The Monthly Dose of Climate Solutions, March Edition

Welcome back to The Monthly Dose of Climate Solutions, your monthly digest of our analysis of market movements and trends in the transition to a low carbon economy!

In this edition, we reflect on the key market triggers and the optimistic findings from the Ember Global Electricity Review 2022 on the acceleration of solar and wind energy. March has been a resurgent month for green stocks and in particular, the performance of our two indices; we spotlight the outstanding performers across both our indices. We delve even further into the emergence of energy storage technologies, an essential part of the energy transition discourse. Don’t miss our riveting conversation with Julian Poulter, Partner at Energy Transition Advisors (ETA), on our podcast, in which he discusses the impending energy transformation.

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Will the Russia-Ukraine crisis derail the energy transition?

Polarised views dominate the news; some analysts argue that because Europe has restarted multiple coal-fired power plants and the engagement into long-term contracts for US LNG from shale gas sources to replace Russian-supplied fossil fuel, climate change mitigation is no longer a priority. This narrative is disingenuous. In my interview with Proactive London, I argue that we are witnessing an acceleration of climate goals instead. Since the invasion of Ukraine, coal, crude oil, and natural gas have not gotten more investible, cleaner, cheaper, or less volatile. Supply security is a primary issue for all countries, particularly the EU, and the pace of the energy revolution is indisputable. We must distinguish between the necessity to avoid a recession, deal with inflation, and handle the energy issue and the mid- to long-term commitment to transition away from fossil fuels.

High uncertainty and polarised views keep volatility high

Looking back at the important events in March, it is simple to understand why markets have been volatile. The US FED approved a ? percentage point hike of the federal funds rate on March 15th, the first increase since December 2018. The yield on the 10-year Treasury note began the month at 1.74% and ended at 2.38%. China went back into lockdown in the last week of March, and the financial powerhouse Shanghai, with its 25 million residents, became the country's hotspot of Covid cases. And finally, after a month of war in Ukraine, peace negotiations on March 30th failed, with Putin’s demands of Mariupol's capitulation.

The SEC’s climate change legislation will amplify the tailwind of the decarbonisation megatrend

On March 21st, the US Securities and Exchange Commission (SEC) issued a 465-page paper outlining potential guidelines for climate change disclosures on March 21st. Companies, both domestic and international, would be obliged to report Scope 1 and 2 information for fiscal year 2023 and Scope 3 figures starting fiscal year 2024. While GHG emission metrics are centre stage of the proposal, financial disclosures are part of the goal. We believe that the ability to precisely distinguish between "green" revenue and "brown" revenue will provide investors with a very powerful tool for determining where companies are in the energy transition, those facing fossil fuel risks and those with solutions. The SEC is seeking public input on wording that would alter both the Securities Act of 1933 and the Exchange Act of 1934, with a deadline of May 20th. We at iClima Earth, will be formally submitting comments to the SEC during this public hearing phase.

Green growth stocks are on the rebound

Although, US shale gas is a short-term front runner of the European energy crisis, green short-term solutions like energy efficiency, heat pumps, solar rooftops and batteries will be long-term winners. Fossil fuels are no longer sustainable in the long run, and longer-term decarbonising technologies such as offshore wind, long-term energy storage, and green hydrogen will spearhead the energy crisis. For the time being, green and brown will coexist, it is inevitable in this period of transition. March exemplifies this coexistence; iClima Distributed Energy Index was up 5.65%, while the iShares Oil & Gas E&P ETF was up 9.4%.

Big movers in our two indices:

iClima Global Decarbonisation Enablers Index

?iClima Distributed Renewable Energy Index

Solar and wind power generation sets a new high as non-fossil fuel-based electricity overtakes coal: Ember Global Electricity Review 2022

?According to Ember, an independent non-profit research tank, solar generation grew by 23% over the previous year in 2021, while wind generation increased by 14%. Solar and wind power currently account for more than 10% of worldwide electricity output. Considering all clean power sources (nuclear, hydro, and biomass), non-fossil fuel-based electricity generated globally reached 38%, more than coal at 36%, in 2021. The statistics are encouraging. ?When the Paris Agreement was signed in 2015, the amount of power produced by solar and wind was 4.6%; the 10.3% share of solar and wind in 2021 implies a 124% increase – more than double in less than 5 years! While this is uplifting, the NetZero plan IEA published last year to materialize, solar and wind need to represent 40% of all electricity generated by 2030, a four-fold increase from current levels.

