Pedro PalandraniTranscript
Stephanie:
Hi, everyone. Thank you for joining us for today’s webcast, Greening the Future: Exploring CleanTech & Renewables, sponsored by Global X ETFs. Today’s webcast will be providing one CFP, one CEMA, and one CFA/CE credit. With that, I’d like to turn it over to today’s first speaker, Jay Jacobs, Head of Research and Strategy for Global X ETFs; Jay.
Jay:
Thanks, Stephanie, and thank you, everyone, for joining us today. It’s really a privilege to be able to present to all of you. I’m joined here by two other members of the Global X research team, Andrew Little and Pedro Palandrani, who both cover thematic investing at Global X and are regularly publishing information about CleanTech and renewables, among 25 other themes that we currently cover at Global X.
A very brief background about our firm, we were founded in 2008. We are based out of New York City. We currently have over $27 billion in assets under management in 80 ETFs. As you can tell by the chart on the left, the majority of that now is in our Thematic Growth suite specifically targeting disruptive trends that are happening around the world.
The plan for today, we’re going to explore topics that stretch across CleanTech and renewable energy from renewable energy sources and technologies like solar and winds, the electrification of buildings, infrastructure, and transportation, energy transmission and storage, removing carbon dioxide from the atmosphere. A lot of interesting things happening in the CleanTech renewable space. We’re also going to talk about some of the drivers behind these themes and where we are with the adoption of CleanTech and renewable energy around the world. After that, we will be really excited to take any questions. I know Stephanie has already mentioned how to use the questions box earlier in this presentation.
To kick it off, I want to talk a little bit about Texas. I’m sure prior to some unusual events in February with a major cold front and power outages across the state that many of us probably didn’t spend much time thinking about Texas, and well, specifically Texas’s electrical power sources. If we thought about Texas, we probably thought about it as the great oil state, the state that by itself would produce about – would be the fifth biggest oil producer in the world coming after countries like Russia, and Saudi Arabia, and Iraq, a state that is not shy about showing its celebration of oil, where a pickup truck is considered a compact car.
In today’s presentation, I want to talk a little bit – I want to start off by talking a little bit about how although many of the misconceptions we have about Texas as an oil state, it’s actually increasingly becoming somewhat of a champion of renewable energy. I know a lot of this was big in the news recently. We can discuss some of the things that happen during the recent cold front, but what we generally believe is that recent events are not changing the long-term trajectory of Texas.
Why are we bringing up Texas in this presentation? Really there’s been a combination of several forces that have moved Texas away from just being an oil state and into a renewable energy leader. It’s been a combination of plentiful natural renewable energy resources that’s being combined with support of legislation. That on top of declining costs have really turned renewable energy into a very viable energy source within Texas.
A couple misconceptions to address off the bat. I think many people think of Texas as being in the south as a lot of Texas’s landscape being desert; therefore, it should be a solar state. Actually, it’s the Northwestern Panhandle coming off the Great Plains where land is readily available. You see incredibly strong and consistent winds across the year where wind energy is the predominant form of renewable energy in Texas.
You might also think that Texas is a Republican state, that it’s gone red in every presidential election since 1976, and therefore, maybe not as progressive on renewable energy legislation. It was in 1999 that Governor George W Bush signed into law the renewable portfolio standard that actually mandated Texas’s renewable energy construction. Then when Texas exceeded the goals of that legislation, it was Republican Governor Rick Perry who upped the renewable energy standards again in 2005. Another misconception that maybe this is a red/blue thing. That does not seem to be the case in Texas.
Or maybe you think that the recent build-out of wind turbines and other renewable energy sources in Texas is maybe coming from oil guilt, that it’s a state that has been producing so much oil that they feel like they should diversify energy sources into something renewable and are heavily subsidizing that transition. That’s not actually the case either. Research out of the University of Texas Austin has shown that for new energy capacity that wind is actually the cheapest form of generation in Texas. Because Texas is the fastest growing state in America right now by absolute – in absolute terms for population, there is an increasing demand for electricity. That is being directed towards renewable energy, not because people want – just want to out of the goodness of their heart, not because it’s being forced to by certain legislation, but actually because right off the top, it makes the most sense from a cost competitiveness analysis.
What does this mean in actuality? A couple of stats to pass along. Over 17% of Texas’s power comes from wind energy which surpassed coal in 2020 to become the second largest segment. It’s the largest wind producer in the United States producing about a quarter of all of US’s wind power.
If Texas were its own country, it would be the fifth biggest wind producer in the world, so almost comparable to how it would stand with oil production as well. Beyond that, Texas’s renewable power is expected to nearly double in the next three years, not just from expansion of wind but also because we’re starting to see some more diversification into solar in Texas as well. While we’ve seen a lot of the recent power outages in the state has brought negative attention to the topic, actually, a lot of the consensus on the subject matter from industry experts show that clean energy in the CleanTech sectors may have mitigated a lot of the recent issues that Texas was experiencing as it looks to diversify its energy sources.
