Accelerating Decarbonisation - The Energy Of The Future

Financial Advisory

12 October 2021

climate changeEnvironmentalFinancial AdvisoryMeeting of MindsWealth Management and Private Banking

Expert: Dr. Aanand Venkatraman, Head of ETF Investment Strategies, Legal & General Investment Management Facilitator: Jo Goddard, Green & Good Consulting

Key Takeaways:

  1. The green landscape includes solar and wind, batteries and storage, and hydrogen, with energy efficiency also playing an important part
  2. Clean energy has benefitted from economies of scale, especially for solar to date, and will become more so for wind and hydrogen going forward
  3. Technological changes have emerged too, especially with battery storage
  4. There is growth to be seen in the clean power value chain
  5. There is huge potential in hydrogen, especially for heavier industries, within a medium to long-term timeframe
  6. The cost of transition to clean power can be high and timescales long, policy intervention, often a laggard, will help expedite this
  7. Funds and valuations of clean energy are stabilising, increasing confidence in investment.


It is without doubt that the use of coal and other fossil fuels to generate power must stop and that we need to shift towards a greener economy and a greener planet. But how can the finance system support this, what does the transition to a clean economy look like and what are the component parts which we need to consider investing in. This session discusses clean energy, the transition away from coal and other fossil fuels and looks at the growth potential in clean energy and its value chains.

1. The green landscape includes clean energy including solar and wind, batteries and storage, and hydrogen, with energy efficiency playing an important part going forward.

For LGIM, the clean energy landscape includes solar, wind, batteries and storage, and hydrogen power, with energy efficiency an emerging area of research and investment.  This doesn't focus on ESG investing rather it looks into the solutions required for a transition towards a low carbon or green economy and the areas of growth for investors.  It is also the premise that investing sustainably doesn't mean a compromise on growth. 

Nuclear energy isn’t usually seen to be part of the clean power universe, although it is an important part of the power mix for some countries, such as France.

2. Clean energy has benefitted from economies of scale, especially for solar to date, and will become more so for wind and hydrogen going forward

In prior years developing solar plants at scale required subsidies and feed-in tariffs as the solar economy was very expensive – in the region of 3.5 times more expensive than coal. It was very complicated to set up and run efficiently.  Today solar and wind is cheaper in almost every country, and it is felt that economies of scale have been reached. We need an efficient strong market, which is where the private investment is required.

3. Technological changes have emerged too, especially with battery storage

There have been considerable changes in the technology used for clean power, for example, wind turbines can now produce much more power. In 2013, a wind turbine had an output of 3MW whereas now that is more likely to be 20MW which can power approximately 1000 homes.  Offshore wind strengths are generally much better, technologies are developing to increase the capacity of offshore turbines - blade diameter has increased from 15 metres to approximately 18 metres. Turbines are also being built higher to approximately 150 metres, increasing the capacity to generate power even further.  Power generation for solar has increased through technical advances too, moving from polycrystalline to monocrystalline (which also reduces the size of the solar panel) and the introduction of bifacial solar modules. 

However, there is a problem with wind and solar in that the flow of energy is intermittent. 

With coal now only supplying approximately 2-3% of the UK’s energy needs, we are more reliant on renewables than ever before – so we are in urgent need of a way to store the generated power and supplying it when needed. Battery technology addresses this intermittency problem.

There’s also been vast strides in solar battery technology where, within the last five years, batteries can achieve four times more storage for every dollar spent. The speed of charge has increased and discharge rates have decreased. More innovations are likely to come with flow batteries developing quickly.  Different types of chemical elements such as sodium sulphur, zinc and lithium and others that have been researched over the last 10 to 15 years are likely to mature possibly within the next decade or so, which could be a game changer.  For example, we are likely to see changes within charging times for electric vehicles going from several hours to just 15 minutes. Indeed, some car companies have got a goal to achieve at least an 80% charge in 15 minutes, a similar time spent at a petrol station.  At this point, range anxiety, the fear that electric vehicle drivers currently have, disappears, giving a broader reach to the electric vehicle market.

4. There is growth to be seen in the clean power value chain

Within both the wind and solar manufacturing process there are upstream and downstream suppliers playing a vital part in the clean economy.  These range from those supplying the rotor blades, gearboxes, switch gears and the all-important inverters (to convert DC to AC). There is growth to be seen - for example, the shipments of electrolysers has grown approximately 337% in the last year. So, when thinking about the clean power universe think broadly to include the value chain of the main manufactures.  

