Category: Investing in the Energy Transition

Insurers Grapple with Climate Tech Coverage

Source: The Geneva Association

Key Points: A Geneva Association conference highlighted the many challenges insurers perceive in supporting new climate technologies. Specific to geologic storage of carbon, it was noted that traditional coverage doesn’t fit well with the damages if the CO₂ were to leak. Progress may lie in more collaboration, shorter policy periods, and government backstopping.

The Geneva Association’s Climate Tech Conference. Earlier this week, the Sustainable Finance Lab attended a Geneva Association (GA) symposium to discuss how to spur more commercial insurance engagement with new climate-related technologies and climate mitigation activity. The event followed the GA’s publication by of two related reports, Climate Tech For Industrial Decarbonization: What role for insurers? (January, 2024) and Bringing Climate Tech to Market: The powerful role of insurance (April 2024). In the former, the GA described the climate tech landscape. In the latter, the GA introduced an Insurability Readiness Framework (IRF). The IRF is designed to help insurers evaluate a new technology from an insurability perspective by identifying the key issues/risks related to technology, project development, legal/compliance, location, business interruption, long-term and ESG. The GA is an international group comprised of insurers’ and reinsurers’ CEOs.

Cataloguing the challenges for insurance participation. The insurance industry understands it has a role to play in supporting the financing of climate technologies to aid in global decarbonization. Yet the two reports and conference participants compiled a daunting list of challenges for insurance industry participation. Among them:

• New technologies lack that (loss) data to perform effective risk engineering.
• Insurers are short-staffed of engineering expertise to evaluate new technologies.
• Insurers is less collaborative / more competitive than it used to be, which slows new product development.
• There is a lack of education/understanding among entrepreneurs about risk management in general, making it harder to communicate with insurers to address insurer concerns.
• Because of the large scale of certain climate tech investment, project finance is increasingly being used to fund early-deployment stages, which is earlier than insurers traditionally get involved.

Carbon storage in focus. One of the conference focus areas was the potential liabilities resulting from leaked CO₂ from geological carbon storage. Panelists offered another long list of the various challenges confronting re/insurers, including:

• The geology of storage conditions is heterogeneous and the time scales to consider are vast, complicating risk assessment.
• There is price risk for coverage of credit reversals (if CO₂ leaks), given general expectations that carbon prices will rise over time. At the same time, insurers think buffer pools, such as those used in the VCM, are a poor — and inefficient — risk management tool, in part because the value sits idle/isn’t investable and in part because appropriate amounts to reserve are very difficult to determine.
• Potential losses appear to take shapes that are inconsistent with typical insurance profiles. To wit, quantifying losses and damages from any leakage is difficult and leakage may be more likely to be gradual vs. a large one-time occurrence.
• Re/insurers are being asked to write much longer-term policies than normal, presumably at least in part because of the project finance influence.

Solutions sought in early engagement, collaboration, more government partnership, and a little creativity. Conference speakers opined that for the insurance industry to break through these varied challenges, insurers needed to engage relatively earlier in individual project lifecycles — to understand technologies and to offer risk management expertise that would ease the path to getting coverage later as the projects matured.

Other speakers noted that the industry had overcome the challenges of insuring new-to-the-world technologies in the past — satellites was cited as an example. The industry had done so in part through collaboration among insurers to share technical/risk engineering knowledge; collaboration could include with (or it could be facilitated by) third parties (like respected NGOs). It was noted that if “loss” data for a new industry is difficult to acquire (the chicken-and-egg problem for insurance), other data is available that can give confidence (e.g., geological data to anticipate CO₂ movement in a storage zone). Pooling of risks through wider participation was also encouraged.

It was offered that public-private partnerships (PPPs) could assist, with government acting as an insurer of last resort and capping the exposure to a project to be carried by the private sector. The symposium did prominently note the roles government has already played in climate tech development. Speakers highlighted, for example, the U.S. Department of Energy (DOE) and EU as funders of development projects and supporters of carbon credits, along with the DOE’s introduction of an Adoption Readiness Level framework to support commercialization of new technologies.