Now, beyond just purely the renewable energy production story in Texas, there’s also a separate story emerging around CleanTech. This wouldn’t be a CleanTech renewable presentation if we didn’t mention Tesla at least five times. I’m going to use my first card here. Tesla has committed to building its largest factory in the world just outside of Austin producing battery cybertrucks among many other models in the state. That’s also combining many of the several trends that we’ve been talking about, availability of land, availability of labor, support of legislation, another reason why Texas is becoming a leader in the CleanTech space.
For the remainder of this presentation, I’m hoping to show you that if Texas can become a leader in CleanTech and renewable energy that the broader adoption of these technologies across the US and around the world is not only possible but likely. This is a theme that’s not just about political ideologies or about personal values, but it’s about addressing difficult challenges and making sensible economic decisions. For the remainder of the presentation, we’ll be diving into several subsegments of the CleanTech and renewable energy theme.
I do want to point out that we at Global X actually consider these to be two separate themes. The CleanTech itself is about the development of various technologies that are designed to inhibit or reduce negative environmental impacts. That could be technologies like the development of better solar panels, cheaper solar panels, wind turbines, smart grids, storage, electrification, all these different technologies that are coming into play that are going to power this decarbonatization or carbon neutrality efforts. Renewable energy production, the actual production of it, companies that are selling electricity onto the grid through solar or wind projects is a separate theme. We’ll talk about that in more detail as to why we see those two things as separate, but one is the technology side; the other is the production side. That brings us to our first question.
Stephanie:
Perfect, thank you, Jay. The question is, “Are you concerned about climate change?”
Jay:
We’re diving into the hard stuff right off the bat, we really can’t have a CleanTech and renewable energy discussion without talking about the backdrop of what’s happening in climate change because as we will discuss for several reasons later in this presentation. A lot of the investment and interest in action that’s happening in CleanTech and renewable energy is going to be propelled by governments, and consumers, and corporations even when it may not be in their best economic interests.
Let’s start off with a couple of stats about climate change to set the scene. For nearly about 12,000 years, carbon dioxide made up about 280 parts per million of the earth’s atmosphere. Since the Industrial Revolution, that has increased to 415 parts per million. That’s about a 50% increase. Every year, this parts per million increases by about 2.5. It’s estimated that about three-quarters of global warming comes from that increased concentration of CO2 and that humans are responsible for about half of those emissions. Over the last 60 years, the surface temperature of the US – or sorry, of the Globe, has risen by about one degree Celsius.
If we look at current policies, by about 2100, I guess we haven’t gotten used to saying the next century yet, in about 2100, we expect the temperatures will rise by about four degrees Celsius. Now, if you’re in the Midwest or if you’re in the Northeast right now in March, that probably doesn’t seem terrible, but there really are major substantial – major economic and societal issues that came along with that. With just the one degree Celsius increase we’ve already seen, the frequency of billion-dollar weather events has nearly tripled in the last 20 years. If we continue to pollute at this rate, we could see a 10% decrease in global economic output, not to mention an estimated 800 million people that would be displaced as well as lethal heat waves that could kill millions.
This is, of course, a growing dire situation. We believe that CleanTech and renewables can be the antidote to this trend. The Paris Climate Agreement is seeking to limit those global temperature increases to no more than 20 degrees Celsius from pre-industrial temperatures. We’ve already gotten half that distance, a goal that really is likely to be achieved through the transition to renewable energy, but also with great energy efficiency and switching fuel types.
How much do we expect it will cost? Early estimates show that this will cost $110 trillion which is equal to the market cap of every public company in the world. This is obviously a massive transition with global implications across many different segments of CleanTech and renewable energy. With that setup, I will pass it over to our analyst Andrew Little to start digging into some of the specific technologies that are being developed to combat these climate change trends.
Andrew:
Thank you, Jay. In 2019, almost 27% of global electricity production was generated by renewable sources. That’s up to 19% at the beginning of the decade. In the past, you had hydroelectric sources like dams and run-of-the-river power generators. They were really the most notable renewables in the overall mix.
In the past two decades with on and offshore wind and solar photovoltaic – we’re going to call it solar from here on out just to simplify things. Since they’ve picked up, we’ve really seen an inflection point in the renewable share of the global electricity mix. You can see that on the chart right there looking at where the curve right there starts to steepen. This is essentially when solar and wind started to see some adoption.
Much of this is due to declining costs. The levelized cost of electricity, many may have heard of it, but this is the most common metric for looking at the overall cost of an energy source. It refers to the revenue required to build and operate a power source over a specified cost recovery period. Over the past decade, we’ve seen that cost for solar decrease 80% and on and offshore wind together dropping around 55%.
These decreases are mainly due to economies of scale and innovation, past investment, and supportive policies that are both a part of that investment, particularly from the public sector, have really help to make them more cost-competitive. In most of the world, these costs are below coal and gas plants. You can see that on the chart in between the two dotted lines. Those reflect the high and low fossil fuel and gas levelized costs of electricity.
