ESG is often brought up in the same context as sustainability (and climate and energy transition). In many cases, it’s use interchangeably with sustainability to refer to an organization's desire to “go green.” Take for example these recent articles about ESG:
Which almost all exclusively refer to the climate movement. These aren’t necessarily wrong. Many aspects of ESG do overlap with transition or sustainability strategy. It’s often said that ESG is really “big E, little S and G,” which is to say that, out of the three letters of ESG, “E,” or environmental, is often seen and received as the most important.
Using ESG almost synonymously with energy transition or sustainability does one of two things though. 1) It does a disservice to the other aspects of ESG that are not climate-focused and 2) It can actually be hurtful to growth-oriented sustainability initiatives.
#1 is a little more obvious than #2. When the emphasis for ESG is placed so heavily on climate, and in particular emissions, the company can under-recognize efforts that have gone into other initiatives. Things like DEI, responsible labor practices, and business ethics that can get “underfunded” internally with a warped definition of ESG, which can potentially minimize the influence of the company on human relationships and social systems at times where it can be immediately impactful. ESG has to be recognized as a broad umbrella.
(SASB does this well. They’ve identified 26 areas that fall under ESG, of which 15 have no direct relation to the “E” in ESG.)
#2 is what I’ve come to realize over time – and it’s something that I don’t think is immediately obvious.
ESG’s intended purpose is to identify and address the environmental, social, governance issues that matter to a company. The keyword here is matter. In practice today, matter means what gets investors to put more money forward. Matter is what’s relevant to financial performance. Matter is “what does the company do that is different from other companies and raises its equity valuation.”
In other words, ESG is fundamentally a benchmarking framework. It’s used in practice to identify companies that stand out relative to other companies. And it’s used in this way by investors in particular. Which is why the questions that get asked over and over again in ESG circles are “why does ESG matter to financial performance?” “How is this going to make me more money?”
(To put SASB in the spotlight again, this is exactly why they have materiality calculators to determine which of the 26 areas of ESG actually matter for enterprise value across different industries.)
This can undermine true sustainability in leading a company to always look at their neighbor for guidance on what to do and to only focus on things that their investors consider linked to financial return, a mindset that tends to lead companies to take the most conservative path towards sustainability.
A good analogy is in school. The goal of school is to learn (or learn how to learn), but when a student focuses too much on getting good grades (“ESG score”) to get a good job or go to a good college (“financial return”) vs. actually learning (“being sustainable”), the incentive might be for the student to take easier classes or to just do enough to outcompete her fellow students. A parent (the “investor”) might say “why in the world are you taking that class? How is that going to get you a job?” Which is exactly the kind of advice that, while practical, gets in the way of true scholarship. And leads to kids not taking enough academic risks for learning’s sake. (And leads those same kids to take investment banking jobs down the line 😊)
Another way of putting it is that thinking that ESG is the same as sustainability disincentivizes companies to be creative, aggressive, and risk-taking in putting forward new sustainability growth initiatives. If all you care about is the measurement, you’re more likely to stick to what’s being measured.
Don’t get me wrong…ESG is still very important. It (in theory) establishes a fair and objective baseline across companies and industries. It allows the laggards to recognize that they are laggards and take the first step to catching up. It’s a requirement for being a good company. And establishing ESG standards and practices is critically important for catalyzing industry-wide movements forward in sustainability and governance.
But I think it’s wrong to mistake a company’s ESG strategy for sustainability strategy. Every company needs both. ESG can measure a company’s position vs. peers and allow a company to calibrate itself to accept industry best practices. Sustainability strategy will probably overlap in many ways but should always take things a step forward in ways that ESG cannot as a benchmarking tool. Every company has the opportunity to create differentiated, creative sustainability strategy in areas that are not captured by ESG.
In short, get good grades, but don’t forget to learn as well.
An example of what I mean using a fictional lemonade company:
Now having discussed hydrogen production and logistics, the last piece of the puzzle is….hydrogen uses and demand!
Right now the hydrogen use chart is dominated heavily by industrial offtake – out of the combined ~75 Mt of pure hydrogen in the market in 2020, 37Mt was used for refining, 33 Mt for ammonia production, and the remaining 5 Mt for reducing iron for steel production. Including hydrogen in syngas adds another 15-20 Mt to the total, most of which is used in methanol production.
