Keynote Interview: The third wave of decarbonisation
Tackling the carbon footprint of heating and hard-to-abate sectors is paramount if net-zero ambitions are to be fully realised, says Schroders Greencoat’s James Samworth in an article originally published by Infrastructure Investor magazine.
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Delivering the energy transition and shifting to a global net-zero economy will require more than just clean energy. The World Economic Forum says carbon emissions from heavy industry alone need to decline by 93 percent to reach mid-century net-zero goals, while the carbon footprint of heat generation is still considerable.
According to the International Energy Agency, heat is the largest energy end-use and contributes 40 percent of global CO2 emissions.
Tackling these hard-to-abate sectors will require greater investment. Renewables may have made the initial headlines in the race to deliver the energy transition, but further innovation will be key to delivering a truly net-zero global economy, argues James Samworth, partner at Schroders Greencoat. He discusses these emerging trends and the challenges that lie ahead.
Which areas of the transition are you particularly enthusiastic about?
The most important theme is that we need to find ways to decarbonise our economy rapidly. The first wave of the energy transition journey was about decarbonising the power sector, as in most countries that comprised a significant share of emissions. We learned over the past 20 years or so, that that can be decarbonised mostly through wind and solar. That has also proved cheaper than we initially feared.
The next phase of decarbonisation is about, where possible, using that clean power to electrify sectors that were historically powered by fossil fuels, and then the third wave will next be about cleaning the hard-to-abate sectors. That comprises everything from the steel industry to cement, shipping, aviation and petrochemicals, which collectively account for about 25 percent of global emissions. The two main pathways through which those subsectors can be decarbonised are the use of green hydrogen, which is effectively renewable energy transformed into a chemical form, and carbon capture, utilisation and storage (CCUS) to capture excess emissions.
We built our business on the first wave, becoming reasonable scale investors across various renewables markets, and now we have started investing in those emerging areas such as district heating and hydrogen and have begun exploring carbon capture. We think those are going to grow strongly over the next decade.
How do you weigh the challenges and opportunities of decarbonising those hard-to-abate sectors?
Reducing the carbon footprint is very important. I spent the first 10 years of my career in the steel industry and in the 1990s and early 2000s the ambition was to cut emissions by 80 percent from 1990 levels, and so some problems were regarded as too challenging to tackle.
Now, industry has come to understand that 80 percent simply isn’t good enough. As long as we continue to emit more CO2 than we absorb, temperatures will keep rising. It won’t stop until we get to a net-zero CO2 position. We are faced with a difficult choice. We either take on those hard-to-abate sectors, or we envisage a world with much more carbon capture. That would be very expensive and technologically challenging.
This stark reality has forced a re-examination of some of those hard-toabate sectors and has made people look really hard at how they could potentially be decarbonised. We are still in the early stages; it is not like renewables where we are in the deployment and rollout stage. In some of these hardto- abate sectors, the answers are still being debated, refined and tested before we reach the stage where they can be scaled up. That makes it an interesting area in which to invest.
A lot of LPs are looking at how we are going to tackle these difficult challenges. Taking on a difficult but important challenge, and doing it well, is normally a good investment thesis. We want to be at the forefront, but you also need to move when there is supportive policy. There is no point being right but moving 10 years too early. The reality is that cleaning up hard-to-abate sectors is going to require government subsidies much like renewables did 15 years ago. We are going to need those subsidies or carbon taxes to make low-carbon alternatives compete with the fossil fuels status quo.
How can firms tackle the carbon footprint of district heating?
One of the questions that we need to answer collectively is how to decarbonise those heat networks. Most of the heat currently comes from gas. There are technological answers but that is going to require capital investment. For a few years, we have been exploring different ways of investing in renewable heating networks.
We have made three renewably heated greenhouse investments using heat pumps to take waste heat from wastewater treatment works and reservoirs, and use that to warm greenhouses growing fresh produce. Last year, we also acquired – together with Swiss Life – the UK’s largest operator of district heating networks from Equans. Currently, just 2 percent of residential heat is supplied by a heat network in the UK. Government policy aims to get to 20 percent in the coming years, so we hope that our platform can participate in that growth and help deliver good returns for our clients.
Which sectors do you think green hydrogen will have a direct impact on? And how do you see that evolving?
Green hydrogen will very likely have an impact on shipping, aviation and the petrochemicals industry. It is also a possible answer to decarbonising steel and even cement. There are projects at scale in all of those areas starting to be developed, but it is going to take time to work out exactly how to deliver the best solutions, and it is likely going to be costly.
In shipping, hydrogen will play an important role in the majority of low carbon fuels. That could be eMethanol, which is accelerating quite quickly right now, or ammonia among other products that are chemically derived from hydrogen. Which fuels end up winning the race over the coming years is yet to play out.
What is interesting in shipping is that some of the big ship owners have moved ahead of government policy and have placed orders for eMethanol ships before policy and subsidy schemes have even been put in place. They are not going to convert a whole fleet because it costs substantially more, but they are putting their money where their mouth is and making investments.
How will we be able to deliver the green electricity required for all this?
If you look at forecasts from the IEA or the private sector, electrifying sectors that rely on fossil fuels and hardto- abate industries is going to require something like 50 percent growth in global power demand. That is obviously a very significant increase. I do believe we can build that much more renewables capacity, as well as the transmission and interconnection wires to get it there. It might mean more ambitious projects like the sub-sea cable connecting Morocco to Devon, but it will also mean more mundane projects across the North Sea and the continental US.
That can all be done. We know roughly how much capital this is going to take, and the returns needed to finance it, and it looks viable. However, we can’t get away from the fact that there are going to be challenges in building this volume of generation close enough to loads and population centres, and so it is important to maintain public confidence.
How do you see technology evolving to solve some of these problems?
There isn’t a single silver bullet technology out there that is going to ride to the rescue and fix everything. We have all the raw materials and ingredients, but we need time for the technology to evolve and improve the solutions that we already have. It is an enormous challenge. The industry has made a lot of progress over the past 25 years, but there is a vast amount still to do.
We need to get on with what we have got at the moment and look to improve and iterate over time. The energy transition is an amazing area for entrepreneurs and engineers to find the answers to these challenges. As a case in point, we have recently started investing in green hydrogen. Last year, we were pleased to announce a joint venture with leading UK developer Carlton Power. This was our first step into the green hydrogen market, and it has already been a meaningful one.
In December, our joint venture was successfully awarded contracts on three of the 11 projects included in the UK government’s first Hydrogen Allocation Round (HAR1). To help the UK meet its goal of up to 1GW of electrolytic hydrogen production capacity by 2030, we are aiming to build a green hydrogen project portfolio of 500MW.
Any reference to regions/ countries/ sectors/ stocks/ securities is for illustrative purposes only and not a recommendation to buy or sell any financial instruments or adopt a specific investment strategy.
The views and opinions contained herein are those of the individuals to whom they are attributed and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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