4/18/2024

Albermarle Initiates Lithium Auctions

Exhibit: Spodumene Spot Price Trend, March 2023 – Present

Note: minimum 6% Lithium Oxide, cif China
Source: Fastmarkets

Key Points: Albermarle, a leading lithium producer, is introducing auctions; arguably this can improve price discovery and transparency, particularly for strategic buyers. Pricing may be finding its footing after an 85% drop. Price perception today is heavily influenced by Chinese exchange trading, which is said to be driven by speculators.

Albermarle conducts first of a series of auctions. In late March, leading Lithium (Li) producer Albermarle (NYSE: ALB) auctioned 10,000 metric tons of chemical-grade spodumene concentrate, a source of high purity Li. The company has indicated that it will conduct a series of auctions; Bloomberg noted ALB will auction 100 tons of battery-grade carbonate on April 2 and Fastmarkets reported that ALB is planning its next spodumene auction for April 24.

Although not necessarily apples-to-apples, ALB appears to be stepping in to auctions as a competitor steps away from them. Australian miner Pilbara (ASX: PLS) is reportedly pausing its spodumene auctions after having committed most of its product for 2024.

Auction pricing may point to “stronger” demand by strategics. ALB reportedly received ~$1,200 per tonne in the recently completely auction, approximately 15% higher than the midpoint of market intelligence agency Fastmarkets’ most recent spot price assessment (see Exhibit). (The implied premium actually appears modestly higher because the auction basis was ex-works, in which arrangement of shipping generally falls on the buyer, vs. Fastmarkets’ cost-in-freight basis, in which arrangement falls on the seller).

Intent of auctions is to aid price discovery and provide transparency from and to strategic buyers. Per initial reporting of company statements, ALB intends the auctions to aid in price discovery and transparency. The ALB auctions can offer “hard” pricing reference points from strategic buyers relative to what the market perceives as price measures that are heavily influenced by speculative forces in China currently.

This Chinese speculative influence takes its shape in the Guangzhou Futures Exchange (GFEX)-traded Li carbonate contract. The GFEX contract was only introduced in July 2023, but it has grown open interest (the total number of derivatives contracts that haven’t been exercised or closed) to over 300,000 tons. GFEX volume and price volatility is reportedly spurred by large amounts of speculative interest (as opposed to strategic activity from buyers); it is also reportedly difficult for non-Chinese entities to access the market.

For reference, recent trading on the CME in its Li (hydroxide) contract had open interest of ~23,000 tonnes — and is considered a success as it has only been listed since 2021. The London (LME) and Singapore exchanges have reportedly seen very little activity.

It is worth noting that other factors may have a bearing on the relative popularity of the GFEX contract. It is physically-settled, while those on the other exchanges are cash-settled. And the GFEX is that much closer to the 2/3 of the world’s Li that is processed in China, which creates a natural hub. That said, it is also believed that the GFEX’s growth has helped CME contract growth through arbitrage trading.

Auctions may also encourage commodity traders. With prices ~80% below 2023 highs but up ~25% from February 2024 lows (see Exhibit), ALB may be hoping to encourage opportunistic commodity traders to step in.

March 28, 2024

Largest CCS VCM Credit Issuance to Date

Exhibit: Schematic of BECCS Process Sourced from Ethanol Production

Source: University of ND Energy & Environmental Research Center

Key Points: Red Trail Energy’s BECCS credit issuance is the largest technology-based carbon removal project to date. Hints at the economics point to ethanol’s position at the lower end of the CCS cost curve. RTE is a partnership, which limits use of 45Q (affirming additionality for the credits). The issuance adds to momentum in carbon capture project finance.

Largest technology-based carbon removal credit issuance in the carbon markets to date. Earlier this month, Red Trail Energy LLC (RTE), an ethanol producer in North Dakota since 2007, issued 157 thousand (K) carbon credits on the Puro.earth registry. This was the largest listing of technology-based carbon removal credits in the voluntary market (though a registry) to date; it was also the first ethanol plant to produce carbon removal credits. RTE’s credits are based on the first 14 months of operation of the carbon capture program (beginning in June 2022), known in this case as Bioenergy with Carbon Capture and Storage (BECCS). (Note: Puro.earth refers to its credits as CO₂ Removal Certificates, or CORCs.)