Right now, we are starting to see – we already see that the cost of renewables, particularly solar and onshore wind, are dropping below those levelized costs. That’s in most of the world. By the end of the decade, the cost of renewals are expected to fall another 60 to 70% as innovation and continued investment from both the public and private sectors continue to push that economies of scale.
Now, we’re going to do a deep dive into two different renewable technologies, solar and wind, as we’ve been discussing so far, starting with wind. This concept’s been around for around 2,000 years at this point. It first appeared in windmills that many may have seen in the countrysides. They’re still around, but they – those windmills really serve the same function as they did then: pumping water, making flour, doing really mechanical functions.
Modern wind power looks a lot different. It’s typically harvested by on or offshore wind farms that are mainly comprised of wind turbines. The other part of that are the towers and obviously the supporting infrastructure for the turbine. The turbine is the thing you see at the very top of those towers. They’re way more sophisticated than those countryside mills that come to mind. They’re chock full of technology.
They’re lifted to extreme heights by turbine powers that are really embedded with modern technology in terms of construction, but the actual turbines themselves are angled by digital sensors that measure the wind and look at where – or the direction of the wind, so they can really angle the turbines and capture that wind, the large blades of those turbines that catch the energy of the wind spinning the rotor. Then within the turbines, something calls a gearbox really accelerates that rotation speed and uses a generator within comprised of magnets to create electricity. That’s then what goes to the grid, travels down the tower off to the grid.
Innovation in gearboxes and generators mean that more power can be generated with less wind. You may see that there isn’t much wind and say, hey, that turbine might not spin, but because of the gearbox, it’s spinning faster and faster. Because of that, you have improved efficiency which also results in a decrease in costs.
Economies of scale are definitely a significant factor in decreasing prices for turbines. You can see that on the right chart. There are two turbines listed there. There’s Vestas Wind Systems, one of the oldest turbine companies in the world founded in 1945. Their turbines since 2005, that’s the far year on the left, have dropped significantly. Then you can also see the average Chinese wind turbine costs just dropping dramatically over time.
Other innovations like those in gearboxes are increasing efficiency. This is going to relate to the total installed costs usually. In rotor blades, we start to see – we’re starting to see increased surface areas and length. That’s increasing wind capacity factors. That’s another way to improve efficiency, also increasing the ability to generate electricity in low wind speeds.
Making those blades longer also requires some nifty material science innovation. After all, these blades can face up to 200 tons of air pressure. For those of you like me who want to transmit that into more of an understandable weight, that’s the weight of a standard 3,000 square foot house. That’s a lot of pressure that it needs to withstand. Compensating for that really requires composite materials like carbon fiber that are strong enough to handle that kind of pressure. Then finally, as I mentioned, innovation, and power engineering, and also some really interesting innovation in hands-off repair by autonomous robots. Those things are also helping to decrease the cost of operating and installing these things.
For our next deep dive, we’re going to look at solar or solar photovoltaic. Again, to be concise, I’m just going to call it solar. Solar produces electricity at utility-scale, also at residential-scale for both grid-tied and off-grid homes.
Solar panels, also call it modules, they’re comprised of those photovoltaic PV cells which are made of a semiconducting material typically. This material is polycrystalline silicon. This generates electricity through the PV effect. This is when light from the sun in the form of photons knocks electrons from the silicon lose, then creating an electric current. That’s the important part, the electric current there.
It’s useless without the solar inverter which is really one of the main components of a solar generator generating system, solar power system. This converts it to AC power which we can then use in our homes. Those cells, the inverters, those are the primary cost components of solar power. As a result of innovation across both of those technologies, we’ve seen total installed costs of solar projects decrease around – sorry, 79% since 2010.
On the next slide, we’re going to take a look at the actual decrease in price of solar modules, and so that is how modules have decreased in price in just the last ten years. It’s really incredible to look at. A lot of that has to do with improvements in efficiency. Solar power was first created or invented in 1954. Those panels had 4% efficiency. That means 4% of absorbed sunlight actually turned into power. The rest just would come off of the panel in the form of heat.
Nearly 70 years later, we’re at around 16% efficiency with that same style of solar module. These modules actually have a theoretical efficiency limit of around 33%. We’re at 16% now. The limit’s 33%. That’s because they’re what’s called single junction, and roughly translating, it means they’re made out of one semiconducting material. Today, though, we have the ability to make what are called multijunction solar cells. Using that same rough translation, they’re made up of multiple semiconducting materials. This means that they can capture a much broader light spectrum and have a way higher theoretical efficiency, so their efficiency – or max efficiency is actually 87% compared to that 33% for single junction.
There are some multijunction versions on the market right now. They’re at around 30% efficiency, so still greater than the commercial versions of the single junction solar panels right now that we see. There’s a ways to go to get to that theoretical efficiency for the multijunction technology, and that’s really going to be a big frontier for solar right now. As we start to see multijunction solar cells roll out, we’re going to see that there’s greater efficiency that – it’s going to approach the theoretical limit a little better. We’re going to have more cost savings, hopefully, as it scales.