The future of the market is much more diversified…and much harder to predict. 2050 forecasts swing wildly depending on assumptions (e.g. BNEF’s Gray scenario predicts 190 Mt of hydrogen vs. 1,130 Mt in their Green scenario), but most seem to assume more than 500 Mt of hydrogen demand is necessary for a successful transition.
For simplicity purposes, I’ve averaged three sources (BNEF Green, IEA Net Zero by 2050, and Hydrogen Council’s 2050 forecast), which results in ~793 Mt of hydrogen demand. 75% of this demand comes from new uses: Power (30%), Transport (23%), and Heavy Industry (21%). The remaining quarter is made up of hydrogen offtake that largely exist in some form today (ammonia: 6%, chemicals: 9%, refining: 4%) in addition to building heat demand (7%).
(Note that these are not vetted or sorted. This is just a list I compiled of advertised hydrogen use methods from various companies):
To summarize, the future of hydrogen is massively EXCITING! It’s hard not to believe in a robust hydrogen market when faced with the different products under development today that will depend on cleaner sources of hydrogen in the future.
Last week I explored the current costs and methods used for hydrogen logistics today. This week will be about the future of this part of the value chain: what new methods are in the process of being developed and commercialized?
Innovation in storage seems to be bifurcated between 1) improvements to current physical methods and 2) developing new materials or molecules to capture and/or transform the hydrogen. Most startups and research labs seem to be working on #2, which is perhaps a symptom of the fact that there are an incredible number of materials to explore for this application. In fact, the DOE hosts a great database that lists out 250+ hydrogen-storing materials that researchers have discovered.
I won’t come even close to going into all of those methods, but hopefully the below gives a high level overview of what methods are actually being worked on by startups in the ecosystem.
(Note that these are not vetted or sorted. This is just a list I compiled of advertised hydrogen storage methods from various startups):
Distributed hydrogen production does somewhat belong in this section too. Having onsite production at demand points like fueling stations eliminates the need for any hydrogen transport. Companies like IVYS Energy are working on building these all-in-one fueling stations.
It’s also worth mentioning the prospect of shipping hydrogen. Maritime transport of hydrogen is still in its infancy. It will be interesting to see whether or not international shipping of hydrogen will be necessary given the widespread availability of hydrogen-bearing sources. There are also some efforts in recent years to test out actually producing (then shipping) hydrogen on ships.
In terms of costs, there aren’t great sources for the potential costs of transport in the future based on all of the methods described above. According to one study examining Germany by 2050, transport + logistics could get down to $0.30 - $1.60 / kg vs. the ~$1.50 - $6.00 / kg range we determined last time for current methods. This study only looked at gas, liquid, and LOHC methods though.
Finally, I’ll just end on the size of the future market. Luckily, this was actually a bit easier to find than the size of the current market, thanks to the smart people at IEA. According to their Net Zero scenario, they believe storage needs could amount to ~50 Mt by 2050, which is just under 10% of the 500+ Mt of hydrogen that they believe will be needed for Net Zero. That is a lot of hydrogen to store, considering the current total hydrogen produced right now is ~70 Mt. But considering the number of new methods that are under development, I'm optimistic that we'll have plenty of economic storage by that point.
Last time we talked about hydrogen production. I thought it might make sense this week to do a dive into hydrogen transport, storage, and other logistics.
Since there’s a lot that’s not well covered on this subject, I'm dividing this into two parts. In part 1 today, I’m going to explore the current status of this market. Part 2 will lay out new technologies and developments.
The nice thing about the hydrogen logistics industry is that it very much exists today. There is already a functioning model of moving product around safely and at a certain scale.
Most hydrogen today is stored and transported via physical methods, either a) in gaseous form via pipeline and high-pressure vessels or b) in liquid form via cryogenic tanks. Materials-based methods like hydrides or liquid organic carriers also exist, but these are still being commercialized.