RTE CORCs documentation appears to affirm low cost position for ethanol-based CCS. Documentation posted on Puro.earth provides some detail with respect to the cost basis for RTE’s BECCS-based credits, although the detail may be insufficient to characterize total (or per ton of stored CO₂) project costs. The 157K CORCs issued reflects the total CO₂ captured of 180K tons net of the emissions associated with the CCS process (largely electricity). Electricity used for the period was 33.4 Megawatt hours (MWh); if this reflects total power consumption, it would allow for energy costs below $20/ton of stored CO₂. Total capital investment for “buildings, equipment, contractor work and research” was given as $39 Million; if this reflects the total capex, then even assuming no extensions beyond the initial program term of 5 years, it suggests low $40s/ton of stored CO₂.

Additionality may rely on RTE’s status as an Limited Liability Corporation. The additionality audit avers that the project meets Voluntary Carbon Market (VCM) additionality principles, i.e. requires carbon credits to make it financially viable, in part because RTE is a partnership. The entity’s tax status (as a partnership it distributes profit to the partners and is not taxed at the entity level) suggest it cannot benefit from 45Q tax incentives (which for this activity would otherwise provide for $85/ton).

This is by far the largest listing on Puro.earth. Puro.earth, a registry dedicated to technology-based carbon removal projects, launched in 2019. In 2023, its listings totaled 81.5K CORCs (i.e. tons-equivalent) through 362 projects, or an average of 225 tons per project. Also in 2023, 80% of its projects and volume were sourced in biochar, with most of the balance sourced in “wooden building elements.” Puro.earth’s transactions have realized pricing between $110 and $180/ton since the beginning of 2023.

The move comes with momentum in future CCS funding commitments.  There have been notable commitments related to carbon capture support over the past year. These have, however, been structured through directly-negotiated (multi-year) agreements. Examples include:

• OXY-and-Blackrock-owned 1PointFive have over the past year has announced purchase agreements with ANA AT&T (just this past week), BCG, TD Bank Group, Trafigura, and Houston professional teams the Astros and the Texans to purchase Carbon Dioxide Removal (CDR) credits for removals to be delivered by 1PointFive’s under-construction Direct Air Capture (DAC) facility STRATOS.
• Microsoft committed an estimated $200 Million to purchase 315K credits from carbon mineralization startup Heirloom as part of Microsoft’s broader carbon removal portfolio commitments.
• Respira International, a carbon credit investor, committed to buy 50K credits from DAC company Carbon6. This follows Respira’s 2022 MOU with power producer Drax Group to buy up to 2 Million BECCS CDR credits over a five year period to be generated from an as-yet-to-be-built Drax facility in the U.S. Respira intends to resell the credits in the voluntary carbon market.

March 21, 2024

Barclays’ New Rules for Financing Fossil and Transition Activities

Exhibit: Barclays’ New Fossil Financing Exclusions, by Effective Date

Source: Barclays

Key Points: Barclays’ new restrictions on fossil financing and Transition Finance Framework support its decarbonization push and $1 Trillion commitment, by 2030, to sustainable and transition finance. The bank treads carefully with existing, diversified O&G clients, mandating target-setting. The TFF aligns with accepted decarbonization pathways and new taxonomies.

Barclays issues new rules of financing Oil & Gas and Thermal Coal. The bank this month published an updated Climate Change Statement, in which it laid out constraints and restrictions on providing financing to upstream oil and gas (O&G) and thermal coal mining and coal fired power generation companies. The thrust of the policies are (1) constraints on financing O&G expansion generally and not financing specific locations and types of hydrocarbon resource (e.g. in the Arctic and oil sands); (2) taking on new clients in O&G (if they are seeking growth, but that would seem to apply to most upstream O&G companies); (3) O&G clients must develop plans to reduce greenhouse gas emissions and have adequate disclosure; and (4) a path to cessation of funding coal mining and power generation. See Exhibit.

