Snapshot

How the energy crisis boosts the case for renewables that you may not have heard of


The cost of electricity generated from well-established renewable sources like wind or solar has fallen dramatically in recent years. It has long been comparable to - or even cheaper than - power generated from fossil fuel sources, such as combined cycle gas turbines (CCGTs) or coal.

Since Russia’s invasion of Ukraine, the cost of gas in particular has risen sharply as Russia is an important gas supplier.

Alex Monk, Fund Manager, Global Resource Equities, said: “Since the invasion of Ukraine, we have seen a pick-up of energy security concerns, as well as ongoing decarbonisation concerns. This is not just because of quantity of supply from Russia but also because the cost of conventional energy has risen markedly.

“This means that renewable energy, including renewable fuels, is becoming more attractive.”

This is shown in the chart below, which compares the levelized cost of energy (LCOE) of various different technologies. The LCOE represents the lifetime cost of building and operating a generation asset, expressed as a cost per unit of electricity generated.

As the chart shows, solar and onshore wind are clearly cheaper than coal or CCGTs. The cost of the latter in particular is starting to rise.

Alex Monk said: “We can see that the upfront cost of renewable technologies, including batteries, is also rising now after falling for a number of years. This is due to a number of factors, including supply chain disruptions and higher costs of some input materials. But on a relative basis, renewables are looking increasingly attractive compared to conventional energy.”

605032-Renewable-Energy-01.png

The cost argument for wind and solar had already largely been won, even before the recent cost increases of fossil fuels. But more nascent renewable technologies are also starting to become more cost competitive as the price of gas rises.

Take ammonia for example. Currently, ammonia is mainly used as fertiliser, as well as in different industrial processes. Most of what is produced is “grey ammonia”, so-called because the production process is very polluting. It is made by reacting hydrogen and atmospheric nitrogen. The hydrogen often comes from the steam reformation of methane, a process that emits CO2.

But ammonia can be made “green” if it is produced in a way that is renewable and carbon-free. One way of making green ammonia is by using hydrogen from water electrolysis powered by renewable energy.

In addition to much-needed fertiliser, there are hopes that green ammonia could be used in other applications too. It could potentially be used for storing and transporting energy from renewable power plants. There are also hopes it could be used as fuel to help decarbonise the shipping industry.

Alex Monk said: “Renewable fuels such as green ammonia or green hydrogen are where the cost argument is becoming really interesting at present. The chart below shows the marginal cost of producing green ammonia. With gas prices so elevated, the cost of producing ammonia using renewable electrolytes is now competitive”.

605032-Renewable-Energy-02.png

 

Learn more about Schroders’ approach to sustainability and ESG

Find out more about our sustainability impact. Your Relationship Manager will also be delighted to answer your questions about our sustainable investment approach.

Important Information:
Important Information: This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. The views and opinions contained in this material are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.