Solar innovation is also about finding new applications for solar cells. Already we see them on large rafts as sea, particularly in China, and then also in solar tiles on the roofs of houses, so that’s really encouraging as well. I think Tesla is also involved in those – in implementing those and installing those. In the future, we really do hope to see them in windows. There are some in windows right now, but it’s not fully viable for mass implementation, but we’re approaching that, and we’re also starting to see applications in thin films, so that would be the equivalent of wallpaper almost but wallpaper for the outside and also in paint, which is really cool, and that could result in solar being really, really scaled. For now, that’s it from my side. I’m going to pass it over to Pedro to talk about the renewable and cleantech transition outside of the power sector.
Pedro:
Awesome. Thanks, Andrew. Yeah, you’re right. Essentially if we take a wider lens beyond power generation, we can see here that renewables make up a much smaller percentage of total energy consumption. Of course, we know that cars still largely run on gas. Trucks run on diesel, homes and buildings on natural gas and heating oil, so the transition to renewable energy is more than just replacing coal burning electricity plants with windmills. It’s really about electrifying every aspect of energy consumption essentially around the world.
When we take this broader lens into account, we can see that renewables are just 11% of total energy consumption. Electricity production is only 30% of emissions. You can see that on the chart on the right side. The other 70% of the economy needs to be decarbonized as well, and clearly, that includes agriculture. That includes transportation and even steel production, of course, so let’s start here with modernizing a power infrastructure to handle this widespread electrification. Often referred as the smart grid. It’s important to recognize that there is no one component to a smart grid. Instead, it’s really an entirely new approach to electricity networks. In the old grid – and I guess that since we’re calling the new one smart grid, we can call the old grid the dumb grid if you want to. I don’t think it’ll be offended.
With the old grid, it was one way passage system. It was essentially just a large power plant generating electricity, which then was stepped up into high voltage power lines and then distributed across neighborhoods and homes. Now, the smart grid is completely decentralized and multidirectional, so renewable energy at utility-Scale farms and at residential and commercial sites can actually produce electricity and contribute that to the grid. We also have smart meters that are connected to the internet and can essentially offer better data and tracking of electricity used as well as recommend practices such as waiting to charge batteries at night, for example.
Then we have microgrids that essentially allow for more localized energy production and use without depending on a statewide network, and finally, here we’re listing also is stationary storage that is batteries that help to mitigate that intermittency of renewables when essentially the sun is not shining or when the wind is not blowing. I think that’s a key aspect here within the cleantech space. We actually have seen a slight decline in trend in investment in smart grid technology over the last four years, which we really think it’s a major mistake because all of these items that we just described or technologies that we just described really provide the backbone upon which renewable electrification can happen, and we’re seeing that on the chart on the right side here. Actually, going back to Texas, this is the smart electrification that could have solved many of the issues that were experienced there just recently.
Then once the backbone is really solidified, we can work to begin to support the charging of 1.1 billion electric vehicles required to decarbonize by 2050. Despite Tesla being a 15-year-old company now, EVs still only make about 3% of total new car sales. Of course, a lot of the recent increase in demand comes from advances in battery technology. I think it’s common knowledge already that lithium-ion battery costs have declined approximately 90% over the last decade, and we’re really close to reaching price parity with internal combustion engine cars. We’re actually expecting that to happen over the next year or so. I’ll talk more about EVs in just a second, but another technology that we want to highlight here is – to help with electrification efforts are heat pumps.
Heat pumps essentially pull in hot air from cold areas and vice versa. They pull in cold air from hot areas, and really, they’re extremely energy efficient, creating more heat energy than what they actually use, but one caveat here is that they’re expensive. However, if we were to replace natural gas, oil, and even all electric heaters with these heat pumps, that could dramatically reduce fossil fuel reliance.
Okay, so going back to the electric vehicles topics – and I think that’s a key one for everyone – here we want to highlight some of the most recent commitments from OEMs around electrification. Importantly, most of these commitments are very recent. GM for example, they plan to offer 30 new electric vehicles globally just by 2025. They were even advertising their EV push during the Super Bowl if you watched that. Ford, also, just a couple of weeks ago, actually, committed $29 billion to electric vehicles and autonomous vehicles. Just 22 billion of those 29 billion committed are only going to go to the EV buildout. Clearly now almost every major OEM is coming with very ambitious goals around electrification, and here we’ll list a few of them. You can see BMW, Jaguar, Honda, a few others.
Now just a few years ago, the focus was on these companies and these OEMs that were shifting towards electrification from internal combustion engines. Clearly, since very recently, I would say 2020 and certainly 2021 as well, the EV market is really getting flooded with insurgents, and these insurgents are EV-only companies that are raising capital and coming to market with very, very ambitious goals. We have it here a short list of companies in that area. You have Rivian, for example, a company backed by Amazon and Ford. They’ve raised over $8 billion, and Amazon alone actually placed an order for 100,000 delivery vans with just the first 10,000 vans that are expected to be on the road in 2022.
