If we rewind 30 years, 60% of the electricity consumed by a UK home was derived from coal, 10% was from oil with the balance from nuclear and hydro. Today, renewables and natural gas are roughly equal at 40%, while coal has declined close to zero, only being used in times of extreme shortage. The energy transition is well underway.
The UK is targeting net-zero emissions from power generation by 2035. Actions over the next few years will determine whether such goals are achievable, whether power generation and the grid can be modernised in time, and what consumer acceptance of EVs and heat pumps is really like.
As we look around the world for climate solutions providers we are, more often than not, impressed and surprised at the level of innovation and creativity that is being applied to bringing about a decarbonised and circular economy. Entirely new industries and value chains are being created in front of our eyes, with much of the new thinking coming from comparatively small and nimble enterprises.
Our experience has been that a rising tide does not lift all boats. Entirely new industries and value chains are being created in the shift to decarbonise and although the energy transition creates a durable growth runway for many companies, which will ultimately drive share prices, dispersion between the winners and losers is wide.
Taking the global solar sector alone, the spread between the best and worst performing equities on our watch-list over the past year has been greater than 100% (+85% for the best vs -45% for the worst). Simply being exposed to a growing end-market is not enough.
Here are two examples of businesses that are in the driving seat, benefitting from government policy and/or consumer behaviour change:
Alfen: EV-charging and energy storage
Forecasts from the UK Climate Change Committee expect more than a doubling in electricity demand over the next 30 years, largely due to increasing use of electric vehicles and heat pumps. This stands in stark contrast to the past 30 years, in which UK power demand has been stable, and indeed has slightly fallen. These shifting patterns of consumer behaviour have profound implications for everything from the generation of power, its transmission via high-voltage direct current around the country, and the way we interact with it in the home, in the form of EV-charge-points and behind-the-meter storage.
One beneficiary of these trends in the UK, and similar dynamics in Europe, is likely to be Dutch company Alfen. With close to a century of experience in building grid equipment, Alfen is present across the power value chain, providing transformer substations, utility-scale batteries and EV-charge-points for use in the home or at destinations such as shopping centre car parks. Alfen is a rare, possibly unique, example of a company operating in these new markets that already demonstrates profitability. Most like-sized competitors are pre-profit and reliant on growth prospects to support their valuation. We expect policy developments in the EU and UK combined with company-level net-zero targets to continue to support demand for Alfen’s products.
Ceres Power: Decarbonising the internet
We now expect access to our data and to the internet to be continuous and uninterrupted. This creates a headache for the operators of data centres, the large hubs which store and process the flow of data from the apps and devices we use every day. Data centres are enormously power hungry, and their reliability is tied to the quality of the underlying power grid. The share of digital technologies in global greenhouse gas emissions has increased by half since 2013, from 2.5% to 3.7%. If there is a power cut because of extreme heat, extreme cold, or even just a tree falling down in the wrong place, the instability of the grid feeds leads directly to disrupted data relaying and storage. For this reason, today’s data centres are built with several layers of diesel generator sets, designed to kick in during periods of grid instability. Although used infrequently, these diesel-powered machines are not compatible with the net-zero emissions commitments that are widespread in the technology space.
One solution is hydrogen-powered fuel cells, which operate in the same way as diesel-generators, providing fast-response, consistent power, but are fuelled by an on-site store of hydrogen, which itself can be produced cleanly via renewable power. The UK is home to one of the leading providers of technology in this area, Ceres Power. Ceres differs from most companies operating in the hydrogen space, because it doesn’t want to be a manufacturer, it simply wants to license its fuel cell design, the ‘SteelCell’, to large-scale global manufacturing companies who already have a global sales and distribution network.
This approach removes the need for expensive factories, which bring high costs and operational risk, and makes for very high gross margins, since Ceres is capitalising on the repeated sale of the same design. This means Ceres is closer to sustaining itself from its own cash flows than can be said of its peers. Customer endorsement is also very encouraging – Ceres is working closely with Bosch, one of the world’s largest appliance and industrial technology companies, based in Germany as well as Doosan and Weichai in Asia.