I had a hard time finding a breakdown of each storage/transport method (so if anyone has one, would love to see it), but from what I can gather, hydrogen is currently most frequently transported in gas form on tube trailers. Liquid hydrogen transport is limited to large volume, long haul applications where the expense of liquefaction and insulation + the boil off loss of the hydrogen can be covered by the scale and immediacy of the demand (markets usually 150+ km away where a few tons per haul can be used in a short time…space programs are often cited as an example). Pipelines exist but only cover a few hubs (e.g. US Gulf Coast and Northern Europe) and require consistently large amounts of product transported through the same route in order to justify the upfront capex.
Costs vary by technology, distance and amount of hydrogen carried, but typically for distances 500km or less:
Note that the above still doesn’t include the cost of refueling stations if you are looking at the logistics cost for a distributed fueling network. Adding in that cost, which is ~$7/kg, is not exactly straight forward since hydrogen can also be produced on-site at these stations, which eliminates many of the previous logistical costs.
It might also be helpful to think about how these costs break down by method. The below shows what I estimated for total transport, conversion, and storage costs in $/kg for each of gas trucking, liquid trucking, and gas pipeline:
Generally, for deliveries <500T annually, tube trailers are the most economic option. For bigger deliveries, pipe wins out. However, since there aren't enough pipelines to be able to service all of the areas in which large scale hydrogen is needed, liquid hydrogen trucking is often the next most economic option.
These numbers are imprecise and don't take into account situational differences like the availability and accessibility of equipment, lower contract pricing, regional variations in power costs, consumer preference, etc. My understanding is that right now, gas, liquid, and pipe are all used across the matrix despite the price differences shown here.
I also tried to figure out exactly how much hydrogen is stored and transported today.
This is very difficult to find, unlike the widely reported 70 MT number that represents hydrogen produced. I guess the reason why this estimate is so obscure (other than the fact that maybe people don’t care enough about the logistics of hydrogen as much as the production of it) is that most of the hydrogen today is transported and stored by largely same the few giants that are producing the hydrogen. Since the hydrogen is moving around a few internal company ecosystems, perhaps there hasn’t been good data (that’s not proprietary) gathered around this. I’m hoping once there are more third parties in the logistics ecosystem, that will change.
Anyway, the best estimate I could come up with is 4 - 5 Mt. That’s dubiously anchored on several reports that seem to estimate that the hydrogen storage market at ~$14B right now and an assumed cost (loosely based on the above averages) of $3 - 3.75 / kg. That implies that less than 7% of current hydrogen production is stored.
Next time I’ll look into the future of this market. Thanks to the below for offering data points on cost:
Hi everyone – I’m sorry for falling off the map after that last post. I have been a bit busy taking care of some things, including physically moving to Denver. The move was a little unplanned but thoroughly welcomed. One of my goals this year was to explore new networks and Denver will be a great hub to do that from. I’ve been incredibly impressed with the Denver tech community + the many exciting things happening around energy transition and climatetech in this city. The easy flights to Houston are also a big plus!
You might have also seen that I was made an advisor to Boundless Capital Partners, a Denver-based investment bank focused on energy infrastructure and technology. I’ll continue to “do my own thing” but this gives me chance to support a stellar team taking a differentiated approach to investment banking while also staying adjacent to some relevant dealflow. Give me a shout if you’d like to learn more or to generally catch up.
Today let’s talk hydrogen production.
A lot of you might know that the reason why I am long hydrogen, despite the logistical shortcomings of the current network, is the many ways that hydrogen is able to be produced from a variety of sources. Hydrogen is the simplest molecule in the universe, which lends itself to be a product or by-product of a variety of different pathways.
See below for some of the different ways I know of to produce low-emissions hydrogen (Note that these are not vetted or sorted. This is just a list I compiled of advertised hydrogen production methods from various companies, mostly startups.):
*Note: The list could be made even more precise through differentiating between SMR, electrolysis, and pyrolysis by type of catalyst used. For example, there is a sub-category of plasma-based catalysts that are used in pyrolysis.
For a more in-depth explanation of some of these, the DOE is a great resource.
A few observations on the list:
Hope you enjoyed today’s roundup. Would love any feedback or comments!
As many of you know, this year is the year of learning for me…and I had to think: what better way to start off this journey than posing some questions I’d like answered?