Then we have companies like NIO in China. They keep really growing production and deliveries at an incredible, fast rate. Actually, the company’s latest guidance indicates that in Q1 2021, deliveries could reach 20,000 electric vehicles, which could represent over 400% growth just from the same quarter last year. There are many other companies, of course, that we’re listing here, many of which are not in production yet but plan to be in production during the next year or so.
Now, the question is how all of these ambitious plans translate into battery demand, and this is one of the key areas where we see big opportunities for battery manufacturers because it is clear that all of those goals need to be supported by battery producers. It’s really not like all of these OEMs are going to manufacture their own batteries. We have seen Tesla that clearly still relies on Panasonic here in the United States, and now in China, they’re working with CATL and LG Chem, so it’s clear that EV companies are going to be partnering with battery manufacturers more and more.
Actually, if we look at some recent estimates, we can see here that battery capacity increased essentially 13-fold over the last five years until 2020, essentially, but now it’s expected to quadruple just in the next decade to over 3,000 gigawatt hours of battery capacity and that’s by 2030. Just for context, all that battery capacity is enough to manufacture at least 50 million electric vehicles, which could really represent around 50% of total car sales based on current levels of annual global sales. Again, this is probably a key area of opportunities as we think about the electrification of transportation.
Closing the loop here for electric vehicles, we have discussed how battery technology is becoming cheaper, also, how battery technology is becoming vast, and we showed that in the last slide, but it’s also important to highlight how battery technology’s becoming better. I know this chart has a lot of information, but I think the key information here is that battery technology is transitioning from legacy technology to advanced technology, and in the next few years, we’re going to see that next generation of battery technology.
Within each phase, there is a focus on increasing the energy density of the battery to essentially achieve greater range. That should really address many of the range anxiety that exist, especially here in the United States. Now, that range anxiety is really not always something that happens around the world in places like China where distances are much shorter because of the high population density. They really do not need a lot of these range type of or performance batteries. They can actually sacrifice some of that performance and tilt in some of the benefits towards lower-cost batteries.
In the future, if we look at newer technologies like lithium silicon and solid-state batteries – all of those are the new type of EV battery technologies that are expected to improve performance, hold more energy, they’re going to last longer as well and all of that at a lower cost. That’s going to be the next generation of battery technology. I think as a final point here, I just want to mention that it is important to understand that that next generation of battery technology could use lithium also in the anode side of the battery, not only in the cathode side of the battery as it is currently used. The total lithium intensity is actually going to – or it’s expected to increase in the future. I know we get a lot of that question, so we wanted to highlight that here. Alright. With that, I’m going to pass it back to Andrew to discuss indirect electrification. Andrew?
Andrew:
Thanks, Pedro. Next, we’re going to talk again as Pedro said about indirect electrification. For some sectors, electrification isn’t possible. It’s not the ideal solution. In others, it’s not a solution to their emissions at all. This is where green hydrogen comes in. Green hydrogen can bring renewable energy to places where the grid can’t reach, where batteries aren’t realistic. I’m sure it’s something that many of you have heard about, and we’re going to get into how it works and the implementation and use cases there. It can serve as a emissionless input to industrial processes as well as serving as a fuel in what’s called a fuel cell. These functions together, again, being that input to a process or to a fuel cell or something like that, that process is called indirect electrification.
How does it work? Hydrogen is the most abundant element on the periodic table, and it has a lot of energy potential on its own. However, it’s always bound to other elements like oxygen when found in nature, so H2O, water. Hydrogen is typically found in that form. Luckily, modern technology has found a way around this through what’s called electrolysis – in modern technology called an electrolyzer – we can separate hydrogen from oxygen in that electrolysis process, and when we use renewable energy, renewable electricity to power those electrolyzers rather than fossil fuels to generate electricity that would then power that electrolyzer, it creates a renewable energy source that is then green.
You can also use that from the grid as excess spill-off energy from that. Really, I think that that process is really valuable when you think about how variable renewable energy sources work. Once you separate that hydrogen with the electrolyzer, it can then be stored in pressurized tanks, which can then be transported around the world and used as fuel for different – for those industrial inputs or for a vehicle or a building that has a fuel cell, or it can be fed through pipelines for long-term storage or for other purposes.
Direct uses are typically, again, in fuel cells where the H2 is turned back into water through what is called oxidation. By oxidizing the H2, you’re introducing the oxygen, turns it back to water, but also releases some of that energy potential from the hydrogen. Fuel cells, they have a lot of use cases in cars, different forms of transportation besides just the simple consumer car, personal vehicle, but also in buildings, so Pedro was mentioning how heat pumps and traditional gas boilers are inefficient and do result in emissions. If we can put fuel cells in buildings, we can use that to power a lot of the functions in that sector, but hydrogen, again, can also be substituted for fossil fuels or for fossil fuel isolated hydrogen, also called grey hydrogen, as an industrial input.