?Clean energy storage solutions are on the rise

Energy storage is a critical component of the clean energy economy argument, and it is encouraging to see that the debate has moved from whether a grid could be 100% renewable based, to how energy storage is to unfold and enable a purely green grid.

Solar panels have been on a deflationary slope since the 1970s. Recently, the global weighted-average total installed costs of utility-scale solar PV fell by 81% between 2010 and 2020 (from US$ 4,731/kW in 2010 to around US$ 883/kW in 2020). Tony Seba and his team at RethinkX, an independent think tank forecast that the combined capital cost of solar PV, wind power, and batteries will decline a further 75% by 2030 implying that the total installed costs of utility-scale solar PV could reach US$ 221/kW by 2030. Perhaps the most impressive finding from RethinkX’s report was that, contrary to most simulations that aim to minimise curtailed energy, the team designed their energy system model to maximise energy surplus production. This grid's cost competitiveness is such that RethinkX estimates it could be built for less than 1% of the US GDP.

?Furthermore, according to the Solar Futures study published by the US Department of Energy (DoE) last year, battery storage in the US is expected to increase from 3GW to 374GW under the most optimistic scenario by 2035. A crucial finding is that the ratio of solar PV in the system between the Decarbonisation + Electrification and the Moderate cases is approximately 3x, whereas the ratio of battery storage capacity between the two cases is approximately 6x in the same year (374 GW in total versus 59 GW).

?Germany is accelerating its goal of achieving a predominately green grid; following the Ukraine war, it brought forward its timeframe from 2050 to 2035! A new thesis in Energy Economics by Oliver Ruhnay, PhD, provides insight into a long-term energy storage required to achieve the transition to a 100% renewable energy system. A proposed solution would be to store hydrogen (54 TWh) in salt caverns, which would be sufficient to supply 24 days of average load (36 TWh of electricity, 7% of the annual load). The fact that only 65% of the primary energy supply would be utilised to serve load (455 TWh), 23% would be put into storage (160 TWh), and 12 % (84 TWh) would be restricted, is noteworthy.

?The eventual mix of long-term energy storage will be determined by the progress of the various technologies and their respective prices. Additional options, including as vehicle-to-grid and virtual power plants, which both aggregate batteries located across the grid, are also rapidly growing. The question is no longer "if" but "when" and "how" the grid can be entirely renewable.

For a more in-depth analysis, read my article. Read my other NASDAQ opinions here:

Achieving Net Zero by 2050 is effectively beyond reach and CCUS and Nature-based solutions will be inevitable to avoid an overshoot, says Julian Poulter

We had the opportunity to host Julian Poulter, Partner at Energy Transition Advisors (ETA) and former founder of the Asset Owners Disclosure Project (AODP) for an engaging discussion on the orderly transition to clean energy on our podcast, Climate Solutions with Gaby & Shaila this month.

?Julian is cautious in hypothesising on the character of the transition. He is clear that short term fossil fuel price rises will not alter the direction of travel, and investors seeking immediate gains on these price rises risk being stung by the fundamental and inevitable demand reduction. He also notes that these rising fossil fuel price rises only entrench the competitiveness of renewable energy, further driving down fossil fuel demand. Beyond this certainty, he argues that the scale of disruption is unquantifiable. witnessed with the subprime mortgage market's collapse in 2007, there could still be significant losses, especially when serious policy action is delayed and consequently become more extreme.

?Julian's appraisal of the route ahead is outstanding, and recent events further add to his confidence. Fossil fuel use may surge in the very short term, but the underlying economics on which Julian is so certain are only shifting and further entrenching the competitiveness of renewable technology.

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What are your thoughts on our viewpoints, as well as other developments affecting the energy transition? Join the conversation in the comments below.