I struggled a bit before writing this post to decide what part of this broader climatetech ecosystem I’d like to cover. I have an energy tech background – which means I looked at technologies that influence what we now consider the energy industry. However, that set of technologies is rapidly changing. Technologies like soil-based sequestration, chemicals manufacturing, waste recycling and WTE, hydrogen jets, HVAC, insulation, etc. have moved into the “don’t care” to “care” bucket very rapidly for traditional energy players (meaning utilities + oil and gas companies). And that’s because carbon is carbon is carbon. What happens downchain or upchain matters…and is increasingly the responsibility of the parties across the whole chain. Selling product into market or buying product from a vendor is no longer a transaction void of responsibility. The energy industry should care where its molecules and electrons are going and how it can help get those molecules and electrons into better places, in addition to producing better molecules and electrons in the first place.
I think Bill Gates does a great job in How to Avoid a Climate Disaster breaking down what we do from an energy usage / emissions perspective. He separates it into making things, plugging in, growing things, getting around, and keeping warm and cool, or in other words:
I call this the FEST framework. Like a FESTival but for seven billion people. One that needs food, beds, ways to get around, sanitation, a clean up crew, and for everyone to be happy and healthy. But one that also only has a limited amount of time, a rapidly growing number of “attendees,” and a planning committee with zero experience doing this well. Sound familiar?
Which leads to the reason why I like this framework so much. What it does so well is allow us to break down how our everyday activities are affected by what technologies we buy, support, develop, invest in, etc. Other breakdowns separate by energy, industry, agriculture, and other abstract categories that don’t mean much to me immediately…I get especially confused with “Industry.” What the heck does that cover? But I know exactly why I care about access to food, electricity, stuff, and travel. With FEST, the impact of tech on living is clear.
There are of course limitations to breaking things down in this way. The most apparent is that the supply chains are still not clear. For example:
The categories get especially muddling when products with complex supply chains like cars or semiconductors are considered. But overall, FEST is a manageable way to understand and chart emissions impact from various sectors. And sets itself up nicely for a FESTivus-themed conference later this year (if anyone has any desire to fund such a conference, please let me know. I have lots of ideas but no money).
Onto the thoughts and questions...
Would love any thoughts / comments / answers / more questions to add to the list 😊
To see a larger version of the FEST map, please click here.
Last time we wrote about the different components that make up project motivation for energy transition infra, BEPTC. How well a project can address each of these components and establish project motivation is often times the driving force behind an equity investor’s initial interest in the project.
But after interest is established, the real diligence begins to determine level and type of development risk, which informs an investor’s view of fit with their investment mandate and the ultimate investment structure (% equity or debt, assetco vs opco vs holdco, etc). Once again, we cite NREL’s framework for the second phase, SROPTCC, or Site, Resources, Offtake, Permits, Technology, Team, Capital:
These first three are crucial to securing the base project economics. Often times, projects come to us when these three are still in flux, which makes modeling the project more challenging and why some more conservative investors prefer agreements to be more or less in place before they engage. At the same time, project developers often find that initiating conversations with investors when agreements are not finalized can provide larger corridor for investors with different risk profiles to come in and help negotiate those agreements to their liking. Balancing the timing of these conversations is an art much more than a science. Sometimes we advise clients to execute LOIs with the appropriate parties, which can formalize a series of conversations into a document that can be shown to an investor but also leave room for further negotiation. This formalization and documentation is important for projects that are “first of a kind” or championing a new set of relationships.
The last four components are ones that every project should also have clear visibility around before talking to investors (and probably do based on work done during the project motivation stage) BUT are not crucial to the economics of the project. Instead, they more so dictate timing and execution risk around a project. Thus, these components can change a little throughout the financing process without major effect. At the same time, much of this work will inform the first three, so it’s unlikely that these components will change drastically anyway.
Hopefully that provides a clear framework around how projects in the energy transition space are evaluated by investors. For project developers, the broad takeaway is that there are many questions that will get asked around the development / financing process, many of which there won’t be clear answers to from the get-go. The important thing is to have answers at ready and be ready to document and validate those answers at each step.