In steel making, for example, in a part of the process in refining the iron there, it uses hydrogen as an input, but most of that hydrogen has historically been isolated with fossil fuel-powered electrolyzers usually done on-site, actually, in the steel-making facility. If you can substitute in that green hydrogen, you’re creating a big source of emissions reduction. It’s actually a very significant portion of overall emissions from non-related sectors.
Then finally, hydrogen can also be used in making biofuels, mixed in with traditional biofuels or synth fuels, what they’re called, and also mixed in with natural gas for other – for different sources that use that or different things that consume that type of fuel or energy. Shipping and aviation would be a great use case for that. Right now, though the majority of hydrogen is gray hydrogen, again, excess power from renewables has a lot of potential for transitioning this to be green as well as that runoff energy from the grid.
Right now, the cost of electrolyzers and fuel cells are really the current limitation for this, but a lot of infrastructure is actually built out that is suitable for hydrogen both from actually fossil fuels, natural gas, that infrastructure can then be used for hydrogen but also infrastructure from that gray hydrogen, that fossil fuel isolated hydrogen. That’s already built out, and that’s very supportive of green hydrogen in the long-term, so looking at those two things together, we think there’s a lot of potential for adoption, but it’s likely going to be in the medium- to long-term, and looking at the demand for that based off the technology and other factors, we do see a lot of use cases in the different areas in the chart that is on the slide right there.
All of these technologies definitely present great solutions when implemented, but in the meantime, as we said, renewables are just 11% of overall energy use. 27% of electricity, but 11% of overall energy use. We continue to emit carbon into the atmosphere with this just 11%. Right now, one of the most promising pieces of technology to reverse this trend is carbon capture use and storage, which essentially tries to scrub that carbon out of the atmosphere. Cost remains a big issue for this, but they are expected to continue to fall. We’re already seeing a lot of these facilities rolled out. Sometimes they’re just implemented on existing facilities.
There’s also a carbon dioxide removal, which isn’t really about capturing carbon at the source of emission. It’s going into the atmosphere and really trying to remove it from the skies. Right now, carbon in the atmosphere, it’s about one to 2500 per part, so that’s really like picking one star out of the entire night sky. It’s very difficult to do, but with this technology and continued scale, we really think that that’s something that we’re going to be able to do.
Now I’m going to explore some thematic drivers as well as current adoption. If these technologies seem really far off and expensive, they really have a lot of support from key areas that can drive down the costs and really make it more realistic in the short- to medium-term. Consumers and corporations, for example, are in big support of renewable energy and efforts to mitigate the impacts of climate change and also the causes of it as well. Residential solar installation is steadily climbing each year, and more than two thirds of consumers support policies like funding renewables research, renewable electricity requirements, as well as tax rebates based on all of that, and to satisfy their customers, companies are acting in turn.
Google, Facebook, Microsoft, Apple, they’ve all made commitments to become carbon neutral by 2030 or even earlier and that’s 20 years ahead of some of the plans that we’re seeing in a lot of the world. That is by no means an exhaustive list of companies that are engaging in these types of commitments. In the past month or so, we saw significant commitments in the financial sector, which is very important based off of the way they deploy capital.
On the government side of things, China and the US, responsible for 35% of all emissions globally, good greenhouse gas emissions, and we’re just starting to see positive action from them with recent commitments from China and also a pretty detailed climate plan from President Biden. A lot of that plan is based off of what he laid out in his – in the run up to the election, but by recommitting to the Paris agreement and what that requires including what’s called recommitting your NDCs – so that’s something that we’re going to have to do in the coming year, the US is going to have to do and really establish some clear targets for the short-term, but Biden’s main plan is to become carbon neutral by 2050. We can see some of the bullets here that really look at what that will entail. That’s going to require significant investment in cleantech and renewable energy.
China’s also pledged to be carbon neutral by 2060 with peak emissions in 2030 and other countries like Korea and Japan have made similar commitments while Europe just continues to lead on decarbonization and carbon neutrality efforts. Just looking at the chart, the bottom chart on the right just a significant share of emissions without much legislation over the past ten years, and also with a lot of GDP behind it. I think when the US and China make – actually start to implement some of the things based off of their commitments, which are way more solid than they’ve ever been before, and some of them have – nothing had ever been similar to what we’re seeing right now – I really do think we’re going to see a lot of investment here. Now we are going to pass it on for a poll question.
Stephanie:
Great. Thank you so much, Andrew. This brings us to our next polling question. The question is when do you think the US will become carbon neutral. Your answer choices to choose from are before 2050, around 2050, after 2050 or never. Let’s take a look at the results. Okay, so about 35% each around and after 2050. 17 almost 18% before 2050 and then 11% saying never. Andrew, I’ll turn it back over to you.
Andrew:
Thank you very much. I think those polling results are very interesting. It definitely does include and look at some of the efforts that we’re seeing right now, commitments we’re seeing, but we’re also the dispersion we’re seeing does definitely anticipate there being some back and forth in terms of the ability to have a consistent policy over a number of different administrations. Hopefully, we are able to take action in a way that is meaningful, and I also think that around the world, we’re seeing similar momentum, and that investment in these technologies will come from that, those different areas as well.