Globally, the world needs 50% more energy from a demand perspective, and certainly there is not enough currently within the UK. Therefore, there is opportunity in investing in clean power. The world needs to switch away from dirty sources of power into clean sources of power. We also need to continue installing new capacities, and any new capacity installation.

5. The potential of hydrogen

Cars and light transport vehicles can run on electric power, but this is not practical for heavy good vehicles.  This is where hydrogen can offer a potential solution.

There has been a lot of interest in this market over the past couple of years.  Hydrogen fuel cell technology has been mooted for several years but at the moment the technology is far more inefficient than battery technology. For every unit of power drawn from hydrogen to produce electricity, 75% of fuel power is lost.  Whereas with batteries, you can convert 90-95% of power back correctly.   For applications where 300 miles are needed, batteries will suffice, whereas for applications where 1500 miles is needed, hydrogen becomes beneficial. However, hydrogen production today, contributes to more CO2 emissions than the entire airline industry put together, so it needs to be cleaned up. 

The industries using hydrogen to manufacture fertilisers, refine oil and so on need to switch away from this carbon intensive source. If these industries switch away from you make the fertiliser manufacturer switch away from grey hydrogen to green hydrogen, their emissions are reduced.  Going even further, if steel companies, and other users of coking coal, switch to hydrogen, CO2 emissions can be reduced by about 20% globally.  So, the potential that hydrogen offers is immense, but it's not going to happen in the next year or two as the economics currently don’t add up, but investment is increasing, in factories and so on.

Reducing the cost of hydrogen is purely down to economies of scale. Building more capacity will drive the prices and costs down, and for that to happen, hydrogen has to be transported in a safe and clean way – via pipeline infrastructure for example.

The types of businesses focusing hydrogen are large cap companies who can afford to develop this.  There is a possibility that by 2026 Spain could reach the $1 per kg – the required affordability indicator – with other countries following suit.  A hydrogen economy is on the cusp of happening. 

6. The cost of transition to clean power can be high and timescales long, policy intervention, often a laggard, will help expedite this.

The development of batteries for storage, solar panels and wind turbines requires use of natural resources, often through carbon intensive processes. Replacing petrol and diesel cars with electric cars is not only costly it is also wasteful, often leaving behind perfectly serviceable cars.  One policy intervention can often negate another, but it is policy that is required to continually move the market towards a low carbon economy.  Alternatives to fossil fuel energy supplies need to be cheaper and more efficient for take up to be high.  

On the flip side, it is also true that the UK particularly could not support a total and immediate take up of electric cars for example, as the supply is not currently available.  Therefore, take up does have to be gradual. Transition will be costly in the short term but become cheaper over time.

Getting the speed of transition right is vital.  Accelerating the process may cause adoption of a less good technology, whereas a slower approach considers the ability for hydrogen to be a component part, see improvements in battery technology and recycling the circularity of technologies that we already have.

There are some positive sides to this. Globally, we are much more able to recycle goods, reusing precious materials in some cases. Lead batteries for example, are almost always recycled and these skills will be mastered over time to reach true circularity. Recycling of any material or equipment usually plays a catch-up game where it is cheaper to manufacture from scratch than recycle, but eventually the scales tip in favour of recycling.  The opportunity is in finding the right solutions which are economical.

Developing projects such as new wind farms and so on can often take time too.  It can take approximately two years from placing an order for a wind turbine to delivery. Set up and installation can make the process longer still. However, solar farm developments are generally much simpler and quicker to install.

7. Funds and valuations are stabilising

The clean energy space has been dictated by one or two funds, which have ended up having very high valuations leading to speculation they are over-valued. But in reality that is not the case. 

The clean energy market also must consider energy efficiency and the part that has to play in the transition to low carbon. Insultation technologies are generally old within a huge potential for growth, although still an important solution to reducing energy use.  Smart grids, LEDs, smart meters, and energy systems such as temperature panelling will see some high growth going forward.

Fund managers need to participate in the solution, invest in green technologies.  Countries have to too, where it is viable – it might be said that in France it is less viable as they have a high density of nuclear fuel and making those redundant would cost billions of dollars.  Nuclear doesn’t often appear in clean tech funds – that will depend on the fund manager, but largely the risk factors associated with nuclear see them excluded.