Also, Barclays lays out parameters for transition finance. The bank has developed a set of over 110 transition activities across 11 sectors that it classifies as high-emitting and hard to abate. In addition, activities include seven “cross-cutting” technologies including CCUS, blue hydrogen and low-carbon fuels. These, along with the principles behind their use have been published in the bank’s Transition Finance Framework (TFF).

As it relates to Oil & Gas, transition activities include Carbon Capture Utilization & Storage (CCUS) on existing oil and gas assets (whether for geologic storage or H2 production but excluding for Enhanced Oil Recovery) and investments to (1) eliminate flaring, (2) reduce methane emissions, (3) improve energy efficiency of O&G assets, and (4) electrification of O&G assets. For coal, transition activities include CCUS and coal-to-gas switching.

The TFF lays part of the ground rules for the bank’s $1 Trillion commitment to sustainable and transition financing. Barclays has committed to $1 Trillion in sustainable and transition financing between 2023 and 2030. As the bank puts it, “[t]he inclusion of transition financing…reflects…recognition of the importance of lending, facilitating funding and investing in technologies and activities that support greenhouse gas emissions reduction (directly and indirectly) in high-emitting and hard-to-abate sectors.” To support that commitment, Barclays last month formed an Energy Transition Group within its Corporate and Investment Bank, which reportedly will have over 100 bankers.

Broadly, transition finance appears to be gaining momentum. The topic of transition finance was prominent at COP28. Growth potential was marked by large cash commitments from the UAE in conjunction with large investment houses, including Blackrock and Brookfield, and concessional sources, while the Monetary Authority of Singapore released the Singapore-Asia Taxonomy (SAT) — the world’s first, it claims, with a transition category. An enabling taxonomy will let a financial institution put money into a high emitting sector (with a transition plan) and not run afoul of its Net Zero targets.

February 14, 2024

VCM 2023 Update: Retirements Stable; Transaction Volume Falls

Exhibit: Carbon Offset Credit Retirements, by Month 2023 (Millions Metric Tons CO2-Equivalent)

Source: MSCI Carbon Markets (formerly Trove Research)

Key Points: Strong YE VCM credit retirements may suggest companies eventually deliberated, but then used, purchased credits to fulfill climate commitments. Retirements were thus flattish yr./yr. in 2023; issuances likely fell more than 10% and transaction volumes perhaps >50%. Demand in 2024 may be bolstered by integrity frameworks and incremental company buyers.

Strong December brings VCM credit retirements in line with prior years. MSCI Carbon Markets (formerly Trove Research) posted its tally of carbon offset credit retirements in the Voluntary Carbon Markets in 2023. Including a record setting month in December, in which 36 million offset credits were retired (see Exhibit), MSCI counted 180MM retired offsets in 2023, down only 3% year-over-year (yr./yr.).

Note: to retire an offset credit is to take it out of circulation; in so doing, the buyer/”retirer” uses the credit to report it as an offset to its internally-generated carbon emissions. One credit is the equivalent of one metric ton of carbon dioxide equivalent.

This outcome surprises; per MSCI, retirements were on pace to fall 12% yr./yr. through the first nine months of 2023 (excluding crypto-based transactions). The pace of retirements had slowed through the course of 2023 through September and it was tempting to tie that slowing pace to greater scrutiny and integrity concerns across the VCM.

We are left to speculate about companies’ thinking. It seems plausible that companies engaged in review of credits they had previously purchased before deciding it was “ok” to use them as offsets. Further, as MSCI had identified earlier in the year, the decline in retirements by a few large buyers of offset credits had slowed their retirement cadence; this had been only partially offset by newer and smaller buyers. Perhaps more (many) of those newer entrants acted in December to fulfill annual commitments.

Issuances were presumably down more than retirements in 2023… Per MSCI, issuances as of the first nine months of 2023 had fallen 8% yr./yr. and 4Q22’s 141MM credits issued was particularly strong (it was double the pace of the first three quarters of 2022). This sets up for full year 2023 issuances to fall more than 10%. Given heightened integrity scrutiny being taken by Verra and other registries and the softer market generally, it is perhaps surprising that issuances didn’t fall more.

