Renewable Energy: The Cornerstone Of Decarbonization & Energy Security

On the Fourth Episode of Cowen’s Thematic Outlook Podcast Series, Jefferey Osborne, Sustainability and Mobility Technology Analyst, joins Bill Bird, Head of Thematic Content for a discussion on sustainable energy. They touch on how renewable energy is becoming the most cost-effective source of power generation and how, as events play out in Eastern Europe, decarbonization is crucial for economic stability and national security.

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Transcript

Jeff Osborne:

We do see hydrogen as an effective molecule to help decarbonize industries that are challenged to electrify.

Bill Bird:

Hello, my name is Bill Bird, Cowen head of thematic content, and welcome to the Cowen thematic outlook podcast. In this episode, we discuss sustainable energy with Jeff Osborne, Cowen senior analysts for sustainability and mobility technology. Each month our thematic podcast discusses areas of emerging growth and disruptive innovation, topics that are pivotal interest to investors and corporate executives. The raw materials for the themes we’ll unpack are Cowen’s proprietary data sets and Cowen’s Ahead of the Curve series, where so much of our thematic work is expressed throughout the year.

              Today’s topic is sustainable energy. Renewable energy is fast becoming the most cost effective source of power generation. And as events play out in Eastern Europe, decarbonization is proving to be not only beneficial to the environment, but crucial for economic stability and national security. But before we dive in, I’d like to provide some background on our guest, Jeff Osborne. Jeff is the longest tenured, sustainable energy and tech analyst on Wall Street and the most knowledgeable person I know on renewables and mobility technology. His research coverage spans solar, infrastructure investment, wind, fuel cell power systems, smart networks, connected devices, lighting, transportation solutions, including electric vehicles, semiconductor enablers, and geothermal.

               Jeff doesn’t just cover sustainability. He lives it, residing in a solar powered house north of New York City. Jeff, it’s a pleasure to have you on the podcast and thanks so much for being here today.

Jeff Osborne:

Absolutely. Thank you Bill for having me. I thoroughly look forward to the conversation. In the 16 years that I’ve covered the sector, I’ve never seen so much positive momentum and investor interest in the space. So it’s great to see and thanks again for having me.

Bill Bird:

Great. So let’s just dive right in, Jeff. Jeff, when you think about the state of play and sustainability today, what are some of the things that you believe may be underappreciated by investors and other outside market observers?

Jeff Osborne:

Yeah, I think the biggest thing that’s not appreciated in general by investors is really the cost effectiveness of renewable power around the globe today. We estimate about 60% of wind and solar power produced today is cost effective without any subsidies. So the common misperception is that you really need government intervention to really have this market be effective. Taking this a step further, low cost electricity can enable the development of exciting things like the hydrogen economy, which we’ll touch on in a second. But when you think about big picture wise, Bill, the mega theme that’s at play here is really the electrification of everything around us.

              Up until the 1950s, a typical household had about a dozen items plugged into its sockets and electricity demand really grew just with population growth and economic activity. The introduction back in 1956 of the General Electric electron consumer alarm clock really was the first gadget that people had that required electricity for their household. And ever since then, we’re being surrounded by PCs, TVs, personal assistance, and increasingly so, electric vehicles and things like heat pumps. So the electric load profile of your house is going to dramatically increase both for things from a convenience perspective, but also as we substitute fossil fuels for things like cars and heating applications. So electrification of everything around us is a big theme that we’re excited about.

Bill Bird:

Jeff, there’s a lot going on in the world today. What are you watching to gauge the development of the sustainability market?

