Bill Gates recently published his new book, a green manifesto called ‘How to Avoid a Climate Disaster’. We’re still reading our copy but we believe a core element to this manifesto is noteworthy – addressing the price differential between a fossil-fuel-based way of doing something and the clean, non-emitting way of doing the same thing – what Mr Gates calls the Green Premium.
For electricity, the green premium has been in significant decline for years thanks to rapid innovation and increasing economies of scale. In many markets, solar and wind power are now the cheapest options for bulk power generation, which is driving the accelerated update of these technologies. According to a study quoted by Bill Gates, the estimated green premium in the US and Europe at a 90-95% renewable energy penetration could be as low as 15%, an affordable premium and one that many would hope can be closed with continuing technology improvements thanks to the increasing scale of investment, especially in battery technology.
Other industries are further behind on that curve. The steel making industry for example, which is estimated to account for between 7-9% of global direct carbon emissions. In recent months, we have seen some positive advancements in development of green-hydrogen based steel-making plants from European steelmakers like SSAB. The blueprint is based on a process already used for a small proportion of global supply called direct reduced iron (DRI), normally injected with natural gas which can be substituted by green hydrogen. The green hydrogen is produced using renewable energy and a process of electrolysis. The industry players cannot achieve this without the support of the electricity producers, as it will require significant investment in renewable energy infrastructure. According to the International Renewable Energy Agency, Germany would need to add renewable energy equating to 20% of the total electricity supply today just to convert its steel industry to green processes.
The cement industry, which makes up 5-8% of direct greenhouse gas emissions, still has not discovered a proven process that does not release carbon and can be applied commercially, which means the best options are to capture and store the carbon emitted. This is a very expensive process, adding between 75% and 140% to the cost of manufacture, and remains controversial due to questions on how permanent the storage is.
The green premiums in transportation industries are even higher. Cargo ships, for example, run on fuel that costs $1.29 a barrel. The current clean versions of this fuel cost between $5.50 and $9.05 according to the book. Airlines use jet fuel which has averaged $2.22 per gallon in recent years, while advanced biofuels cost around $5.35. These kinds of premiums are unsustainable for both highly competitive industries.
These figures are not intended to dissuade the reader of the opportunities in these industries. The shifts to zero carbon across these industries are a necessity, not a luxury. The intention is however to identify where the most investment is needed to reduce these green premiums, and what governments and companies can do to accelerate this. We must not forget the renewable energy industry faced similar headwinds not long ago. Solar power prices were twice the current cost just five years ago and nearly 10x the cost 10 years ago, However, significant investment backed by incentives brought these costs down much faster than many market commentators expected.
As part of the manifesto, Bill Gates calls on business leaders to start making business decisions that help drive down these green premiums. Mobilise capital to scale new technologies, making purchasing decisions which signal real long-term demand to the market for green products, allocate R&D to green investment and finally help shape public policies.
In the article written for the FT about his manifesto, Bill Gates concluded saying ‘In my experience, it’s rare to have a cause in which the entire world wants to participate. I’m used to working in global health, where rich-world governments and companies occasionally need to be reminded why they should care. Not so with climate change. People around the world from all walks of life want to do something meaningful about it. Now, after years of uncertainty, we are finally seeing what meaningful action looks like for business leaders. It is having the courage to take risks.’
At Quaero Capital, we are mobilising capital for such investments, in clean energy where this is still needed and across the clean energy value chain. We are encouraging companies to make those long-term decisions that support this transition. And finally we’re making changes to reduce our own footprint and offset this footprint where a reduction isn’t possible.