An interesting dilemma for capital providers in energy transition these days is being able to underwrite the unique risk profile for infra development in the space. Traditional project development relies on visibility, predictability, and repeatability, all aspects that get blurred by the uncertainty, dynamism and constant “newness” that runs across energy transition. That’s why infra has traditionally focused on projects that have low to no technology risk, rich precedence, and contracted cash flows – things like roads, buildings, pipelines, etc.
Renewables has come a long way in its road to being the perfect project finance candidate. Technology development has progressed to the point where solar panels and wind turbines are proven at scale and, on the lower end, virtually commoditized. Backstopped by typically 15-20 year PPAs, renewable assets have become prime targets for energy transition infra deployment.
But there’s a whole host of other new energy infrastructure that relies and will rely predominantly on emerging energy technologies. That includes storage, CCUS, hydrogen, biofuels, water recycling and filtration, waste-to-energy, etc. For so many of the companies in these areas, the capital ramp is quick – going from Series A/B to the next phase of capital can mean a jump from $5-15mm to $50-500mm+. The step-change nature of the development cycle for hard tech means that the incremental de-risking that is achieved is often disproportionate to the incremental capital ask. Most of the time, the change in capital is much larger than the perceived change in risk.
NREL breaks down the different components of project motivation, which is what they define as what drives the project forward and gathers the necessary stakeholders. They break it down into BEPTC – Baseline, Economics, Policy, Technology, and Consensus. How this framework plays out in energy transition infra:
How this relates to raising capital is that it’s these very core elements that come to form the “gut feel” of whether a project is worth pursuing. When presented with an opportunity, investors have to make quick decisions on whether to spend time on that opportunity – and what we’ve observed is that it’s this general framework that investors use to make those quick decisions.
Once a project gets the green light for deeper due diligence, the next steps are understanding the timing / stage of a project and refining an investor’s understanding around risk to see whether that matches up with an investor’s investment mandate. A good way to look at this phase is both quality of decision around and progress on decision around: site, resource, offtake, permits, technology, and team.
The concept of economies of scale has been long ingrained into our paradigm of an efficient economy. Reducing costs by increasing efficiencies in larger scale, more centralized production units makes sense to us intuitively. We’re taught to buy supplies in bulk and get a discount, spread fixed overhead over larger production volumes, use size to gain market leverage over customers and suppliers, and access larger and cheaper tranches of capital via larger capital projects.
The twist with economies of scale in the context of climate change is that the classic industrial optimization problem becomes bifurcated. Efficiency as a goal has to compete with climate friendliness. That changes the economies of scale equation a bit.
In a traditional economies of scale model, industrial centers produce vast, cheap quantities of product and that product is delivered to other industrial centers for further processing or large distribution warehouses for delivery to the end user. The result is the ecosystem as we have it today: industrial clusters where similar products are developed in tandem, networks of pipe/rail/trucking routes where product can be delivered to another industrial cluster where synergies can gain be realized.
But in an economy where climate impact is prioritized, these centers of industry are focused on delivering the smallest footprint, and that may not line up exactly with our traditional model of economies of scale.
A prime example is the distribution of solar resources. Residential solar comes in at ~$0.15 - $0.22 / kWh vs. community solar at ~$0.07 - $0.17 / kWh vs. utility scale solar at ~$0.03 - $0.04 / kWh, costs that indicate a fair bias towards “bigger is better.” But when taking into account factors that affect the environmental impact of each project like land usage, transmission losses and time to deployment, residential solar starts to level the playing field.
This effect is even more prominent when considering energy resources that don’t have as efficient of a network to deliver to the customer. Within the industrial ecosystem, goods get hauled between industrial sites everyday. For processes that are aimed at lowering the carbon intensity, the effect of this haulage, which includes road fuel and any preparation work to get the product ready for transport, on the carbon footprint makes a sizeable dent on the overall score. Decarbonizing a heavy industry facility will require making sure the incremental footprint made by logistics at that site is netted out against the footprint reduction of the process itself.
A salient example of this is in CCUS, where the financial and environmental cost of transporting CO2 means that sources have to stay close to capture sites which have to stay close to end uses / points of consumption. The end result is a much more distributed network vs. incumbent industrial networks like this in oil and gas or steel production.