Jeff Osborne:

So we’re constantly monitoring supply and demand trends across a multitude of technologies that can enable the energy transition. While we see the move towards a sustainable and zero emission world as cost effective without government intervention in many parts of the world, we’re seeing governments seeking to turbocharge the energy transition by putting in place a carrot and stick approach to spur that demand. In fact, you saw quite a bit of news flow on that this week in Europe. That has been a challenge domestically, despite Biden’s best intents, but internationally we’re seeing a great deal of progress in this regard. The war in Ukraine has served as a wake up call around over reliance on one particular resource. And we see Western Europe seeking to accelerate the energy transition towards solar, wind, hydrogen, and a bunch of other technologies. The recently announced aim of Repower EU plan identifies a multitude of different technologies that can help transition Western Europe off its addiction to Russian natural gas.

              Lastly, the clean energy industry is overly reliant on China for its supply chain and the mega theme we see playing out as the localization of production of raw materials in the supply chain for wind, solar and EVs. This manufacturing transition will take time to play out, but we see both the US and Europe encouraging localized manufacturing through incentives and may spur capacity faster to meet increased demand.

Bill Bird:

Jeff you’ve covered the renewable space for a long time. Tell us about some of the historical obstacles to decarbonization and what you’re seeing right now.

Jeff Osborne:

Yeah, Bill, the two historical problems with the sector in the 15, 16 years that I’ve covered it, is one, access to capital. And two, is the cost effectiveness. Both of those are largely behind us. Banks in essence, are stumbling over each other to allocate sustainable capital. And 60% of the world can use solar and or wind at parity or lower cost than the grid without subsidy. So the cost effectiveness is improved. Plus that capital is starting to flow as green financing has picked up. The electrification of everything is really driving alternatives to replace fossil fuels, primarily in mobility, but also in heating and manufacturing. Industries like steel, cement and chemicals are rapidly exploring this. So that’s something that is exciting to monitor. And then also something that is very topical is the grid. In essence, the grid has to interconnect our lives around us and it’s unstable, it’s antiquated, and it’s not really prepared for what’s going on with this decarbonization trend.

              So similar to a congested freeway, we need to have more high voltage lines or lanes essentially to handle the traffic, but also a better stoplight system in essence, to manage and coordinate all of this disruption and congestion that’s out there. In addition, one of the biggest challenges right now is the ability to interconnect your renewable project into the grid. Essentially think of this as an On ramp to that freeway. So in essence, there’s a huge queue of people that are trying to do solar and wind farms and get those and the high voltage lines are just too congested. So it is nice to see effective coordination of more high voltage capacity being put in place. And that’s really one of the first places that we need to start to enable this decarbonization trend.

Bill Bird:

Yeah. You referenced the grid and some of the challenges with the grid. What does the grid need to be more reliable?

Jeff Osborne:

Yeah, it’s a great question. I would say it’s something that we’re very focused on with our research. Really it’s three things that all start with the letter D, so it’s the 3 Ds. Decentralization, decarbonization and digitization. In essence, the grid needs technology to handle intermittent power generation and big spiky loads that can pop up with this electrification of mobility that’s going on.

              Historically, the grid was designed for one way traffic from power plants to the outlets in your wall. We now need to handle distributed power and storage solutions as well as electric vehicle charging. So we need a heavy investment in hardware and software to help manage that. Power is becoming essentially virtualized or digitized and maximizing distributed energy resources is a software optimization problem. We also are starting to see this play out in how utilities’ CapEx budgets are being set. Essentially their budgets are switching from power generation to the distribution of power. Many renewable power plants are owned by independent owners and not the regulated utility in a particular service area. Also, Bill, we’re seeing the biggest driver of power demands stemming from the electrification of vehicles in the future. We note that if about a third of vehicles sold in the US were electric, which we expect by the mid 2030s, we see about a 10% increase in electricity generation needed to serve those vehicles. So the electrification of everything trend is happening around us and mobility is front and center for the sea change that’s going on.

Bill Bird:

Jeff let’s zoom out [inaudible 00:09:08] the bigger debates in the marketplace. What do you believe are the key renewable power debates for investors to monitor?