…while transaction volume appears likely to have fallen considerably. Ecosystems Marketplace (EM), which has conducted a survey of VCM participants and registries for a number of years, published an update in late November 2023. The report cautions that its 2023 data, which covered through mid-November, is preliminary and likely reflects very incomplete survey results. That said, with survey responses from 2/3 of the actors that responded in 2022, the fact that transaction volumes were down 80% in 2023YTD vs. 2022 certainly points to a dramatic decline — perhaps more than 50% yr./yr. (Our channel checks appear to support that as well.)

This slowdown in transactions likely reflects a pulling back by both buyers/end-users and speculators; it seems entirely plausible that they are waiting for the integration of recommendations/certifications by the integrity standards bodies (and specifically the Integrity Council of the Voluntary Carbon Market or ICVCM) into the registries.

ICVCM assessments and demand from new companies points to some recovery in 2024. Looking forward, transaction volume in 2024 —and demand generally — should depend on a few factors. These include the extent to which: (1) existing/issued credits are deemed to “fit” with ICVCM Core Principles; (2) companies conclude they can or cannot use credits they have already purchased for offsetting purposes; and (3) near term demand for offsets is bolstered by the addition of companies making climate commitments. To this last point, although data still pending, MSCI data through nine months of 2023 would suggest that the number of companies committing to align their emissions with limiting global warming to 1.5°C more than doubled in 2023 to well over 3,000.

January 8, 2024

DAC’s Recent Cost Curve Signals

Sources: CarbonCapture, Heirloom

Key Points: Frontier Climate’s Advanced Market Commitment to CarbonCapture has average per ton pricing of $440, with a plausible step down from $650 to $350 by 2028. This compares, for example, to OXY Stratos’ estimated $400-500/ton cost and expected medium-term future gen cost of <$250/ton. Frontier’s other newly announced AMC, to Heirloom, equates to $990/ton.

Frontier Climate makes two new investments in Direct Air Capture (DAC) technologies. Frontier announced two additional AMCs last week, $20MM to CarbonCapture to remove 45,500 tons of CO₂ through 2028 and $26.6MM to Heirloom to remove 26,900 tons of CO₂ through 2030. CarbonCapture and Heirloom are deploying different DAC systems. CarbonCapture’s DAC uses solid sorbents to soak up atmospheric CO₂. The company is using a modular system that allows it to upgrade existing facilities with best-in-class sorbents as they become available. Heirloom accelerates limestone’s natural CO₂ absorption properties.

CarbonCapture is developing its first facility, Project Bison, in Sweetwater County, Wyoming. The project has been delayed from its originally-announced startup this year; the company continues to target 5 million tons per year of CO₂ capture by 2030. Heirloom commenced operations of its first facility in Tracy, California earlier in November with a capture capacity of 1,000 tons per year.

Using an AMC to track a carbon removal learning curve. Frontier addresses cost reductions for both CarbonCapture and Heirloom’s approaches, albeit in different ways. For CarbonCapture, Frontier has structured the AMC with pricing declining through the agreement period. Frontier will pay “at least 46%” less for CarbonCapture’s removals by agreement end (2028) than in year 1. Backing into possible annual volumes and prices to total the $20MM commitment and $440 average price suggests that pricing could be $600-650/ton and $325-350/ton in 2024 and 2028, respectively.

For Heirloom, there are no indications of a pricing trajectory in the AMC, but Frontier notes that Heirloom is projecting a 70% decline in cost by 2030 from today, after having reduced costs by 50% since 2021.

For reference, OXY anticipates current Stratos costs of $400-500/ton declining eventually to $150/ton. Construction of OXY’s Stratos DAC plant is 30% complete and the facility is projected to start operations in 2025 at a capacity of 500,000 tons/year. OXY has characterized a potential DAC cost curve declining to $150/ton by the “Nth gen” facility. OXY has indicated its intent to aggressively build out its DAC capacity, including having 135 facilities online by 2035.

As an important aside, this month’s announcement of Blackrock taking a JV stake in in Stratos, contributing $550 million of the project’s expected $1.3 billion cost, marked a data point regarding the perceived ability to earn an adequate financial return in DAC including from credit sales and tax credits.