Several other areas of climate tech will follow suit in becoming more distributed over time, including hydrogen, green chemicals, and agriculture. The closer one’s customer base is to the individual consumer, the closer the industrial site might have to be a population center, spreading these networks much more similarly to population. The environmental benefits are not just limited to logistics either – finding more sustainable ways to produce something will fragment our industrial products such that regionalism / customization to the local consumer will have an increasingly dominant effect (e.g. consuming produce that’s local or using energy produced by a local landfill). This will often run counter to the traditional inclination to build towards economies of scale and centralization.
A final thought: perhaps the end result of all of this is that population growth and migration will evolve to take advantage of areas where economies of scale won’t have to be sacrificed for the sake of decarbonization. Urbanization is often pointed to as a key risk factor for climate change, mostly due to the current limitations of urban infrastructure. However, urbanization does have the nice benefit of creating economies of scale in having points of consumption all gathered into one place. Cities were once built around proximity to coasts and rivers to take advantage of trade and water available for agriculture/drinking. Now that we’ve identified novel, cleaner ways to utilize the resources around us, perhaps cities will evolve to be gathered around those industrial resources instead.
Energy transition and circular economy go hand-in-hand, both optimizing for an ultimate vision of sustainability. Where they overlap is around the industrial processes that generate energy, adjacent to energy production, or use energy in a significant way. Creating a circular economy means that products are able to be used for longer or for more purposes, waste products are turned into feedstock for creation of new products, and that there are industrial pathways in place for recycling, repurposing, and recovering within the product’s lifecycle. We see the circular economy divided into two main areas:
Waste to energy, or creating electricity, heat, or fuels out of trash or organic waste. Landfill to biogas, dairy manure to RNG, municipal solid waste to syngas are all thriving examples of these pathways. Most of these technologies have existed for decades in order to reduce the operating costs and amount of land occupied by waste management facilities, but we’ve seen a recent “renaissance” of activity and development. The unusual tenure of the technology (derisking it in many people’s eyes) combined a macro focus on decarbonization and expanding regulatory programs like LCFS have led to WTE projects skyrocketing in number.
The production of goods from waste resources or industrial by-products. The utilization of CO2, normally a by-product or waste product, in producing chemicals, carbonates, or synthetic graphite has been a big topic. Plastics recycling has been and continues to be a dominant focus in this space. Creating chemical precursors like methanol or ethanol or hydrogen from excess syngas streams or waste biomass can be the industrial bridge to creating more sustainably produced plastics.
Creating these pathways is no easy task – and being able to sustain them over a long period of time will be even harder. A big challenge with circular economy pathways is maintaining the balance between supply and demand. An instable waste stream can cause a feedstock shortage, disrupting commercial agreements and leading to price volatility. Because the components of a circular economy are so interdependent on other processes, a circular economy is vulnerable to the domino effect. One sequence of disruptions can completely eliminate the viability or need of a pathway.
This brings us to the ultimate challenge: commercializing circular economy pathways for the long term. Like other industrial-scale projects that we have seen in the energy transition space, circular economy projects will require a combination of technology development and project development, two different sets of expertise and ecosystems. Moreover, the traditional infrastructure development mindset relies on having high visibility of offtake and feedstock. Both of those are hard to secure long term in a circular economy, where inputs and outputs are always shifting according to market dynamics.
The name of the game for circular economy is flexibility. Having optionality around feedstocks and offtakes will generate an advantage for projects, especially those that deal with intermediary products. Most of the projects we look at don’t future test their pathways, only basing their narrative on one particular macro outcome. Circular economies are not static, especially as we deal with the behavioral science surrounding waste vendors. A big question is what happens when a waste turns into a valuable product, one that merits a premium vs a discount? We saw that happen with flared gas to bitcoin mining. It’s for that reason that for companies looking to commercialize circular economy projects, we recommend extensive scenario planning.
In any case, the circular economy is an exciting vision that is flourishing now. WTE, which was once the dirty cousin of wind and solar in the renewable energy industry has turned into a fast-growing behemoth. Recycling is not so consumer driven anymore and scaling up to replace industrial processes. We’re excited to see this space grow and what comes out of it.