Jeff Osborne:

I’d say the biggest one is really cost profile. Years ago it was government subsidies. I felt like I was a policy analyst. But right now it’s cost. So solar and wind have reduced their cost profile by about 15 to 20% per year for solar, and more like 15 or percent or so for wind over the last decade. Given the inflation around us, this price drop is stalled out. However, we’re starting to see natural gas go up and renewables are very competitive still despite the inflation. But the inflation around us is an issue certainly to monitor as it relates to cost. Solar and wind, our neck and neck in lowering cost. Solar generally has a steeper cost curve than wind as it’s a semiconductor device and metrics like efficiency continue to rise, driving more power per square meter on the solar panel exposed to the sun.

              Solar in 2021 was 46% of new generating capacity added to the grid. And there’s enough solar installed in the US right now to power about 23 million households. There was a new solar project installed last year about every 60 seconds. So certainly residential, commercial and utility scale solar is proliferating. Wind on the other hand, generally can produce power at lower costs as the blades get bigger and the towers get taller. So there’s not a semiconductor effect there. That transition is more gradual as blade designs evolve to accommodate larger footprints. And also you have things like offshore winds starting to proliferate as well. Over time those subsidies that we spoke of have waned for renewable power, and we expect that trend to continue. However, given that there’s a lot going on around us in Ukraine, as well as domestically, we likely see Europe turbocharge the sector by laying out aggressive targets and reintroducing subsidies. So they put out some targets last week, and I think those will spur subsidies to excite demand or stimulate demand over the coming weeks and months.

Speaker 3:

Jeff, there’s a lot of buzz in the market about hydrogen and the hydrogen ecosystem. What are your thoughts on hydrogen?

Jeff Osborne:

Yeah, it’s a sector we’ve covered for a long time. Historically been a publicly traded science experiment, but we are starting to see hydrogen proliferate. So we do see hydrogen as an effective molecule to help decarbonize industries that are challenged to electrify, namely heavy duty transportation, but also industrial applications like cement and steel. So right now there’s a great deal of investment going into the ground and over the next one to two years, I think as that plays out, you’re going to start to see the fruits of that investment. There are multiple industries that can benefit from the hydrogen trend, including electrolyzers to produce the hydrogen, storage and liquifaction companies that can both produce the liquid hydrogen as well as store it in tanks, industrial gas distributors and players there. And of course the fuel cell companies, which I cover, that are going to be consuming the hydrogen to then create electricity.

              So fuel cells again have been a publicly traded science experiment for 15 years or so. They are starting to become cost effective, reliable, and have an effective cost structure to produce both mobile power as well as stationary power. I think the fuel cell space is poised to breakout now that low cost hydrogen is becoming available through electrolysis. Historically, Bill, hydrogen came from natural gas, very reliable and cheap, but didn’t have that green footprint. And now with electrolysis, we can actually start seeing a whole new proliferation of the industry now that the technology is reliable.

Bill Bird:

Jeff, tell us about how you see the role of batteries, hydrogen and gas for the grid.

Jeff Osborne:

Yeah, just because I cover renewables, that doesn’t necessarily mean I’m an anti-gas person. So there’s certainly a coordination that’s needed of the three technologies. Intermittent power requires more backstop and balancing resources. So batteries are perfect for that. And renewable natural gas can also help fill this void while aiming to lower the carbon footprint for the grid. We can also anticipate that the lion’s share of demand for battery storage solutions will be in front of the meters. So think of that out in the grid, as opposed to in your garage. So grid scale is something that we’re super excited about. These batteries can be used to inject power into the grid for a handful of hours and leverage parts of the day where we’re simply just not producing enough wind or solar for the grid to be reliable.

              The market today is focused on shorter duration, energy storage systems, leveraging batteries, typically for about two to six hours, but this is expected to increase to 10 or more hours as new technologies proliferate and intermittent, renewable energy generation continues to grow. Many systems today are using your classic lithium ion battery like you would have in your electric car.

