportunity in history. Bill Gates repeated the claim in an interview in October, at the virtual SOSV Climate Tech Summit, where he said future returns in climate investing will be comparable to what the biggest tech companies have produced. He added: “There will be eight Teslas, 10 Teslas, and only one of them is well known today.”

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This should surprise no-one. In approaching the issues raised by Energy and Investment, the essential requirement for success in making the changes is a shift from a hydrocarbon world to a non-hydrocarbon world. It sounds like a contained, discrete task. But this transition is required in every single economic sector, in every part of the world. It is huge. In the widest sense of the requirement, this is how economist Mariana Mazzucato sums up the scale of the challenge: “A green revolution will require deliberate and conscious changes in social values: a redirection of the entire economy, transforming production, distribution, and consumption in all sectors.” (The Value of Everything: Making and Taking in the Global Economy, p.279, Allen Lane, 2018)

How can we hope to achieve this? The answer is simple. The potential to make changes to any system relies on a series of granular innovations capable of integrating into a new system of production. We have to incentivise, stimulate, encourage and invest in the granular innovations, numbers and numbers of them, that address the challenges in all of these sectors. But, as Gates went on to say in the same interview, for “somebody who can’t afford risk or if you expect near-term returns, I would look elsewhere.”

These are investments in entrepreneurial, start-up or early stage companies creating the innovations and testing them as a process of invention and discovery. These are people doing things that have never been done before. They are finding new ways to do old things – people experimenting with new technologies that relate to old processes. It might be a new valve to control flow for hydrogen, new piping that would allow air-source heat pumps greater efficiency, increased density for materials in EV batteries, it might be as small as a washer that can sustain intense heat. When this is overlaid with the range of software applications required to measure and control the completely new things we are demanding from the Energy industry, the scope for creative innovation doubles and trebles.

They will be high risk investment opportunities, but will also be high reward. Nassim Nicholas Taleb, the economist and commentator, referred to these investment opportunities as the best in the market. He pointed out that they have an “asymmetric upside”. You know the downside, but the upside can be anything. It is unlike any other investment or even any bet you can make, the casino or the bookies, you always know the odds. Angel investing, you have no idea. You only know what you can lose.

It is not for everyone, as Gates points out. In another analysis of the investment opportunities in climate change, the Financial Times journalist and commentator, Alice Ross, echoes Gates’ point: “Funds in the area of climate solutions or clean energy or technology tend to be more suitable for investors with a high-risk appetite, as they often include smaller companies.” (Investing to Save the Planet, p.125, Penguin, 2020)

She also provides perhaps the most reassuring perspective on the goal of innovation and investment, when she quotes the International Renewable Energy Association (IRENA) as saying that “renewable energy and energy-efficiency measures can potentially achieve 90% of the required carbon reductions.” (Investing to Save the Planet, p.110, Penguin, 2020)

This may be correct, but we will only know if we invest in the energy innovations needed to deliver the new means of accessing the energy we need, and do it with all possible speed. There is no time to waste.

Nick Lyth is Founder and President of Green Angel Syndicate, one of the largest active angel syndicates in the UK and the only one specialising in the fight against Climate Change. For regular updates follow Green Angel Syndicate on LinkedIn and Twitter.

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