Prime Capital: Primed for renewables

This article is sponsored by Prime Capital

What are the most exciting and innovative aspects of the energy transition today?

Thomas Zirngibl: We have all known about climate change for decades. This is a phenomenon that was proven back in the seventies. Finally, the battle against climate change is being viewed through a holistic lens. It is being considered as something that affects every aspect of our lives on a global scale. That, for me, is what the energy transition is all about, and being actively involved in making it happen is exciting.

Janna Brokmann: I agree. It feels as though we are finally getting somewhere. I would caution about focusing too much on what is innovative, however – on technologies that are too futuristic. We know the tools that we have at our disposal currently can be used to facilitate a large-scale transition; that is where we should be focusing our attention.

Mathias Bimberg: These technologies are not new, but what has changed is attitude. European governments are setting a regulatory framework around the energy transition and individual countries are also setting climate targets, together with targets for specific sectors. In this sense, Europe is leading the world, and we need to ensure that we maintain that position.

Meanwhile, within Europe, the Nordic countries are rapidly turning into hydrogen economies, in a similar way that the Norwegian economy was transformed with the discovery of oil and gas more than 50 years ago. These are the countries where we operate, so it is exciting for us as the largest investor in the energy transition in that region. This is a very different generation than the generation that came before us. It is a generation that demonstrates against climate change. The fact that we are now in a position to do something about it, is incredibly exciting.

Why is Power-to-X, in particular, playing such an important role?

TZ: To put it simply, Power-to-X is the energy transition. It means that everything that used to be powered by carbon dioxide-emitting fuels needs to be replaced with electricity. Minor aspects can be substituted with biofuels, but the potential is limited. Taking electricity and turning it into something more useful, be that heat pumps or hydrogen, is therefore critical. At the same time, of course, that means we will have to triple or quadruple our renewable energy production globally, and looking at European figures it is clear there is a great deal of acceleration required. We have been installing less than even required to substitute current fossil fuel generated electricity, when we need to install much more to make Power-to-X – and therefore the energy transition – happen.  

MB: If we want to reach net zero, we do not only need to generate more electricity, but we need to make that electricity transportable over long-distances by turning it into green hydrogen and further derivatives to tackle hard to abate sectors. You cannot electrify everything; we need to make our steel industry green and our chemicals industry green, as well as transportation.

One of your Power-to-X projects is the Kristinestad plant. What were the origins of that investment and why was it an attractive proposition?

TZ: Krinstinestad is a wind power paradigm municipality in Finland. We are invested in a wind farm in the region, which is now fully commissioned, and that is how our footprint in the area began. Then, through discussions with local stakeholders, including the mayor and city council, it came to our attention that there was a former coal plant site that required industrial rejuvenation. Those discussions set the scene for the Kristinestad project, which is now in the process of getting permitted.

MB: This is a region that is at the centre of wind power development in Finland and, as with all our energy transition projects, it was essential that we secure the most important cost factor before we began. Somewhere between 70 percent and 85 percent of the cost of green hydrogen production involves green electricity. By entering a partnership with the developer of the onshore wind project, we were able to secure a substantial pipeline of new green electricity for this next generation infrastructure, whereby we will do something intelligent with the electricity that is being produced. 

To do this we need to become alchemists, which requires business courage. Afterall, we are not entering into the classical PPAs with major American technology companies. But that hybrid approach of using our new green electricity to go into the energy transition creates greater additionality than going into the energy transition alone.

What are the plans for the asset now?

TZ: The plan for the Kristinestad project is predominantly to produce green synthetic, liquified methane, which is a carbon dioxide-neutral substitute for traditional LNG. There are already heavy-duty trucks with LNG engines that can easily be adapted to run on liquified synthetic methane, thereby immediately cutting carbon dioxide emissions in a transport sector that is otherwise hard to abate. We are only at the beginning of the journey that will see these trucks also being electrified or running on hydrogen, but it will take many years before that has a significant impact. But through our activities in Krinstinestad, we will be able to pioneer this sector.

Governments are clearly now getting behind these initiatives. But what about investors?

MB: I would compare the situation to where we were trying to make investors comfortable with greenfield onshore wind risk, as opposed to brownfield, five years ago. It is something that is new and therefore there is an education process required. 

However, our strategy of combining new green electricity production with the energy transition is more digestible for investors than a straight energy transition play because the energy transition will only represent between 20 and 30 percent of the fund. Furthermore, any perceived increase in risk can be countered by the reduction in merchant risk that takes place when you utilise your own electricity in an integrated approach that sees us control the entire value chain. 

Institutional investors are facing their own challenges right now in terms of rebalancing their portfolio allocations in the face of what is happening in the liquid markets. But what I would say is that infrastructure is extremely well positioned to weather the current macroeconomic environment, given the strong underlying tailwinds of the energy transition, as well as the asset classes’ inherent inflation hedge.

JB: I would add that generating a positive, measurable impact is becoming more and more important to institutional investors and that is being supported by the regulatory environment. With our Article 9, or dark green funds, we are creating real world environmental impact. We can show investors how much green electricity they have helped generate, but also how many greenhouse gas emission they have helped to avoid, through these Power-to-X projects. 

To what extent are technological innovations reinforcing the Power-to-X sector’s potential and growth?

TZ: There is a lot of innovation happening. Some initiatives are still at a relatively early stage, while others are more mature. It is clear we require an increase in renewable energy generation to support Power-to-X and these innovations will help make that happen, by increasing efficiencies and producing economies of scale and therefore capex reductions. In particular, we are monitoring some electrolyser innovations that are ongoing. Those are not yet mature enough to be deployed at Kristinestad but by the end of the 2020s, could be ready to be deployed commercially, therefore benefiting the growth of the sector a great
deal.

Given the boost that Power-to-X is giving the energy transition, how optimistic are you that we will reach net-zero targets by 2050?

TZ: I am optimistic when it comes to governments and industrials. I think the willingness is there. I am perhaps a little less optimistic when it comes to every individuals’ daily behaviour which must also change for net zero to be a reality. 

MB: We are talking about a date that is almost 30 years in the future. Look back 30 years at where we were as a civilisation when it comes to technology and you will realise that we didn’t even have mobile phones. It can be easy to be pessimistic, but it certainly isn’t helpful. We are still at the beginning of this journey and there is a long way to go. The sheer scale of what needs to be achieved is mind blowing. Germany, for example, would need to increase its onshore wind capacity by a factor of 55x just to make its chemicals industry green. All of this is, of course, going to require a huge amount of institutional capital. Will we reach net zero by 2050? I am not sure. We could already be too late to prevent a further increase in temperatures. But this mega-trend is unstoppable, and we are excited to be playing our part.