              But the industry is rapidly expanding with innovative storage technologies like flow batteries and novel gravity based storage systems that are positioned to capture share as duration requirements grow up towards that 10, 12 hours a day. Strong demand from the auto space, coupled with continued global supply chain issues and geopolitical turmoil has led to higher prices for raw materials used in lithium ion batteries, which could drive incremental interest for alternative energy storage solutions like flow batteries and the gravity approach I mentioned before.

               Resiliency concerns, Bill, also driven are by blackout events in California and the storms in Texas and Florida that we’ve seen have also spurred strong demand for behind the meter storage solutions. So these are things that businesses and homes would have as well as industrial customers. And that’s a hot area that can oftentimes be paired with rooftop solar installations. Today about 4% of American homeowners have rooftop solar, and we see that growing quickly, but many people are also electing to put in batteries to pair with that solar system.

              Project developers are also able to capture more value with their projects by adding batteries, to achieving a higher capacity factor. Essentially the percentage of the day the project is available to dispatch power into the grid. So this is essentially a way for asset owners to make more money. And lastly, Bill, we also see a great opportunity for hydrogen to be used as a base load or backup fuel to be fed into fuel cells that could be powering both buildings as well as the grid itself. So over the next few decades, we may start seeing hydrogen used in existing pipelines where natural gas is used today. The hydrogen economy is a big industry in South Korea at the moment, and we are starting to see other countries like the United Kingdom go down that path as low cost hydrogen is produced through electrolysis around the world.

Bill Bird:

Jeff, do you see a centralized, renewable power market or decentralized ,or both?

Jeff Osborne:

I’m in the both camp. This is a debate both at the political level as well as at the utility scale level. So really, it depends on what part of the world we’re talking about as to the way this plays out. So you have to keep in mind that utility scale renewables are certainly the lower cost. You’re getting that economies of scale in that industry. And solar, for example, 60, 70% of demand is that utility scale or centralized approach relative to the distributed rooftop approach. But the issue with centralized is for example, a megawatt of solar power would take up about eight acres of land. So finding that land access is a challenge and that eight acres would power about 150 homes. So certainly you get more bang for your buck on the number of homes, but finding that land access is a challenge.

              The problem is most solar projects today are 20 to 50 megawatts at a minimum. And oftentimes you’re seeing wealth north of a hundred megawatts in your typical size. So up here in the Northeast where I’m joining you from today, Bill, not really going to happen. Markets in the south, in California tends to be more of a centralized approach. Wind power is obviously dependent on the resource as well. So think about it as the Texas region, as well as the I-35 corridor in the middle of the country tends to be great locations for wind. And your state of the art tower today can produce about four megawatts of power, but that also takes up several acres. And you also have an aesthetics issue where there’s just either access to land or people’s concerns on visualization.

              So multiple megawatts of fuel cells can be dropped into something the size of several tennis courts. So we actually have several of those near my office here in Connecticut, where base load power can be used with fuel cells. And as more hydrogen’s put in, I think that’s something to watch. The challenge there is getting carbon free fuel, which today is generally not the case. But in the future, I think will change. And also cost. Fuel cells tend to be the most expensive of all renewables, but they do have a pretty steep cost curve ahead of them.

Bill Bird:

Jeff, through the course of the year, you host a number of conferences and events related to both sustainability and mobility. What’s coming up?

Jeff Osborne:

Yeah, super exciting couple weeks ahead of us here. So on the heels of our seventh annual Sustainable Energy Primer that was just published, we are having our Cowen sustainability conference on June 7th and 8th. And then my colleagues in Washington research group are hosting an energy policy event in Washington, DC on June 13th. Cowen sustainability conference that I mentioned is a virtual event where we’ll host thought leaders from 40 plus companies cutting across industrial, technology, energy transition, and sustainability.

Bill Bird:

Well, as we wrap up today’s podcast, I want to thank Jeff for sharing his thoughts and everyone for taking time out to listen. Be well and see you next month.

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