This is our final thoughts slide. We do have additional slides following this as well, but just on the actual theme itself and reflecting on what we’ve discussed today, different than in the past, the impacts of climate change, they’re observable, and they’re definitely concerning. Encouragingly, cleantech and renewables, they present the means for mitigating these impacts now and into the future. Cleantech being outside of the renewable chain as well, carbon capture use and storage, carbon dioxide removal, and then the current encouraging progress that we’re seeing on renewable implementation in direct electrification and all the other things we discussed including electric vehicles and batteries.
All of this is becoming more and more affordable, and it’s gaining enough support to make full implementation realistic. A lot needs to be done to bring up renewable’s share of the power and energy mixes to where it needs to be in order to mitigate the impacts of the underlying causes of climate change, so adoption is early on, but in our view, this is just the beginning of a long runway for growth across both renewables and cleantech. Thanks everyone for listening today. I’m going to pass it to Jay now to wrap up our discussion overview of our investment approaches and our products related to this. Thank you.
Jay:
Great. Thanks, Andrew. We’ll take it from here. As I mentioned earlier at the beginning of the presentation, on the investment side of the equation when you look at cleantech and renewable energy, we believe there’s really two different themes at play here, one that’s more the upstream way of allocating to the space, which is looking at the technology developers and producers of things like solar panels, turbines, electrolyzers used in hydrogen, carbon capture technology, batteries, all the different technologies that we talked about today. There’s the builders of that technology that are going to be much more driven by the input costs and scale as well as the advancements of the technology itself through research and development.
The other side of the equation is the renewable energy producers, the people that are buying that technology from the technology developers and implementing it into something like a solar project or a wind project and are now generating electricity and selling electricity at market rates. Those two different segments have very different implications from an investment perspective. The upstream side of things is going to be, we believe, higher growth potential in the sense that it’s more sensitivity to that technology side, to the materials side, and more sensitive to growth rates.
The renewable energy production side is a little bit like an advanced utility. These companies have much more predictable cash flows because a lot of it is contracted out for multi-year electricity contracts. The generation tends to be pretty stable. That’s why we’ve divided this overall megatheme into two separate themes with two separate ETFs tracking each part of the value chain, the first being the Global X CleanTech ETF. This is the upstream side of the equation. It’s look at those different segments within the developers of solar and wind turbines and hydrogen technologies. You can see it’s a lot more in the industrials and information technologies space, and it tends to be actually about two thirds overseas. A lot of that production is coming out of places like China and South Korea as well as Europe.
The other side of the equation is the Renewable Energy Producers (RNRG). That should be much more utility-heavy portfolio, you can see there about 92% coming from utilities. It tends to be more developed market focus, Canada, New Zealand, and the United States being the major geographic segments. Again, very much more of a steady utility-like approach compared to the higher growth, higher risk potential reward of the broader cleantech space. That concludes the presentation from here, but we’ll pass it back to Stephanie for some conclusion remarks, and then we will open it up to Q&A.
Stephanie:
Great. Thank you all for such an informative presentation. Our speakers, as Jay said, will be taking questions, so please type those questions into the box to the right of your slides, and we’ll do our best to get to as many of those questions as possible. With that, Jay, I’ll turn it back over to you to take our first question.
Jay:
Excellent. Thanks, Stephanie. Getting a lot of questions in here, and we’ll do our best to answer a few here while sticking within the allotted time and then getting back to all of you in addition so we can make sur ewe address all those questions. First one, I’ll take this one. With the recent performance in various cleantech and renewables ETFs, are you concerned about valuations? For context, 2020 was a very positive year for both the cleantech and the renewable energy space. A lot of it, I believe, was a result of electoral results, Biden winning the presidency, and Democrats taking the Senate with a razor thin majority made it more possible that Biden’s infrastructure plan, which is inclusive of a transition to clean technologies, is likely to pass.
Of course, we’ve seen a few actions already happen since the election. Biden has reentered the Paris agreement. He’s ordered government agencies to start buying electric vehicles, but the major infrastructure package has not yet passed. That is, of course, the big bogie that I think everyone is looking for, so if we see that come through, most likely through some sort of reconciliation process in Congress which would not require more than a simple majority, you could see really a lot of upside from that single bill if it has a lot of the areas related to cleantech and the implementation of renewable energy policies.
Beyond that, I think taking a step back and thinking about thematic in general – or thematic investing in general, what we have seen through our own research and experience in this space is that valuations in many of these early themes are much less relevant than the growth rates of these themes. The fact that something is trading at a price to sales of two or three or four or five is much less significant than how quickly the revenues are growing in that space because if you’re trading at a five – a price to sales of five but growing at 30% a year, fast forward ten years down the road, that valuation doesn’t look that expensive anymore. It’s effectively that simple.
