A biweekly roundup of Sage’s top ESG news picks
By Andrew Poreda, Vice President & Senior Research Analyst
What it means: The surprise agreement between Senator Schumer and Senator Manchin on the Inflation Reduction Act will be a big win for clean energy and clean technology. With renewable energy and electric vehicle tax credits set to expire soon, the various industries did not have the predictability needed for continued growth and investment in the space. Wind and solar projects take multiple years to finish, from permitting to installation, meaning a larger window of tax credits are needed for stability. The new bill secures tax credits for the next 10 years, giving a much longer window of certainty. This bill also has a myriad of other important aspects to support emissions reductions in the United States, including:
- Increasing the incentives for carbon capture from $50/ton to $85/ton
- 30% tax credit for geothermal and advanced nuclear (in addition to other clean energy projects)
- Stricter penalties on methane emissions starting in 2024
- Rebates for heat pump and heat pump water heaters (up to $8,000 and $1,750, respectively)
- Rebates for electrical improvements and insulation (up to $4,000 and $1,600, respectively)
- Money for domestic clean energy manufacturing ($60 billion overall)
- Establishment of a “green bank” for deploying capital for green projects ($27 billion in funds)
- Funds specifically targeting underserved communities and clean energy projects ($60 billion)
- Funds for curbing agricultural emissions ($20 billion)
Sage’s View: At first glance, this looks like a relatively pragmatic and balanced approach to using taxpayer money in the fight against climate change. Democrats estimate this will reduce U.S. emissions by 40% by 2030. While that is likely overly optimistic for a variety of reasons, the bill will have a meaningful impact in putting a dent in our greenhouse gas emissions. As the American public is overwhelmingly in favor of the bill, it seems like a win-win for politicians and taxpayers. This bill was different than previous “green” bills in that it was clear there was a focus on building up our domestic manufacturing in the clean energy and electric vehicle space, and not just focusing on the demand side of the equation. We haven’t seen experts comment much on whether these incentives will move the needle in developing the domestic supply side of the clean energy industries. And it’s to be determined on how long it will take to see meaningful improvements. China dominates the solar, wind, and electric vehicle battery space, can the U.S. ever catch up? Some demand-side components of this bill in the near-term are going to strengthen Chinese industries, especially solar. Also, it appears that the staff members writing the bill didn’t necessarily have a grasp on the realities of the clean energy space. As an example, criticism is currently floating around about how the $7,500 credit for an EV requires a battery that doesn’t exist. The bill requires 40% of minerals in the battery to be sourced from North American or free-trade partners, but the current control that China has within the battery space (including ownership of the cobalt mining within the Democratic Republic of Congo) means no one will be able to take advantage of the credit. We will have to wait and see what the final bill looks like, but with Kyrsten Sinema getting her way on keeping carried interest around, it looks like we should see it pushed through the Senate.
What it means: Last month Switzerland introduced the latest innovation in energy storage: a giant water battery. By using two reservoirs at different altitudes, this hydroelectric project can, at the flick of the switch, go from providing power to storing energy. Taking 14 years and $2 billion to complete, the project can store the equivalent of 400,000 electric vehicle batteries. Europe has pushed to increase its reliance on intermittent renewable energy sources, and this project could provide much needed stability to European power grids.
Sage’s View: We wrote about closed-loop hydroelectric energy back in January, and we are excited to see projects like this one in action. Obviously, we need to be creative in finding ways to successfully store energy long-term, and projects like this one will put a small dent in the energy storage that is needed for increased reliance on wind and solar. While implementation may only be feasible in select regions, many are bullish on closed-loop hydroelectric projects. The Department of Energy is a proponent as its Water Power Technologies Office demonstrated in two recent surveys. One study discussed the potential innovations in the space, which included using previously decommissioned open pit mines as potential sites for reservoirs. Another survey found that when optimized for cost, models indicated 11,769 sites in the contiguous United States were good options for future deployment, as well as an additional 3,077 sites in Alaska, Hawaii, and Puerto Rico. It’s worth exploring further because over-reliance on battery storage is not going to cut it (e.g., limited resources and cost constraints). These systems may be a good complement to wind power production by storing energy produced from strong winds in the middle of the night (when electricity demand is lowest).