Frontier Background. Frontier, a public benefit LLC owned by Stripe with funding support from Alphabet, Shopify, Meta and McKinsey, is employing an Advanced Market Commitment (AMC) model, in which buyers will commit to an annual spend on carbon removal between 2022 and 2030. Frontier has now made commitments to 28 companies for a combined $126 million (MM) out of total available committed funds of ~$1.025 billion; its commitments are all to new carbon removal technology companies that Frontier deems have significant potential to scale and lower their costs. The commitments are to companies that span technology approaches to DAC; a non-exhaustive list includes (1) new adsorbents for DAC systems (examples: AspiraDAC’s Metal-Organic Framework and Calcite-Origen’s slaked lime for calcination); (2) enhanced weathering techniques (examples: Lithos’ basalt application to cropland and Travertine’s use of electrochemistry to produce sulfuric acid); and (3) synthetic biology (e.g. Living Carbon’s algae biopolymer). Frontier has noted that it is paying as much as $1,800/ton for some very early-stage commitments.

11/20/2023

The Growth in Commitments to VCM

Exhibit: Announced Capital Raises Since 2021 and Estimated Annual Project Investments, 2012-2022

Source: Trove Research

Key Points: Trove’s latest VCM Investment Trends report finds ~US$18B raised for carbon offset crediting in 2021-1H23, including >$5B from corporates. This spurred 50% investment growth in 2022. Trove cites that a tripling of current investment to 2030 is required in a 1.5°C scenario; yet even sustaining recent levels may be difficult given integrity attacks.

Recent report on investments into the VCM. A mid-September report from Trove Research updates on (1) capital raise for the Voluntary Carbon Market (VCM), reflecting survey results and the canvassing of public announcements, and (2) recent capital spend (i.e., investments) on projects. High level takeaways of the report include:

• ~US$18 Billion (B) of capital was raised in 2021 through 1H2023 for carbon credit issuance.
• Of the total, $5B was committed by corporates, with the balance from financial investors (funds, etc.) (see left chart of Exhibit and below for color on corporate sponsorship).
• Use of the capital raises is reflected in growth in project investment. Total VCM investment in carbon credit development grew to $7.5B in 2022 from $5.0B in 2021 (see right chart of Exhibit and below for color on the investments). Half of the 2021 spend went towards “feasibility”, i.e. early-stage, expenditure, which converted to later stage (“development” and “capital”) expenditure in 2022.

Corporates commit over $5B. 2021 marked considerable growth in corporates making direct commitments to purchase credits. Sizable corporate commitments over the last 18 months have included:

• single company to single projects, such as Hess’ $750MM commitment to buy credits tied to Guyana forest preservation;
• single company to a portfolio of projects, such as JP Morgan’s $200MM commitment to sponsor Carbon Dioxide Removal (CDR) activities; and
• multiple company to collective efforts to foster investment at-scale in both nature based solutions (e.g., the LEAF Coalition) and CDR new technology development (e.g. Frontier)

Project investment detail by project type. Nature based projects (Nature Restoration and REDD+) accounted for 50% of project investment vs. closer to 40% from 2012-2019. Other drivers of the growth included methane capture/management (Non-CO2 Gases in the chart) and cookstoves (Energy Efficiency in the chart). Renewable Energy declined (even in absolute terms) as crediting in all but lesser developed economies was ruled ineligible for crediting given technological/cost reduction progress. Carbon Engineering, which includes technologies targeted at CO₂ removal, was a negligible target given the early stage of these technologies. See the Payne Institute VCM primer for more on project types.

The report also notes that there are 1,500 newly registered projects since the beginning of 2021 (by the largest registries, which dominate the market). These claim to be able to reduce CO₂-equivalent emissions to the atmosphere by ~300 million tons per year (Mt/yr.), bringing the total claimed reduction potential of registered projects to ~760 MtCO₂e/yr. With that said, the report acknowledges that not all claimed carbon reduction will necessarily be achieved.

About Trove Research. Trove Research provides Voluntary Carbon Market supply and demand analysis, including market forecasting and influencing factors such as corporate commitments and government policy.

9/25/2023