What we hope to see rather than focusing on the valuations themselves is that these companies not only achieve the expected growth rates but that those continue to accelerate. It’s really about looking at what are some of those accelerants that could move those growth rates even higher whether it’s people underestimating innovation in the case of technology, whether it’s people underestimating the likelihood of an infrastructure bill passing with certain cleantech earmarks, or beyond the United States looking at the global efforts to contain climate change or mitigate climate change and how that will stimulate the space as well. From our perspective, it’s much less about valuations and much more about those growth rates. I’ll pass off the second question here to Andrew. Does US energy policy matter when China’s the biggest polluter on the planet and continuing to grow quickly?
Andrew:
Yes, China is at the – when we think about the tons of annual CO2 emissions. In 2019, China was around 10 billion tons. The US was at 5.3, and then right below that we had India at 2.6 tons of emissions, so yes, China is leading in emissions on a yearly annual basis at this point in time. Both countries are immensely important to this overall story. First just looking at the – before we had that slide looking at governments addressing these issues and what that means for cleantech and renewables. US and China, they represent the top 35% of emissions globally, and very little has been done across the board on both of those fronts. That means on the legislative front, we really haven’t seen much done in the US or China, and what that really means is that there hasn’t been much need to scale that technology the way we really could in the United States.
The US is considered a center of innovation, totem for leadership in the Western world on many of these types of issues historically speaking. The US sets the tone in a way that China doesn’t, and despite some changes on this in the recent past, I do think the US’s role as an innovator, as a totem for technology in the world is really important for actually bringing this to fruition, so I think that on that front, that’s very important. The relationships with the rest of the Western world is extremely important for the United States on a geopolitical level, but then also when we think about the US leading the world in terms of oil production after a decade of soaring oil and gas production that really brought us to this point. I think that that is really necessary just in terms of the importance of the US on that, but I think that means that the US emissions are absolutely understated.
We do get a lot of questions when it comes to what about energy independence. I think in regard to that in terms of the US moving away from really relying on its own fossil fuels, I think that renewable energy sources do reflect energy independence in that you are generating electricity from the natural environment, and of course if you’re able to use indirect electrification like hydrogen and a number of different things for supporting infrastructure for actual electrified sources meaning that you have batteries to store power when the sun isn’t shining or when the wind isn’t blowing, I think that that’s really important. We did see in some of what happened in Texas was due to not really investing in the enabling sectors of renewable energy, cleantech being reflective of most of those enabling sectors and industries.
I do think that that’s immensely important, and because of – if the US were able to transition away from oil and gas in the way – obviously in a realistic sense wanting to continue to have a healthy economy and have healthy relationships with our trade partners, but a gradual shift over to renewable energy is very necessary for the US from that point of leadership. I also think the positive for employment and the upscaling of the workforce presented by this – solar sector is the fastest growing employment sector in the United States, and I think that that just is very reflective of the overall picture of this and the importance of the US’s leadership.
Jay:
Great. Thanks, Andrew. We’re getting several questions about the environmental impact of batteries themselves. Is there a safe way to dispose of batteries? Can they be recycled in a more environmentally friendly way? Pedro, I’ll pass that over to you.
Pedro
Yeah, absolutely. It’s really a great question and a very important one. We need to recognize that if we look at lithium-ion battery technology, which is the gold standard in battery technology that we’re using today in electric vehicles regardless of the chemistry structure that we see it’s really easy to recycle those batteries. Of course, because of the fact that electric vehicles still represent less than 3% of total vehicle sales, we’re not going to be seeing a huge increase in activity around recycling technology just within the next five years, but we do expect that by 2030 recycling activity is going to pick up. If you think about the fact that an electric vehicle – and the battery of an electric vehicle can last at least 10 to 15 years, by 2030 when we’re going to see a nice pick up in recycling activity.
That recycling activity is especially important because it’s going to be part of the supply of the key raw materials that are really important for the manufacturing side of these batteries’ technologies. If you think about lithium, for example. Lithium demand by 2030 is expected to be around two million metric tons of lithium, a carbonate equivalent. Just for context, in 2020, lithium demand and supply, it was around 300,000 metric tons of lithium, so it’s going to increase 6x just during the next ten years, and because of that, recycling is going to be an important additional supply that could mitigate some of the increasing demand from – for lithium by then. We actually expect that by 2030, around 5 to 10% of total lithium supply will come from this recycling activity.
It’s really important, and battery technology companies are actually working significantly on this area, not only here in the US but all over the world, even companies in China with Gangfeng Lithium, other companies in Asia, LG, Panasonic, all of them actually working very hard to increase their recycling efforts, but of course, like I said before, that’s going to be important over the next decade or so.
Jay:
Excellent. Thank you, Pedro. We are right at the hour so thank you, everyone, for joining today’s presentation. Really appreciate everyone joining today and listening to our discussion. If we didn’t get to your questions, we certainly apologize, and we’ll do our best to reach out to you in the next few days with our answers. If you like the research that you saw today, please don’t hesitate to visit our research portal at globalxetfs.com/research, or you can follow each of us on Twitter where we’re posting our latest research and insights on the space. Thank you all for joining and have a wonderful weekend.
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