- Germany Says It May Leave Its Final 3 Nuclear Energy Plants Running For Longer Than Planned, Reversing Nearly A Decade Of Work
What it means: Germany has had a contentious past with nuclear power that stems back to the 1970s. But the final straw appeared to be witnessing the 2011 disaster at Fukushima, as the Germans made the kneejerk reaction to shut down all their nuclear reactors. That mission was set to be complete by 2022, but now it appears the Germans may be getting cold feet. Since its invasion of Ukraine, Russia has tortured Germany for its lack of energy independence, and the Germans have been forced to respond by reopening shuttered coal plants. But the notion of keeping Germany’s remaining three nuclear power plants open remained off the table – until now. When asked about the possibility, Chancellor Olaf Scholz recently hinted that it now may be under consideration. As natural gas represents approximately a quarter of Germany’s energy mix, and Russian imports account for 35% of that figure, the country will be in quite a bind this winter season. The Russians have been playing games with the Nord Stream 1 pipeline, as current flows are operating at less than 20% of overall capacity. If those flows are cut any further, there could be severe economic consequences.
Sage View: We have stated before that keeping these plants open until the end of their operating life is an easy decision, war or not. Nuclear power’s performance and safety record has been exemplary when put into context and does something that wind and solar can never do: provide reliable, continuous energy. Just as with California reconsidering keeping Diablo Canyon open, it is great to see pragmatic approaches taken in the decision-making process when weighing the costs against the benefits. The Germans will still be in a bind, as nuclear power will not be a panacea for the industries and homes that rely on natural gas directly (vs. using it for electricity). But since natural gas is responsible for 15% of their power production, it can help divert some of that power elsewhere. Hindsight is 20/20, but how much better off would Germany be if it still had all 17 of its nuclear reactors open?
What it means: Although wheat prices have fallen from their peak, there appears to be no end in sight to the issue of supply shortages of the world’s most widely consumed food. The output of the grain is a complex problem – from geopolitical concerns to weather effects – and there is still the potential that wheat prices could spiral out of control. Prices jumped from $7.70 a bushel at the beginning of year all the way to $13, and now have gone back down to $8.00. some
The agreement between Russia and Ukraine to allow safe passage of Ukrainian ships for grain export certainly helped ease future supply concerns, although the deal may not hold. Experts expect prices to go up, with the impacts of climate change making the ability to predict seasonal and regional outputs even more difficult. As an example, last year Canada experienced hot and dry weather, with wheat production declining 40%, but this year production is picking back up. Europe and India, on the other hand, are having a down year. High oil and fertilizer prices are also factoring into the equation and may limit farmers from planting extra this year, injecting more ambiguity into to the outlook.
Sage View: With the global population rising and climate uncertainty continuing to wreak havoc on weather forecasting, expect food shortage problems to persist. Are the supply chains so fragile that the Russia-Ukraine war will continue to cause chaos? Let’s hope not, but only time will tell. On a positive note, it was excellent to finally see grain exports being shipped out of Odessa, with the first commercial ship leaving the port since February 26. Another positive story is the fortunate timing of a great U.S. wheat season. North Dakota, which is the top-producing state, had a record spring season. But one story that will be interesting to follow is how will the United States address China’s stockpiling of agricultural products like grain? In late July, U.S. officials accused China of doing exactly that, while the Chinese responded with criticism of U.S. use of food for energy in products like ethanol. Normally the U.S. is excited to offload agriculture goods to China, but with humanitarian concerns in food scarce places like Somalia and Yemen, it seems a little irresponsible not to share with those in dire need. But China always appears to be in a constant chess match with the rest of the world, and by hoarding agricultural supplies it can atone for one of its big weaknesses: food production (the other big one is fossil fuel reserves).
What it means: Five years after a fuel rod is loaded into a nuclear reactor, 90% of the potential energy still exists, according to the U.S. Department of Energy’s Office of Nuclear Energy. As a fuel rod spends roughly 4.5 years to 6 years within a reactor, this means that a lot of energy is being left on the table. And it also means more nuclear waste. Although spent nuclear fuel has been managed safely within the U.S., is there a way to harness this energy and prevent further accumulation of waste? The answer is yes, but it is complicated. One scientist likened the challenge of separating useful spent fuel from the unusable parts as “trying to deconstruct vinaigrette salad dressing with the goal of moving ingredients from vinegar to oil.” This is a big concern, as U.S. commercial nuclear plants generate 2,000 metric tons used fuel annually, and it would be beneficial to solve the recycling challenge. But recycling may not be the only option. New reactor technologies are where the real excitement lies. Sodium cooled fast reactors (SFRs), which use liquid metal as a coolant instead of water, could utilize the spent fuel from current reactors and produce electricity. Molten salt reactors (MSRs), which rely on molten fluoride or chloride salts as coolant, can also consume waste from other reactors to produce power. Bottom line is spent nuclear fuel should not be viewed as waste but as a valuable resource.
Sage’s View: While many stakeholders have largely ignored nuclear power in deliberations about the U.S.’ energy future, we appear to be approaching an inflection point with all the renewed interest. Just reading about the role nuclear plays within the Inflation Reduction Act should be a clear signal that nuclear power is here to stay. There is so much exciting research and innovation happening as we speak, and hopefully these efforts will pay dividends for years to come. Whether looking at government projects, like the Department of Energy’s Versatile Test Reactor that will be built at the Idaho National Laboratory, or Bill Gates-backed TerraPower creating molten salt reactors, the future is bright. We also cannot discount the importance of doing all we can to ensure that current plants remain operational, as well as exploring ways to bring down the cost of building traditional light-water reactor plants (perhaps we could learn some lessons from China on keeping construction costs down). But on the spent fuel front, addressing the issue could be valuable from a geopolitical standpoint. Russian ally Kazakhstan dominates uranium production, producing 45% of the world’s uranium in 2021, so we are in somewhat of a precarious position as we only have one small mine in Utah that yields very little output. Fortunately, our allies Australia and Canada are the No. 2 and No. 4 producers, but it is still not a great position to be in if we push to have nuclear power continue to be part of our energy future. Using spent fuel would alleviate our uranium reliance that limits our ability to be truly energy independent with respect to our nuclear power production.
- Hanley, Steve. “Renewable Energy — Wind, Solar, & Storage — Get Big Boost From Inflation Reduction Act.” Clean Technica. July 29, 2022.
- Deiseroth, Danielle. “Voters Support The Inflation Reduction Act.” Data For Progress. August 3, 2022.
- Holzman, Jael. “Climate bill would create roadblock for full EV tax credit.” E&E News. July 28, 2022.
- Raju, Manu et. Al. “Sinema Says She Will ‘Move Forward’ On Economic Bill, Putting Biden’s Agenda On The Cusp Of Senate Approval.” CNN. August 4, 2022.
- Cairns, Rebecca. “This Giant ‘Water Battery’ Under The Alps Could Be A Game-Changer For Renewable Energy In Europe.” CNN. August 1, 2022.
- “WPTO Studies Find Big Opportunities to Expand Pumped Storage Hydropower.” Office of Energy Efficiency and Renewable Energy. June 13, 2022.
- Tan, Huileng. “Germany Says It May Leave Its Final 3 Nuclear Energy Plants Running For Longer Than Planned, Reversing Nearly A Decade Of Work.” Business Insider. July 28, 2022.
- Rennison, Joe. “War, Climate Change, Energy Costs: How the Wheat Market Has Been Upended.” NYTimes. August 1, 2022.
- Falconer, Rebecca. “Grain Ship Departs Ukraine Port For First Time Since Russian Blockade.” Axios. August 1, 2022.
- Nandy, Sampad. “Feature: US 2022-23 Spring Wheat Output Seen At Bumper Levels On Higher Yields.” S&P Global. August 3, 2022.
- Braun, Karen. “Column: U.S. Disapproval Of China’s Grain Stockpiling Full Of Irony.” Reuters. July 25, 2022.
- Larson, Aaron. “Spent Nuclear Fuel: A Valuable Resource — Not A Waste. Power.” August 1, 2022.
- “World Uranium Mining Production. World Nuclear Association.” July, 2022.
For more news, information, and strategy, visit the ESG Channel.
Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.