In 2019 we published a white paper titled “The Teal Energy Deal”. This white paper is a follow up and will feature various solutions to facilitate the global transition to cleaner energy quickly and economically.

We believe that TortoiseEcofin is uniquely positioned as an expert on the energy transition and specifically the role that energy infrastructure companies will play in the evolving landscape.

TortoiseEcofin brings together strong legacies from Tortoise, with expertise investing across the energy value chain for more than 20 years, and from Ecofin, which unites ecology and finance and has roots back to the early 1990s. While the stigma in the oil and gas industry had long been to avoid the topic of climate change, that motto has shifted and big players in the industry are working towards constructive climate solutions. We believe the biggest energy companies in the world today will continue to be the biggest energy companies in the world 30 years from now.

Before we dive into energy transition and its evolving new technologies, we would be remiss if we didn’t take a moment to discuss the importance of the energy we derive from fossil fuels. The modern economy as we know it is dependent on fossil fuels and almost everything we count on in our daily lives is tied to it. Energy transitions are slow, typically lasting 50 – 80 years and occur at different paces globally due to regulations, the sway of incumbency, or uncertainty around new technologies. While the European Union and the United States are focusing on renewable development, India’s energy transition is investing billions of dollars to build its natural gas infrastructure. This investment will ween India off carbon intensive pollutants used for power generation to less carbon intensive liquid petroleum gases. While the energy sources may change from liquids to gases or from carbon intensive to carbon neutral, midstream infrastructure will remain instrumental in delivering energy to the global economy.

Access to energy, whether derived from fossil fuels or otherwise, is the key to improving people’s lives. Affordable energy has led to unprecedented improvements to the well-being of humans. Plastics, which are produced from natural gas liquids, are critical to manufacturing medicines, medical equipment (which was so critical in helping in the fight against COVID-19), and the building of water pipelines, wind blades, and solar panels.

Because developed economies are rich, we dismiss the energies the developing world needs for basic human dignity as dirty. Instituting policies to restrict domestic demand will simply result in the export of the energy and in turn sacrifice our energy independence to developing economies. For example, the United States’ energy independence will be exchanged for solar panels and batteries built by coal powered energy in overseas markets, such as China. Exporting our energy independence will lead to its own set of issues. The 2018 tariff dispute between the U.S. and China and COVID in 2020 awakened many companies to the risks embedded in their supply chains. Building a more environmentally friendly supply chain must not sacrifice the predictability of prices and supply for our current energy needs.

For the world to achieve the climate guidelines established in the Paris Accord, yet continue to provide more energy, a multipronged approach will be needed. The Executive Director of the International Energy Agency (IEA) Dr. Fatih Birol stated “almost half of the emissions reductions needed to reach net zero by 2050 will need to come from technologies that have not reached the market today.” The economic prize for disrupting the current global energy sector is substantial with an estimated total addressable market of over $11 trillion¹. The approach to achieve a net-zero economy will be two-fold: 1. decarbonizing carbon emitting sectors and 2. increasing electrification across the various sectors.

According to the Oil & Gas Climate Initiative (OGCI), approximately 23% of current global warming is a result of methane. Though it stays in the atmosphere a shorter amount of time than CO₂, methane is significantly more potent. The Intergovernmental Panel on Climate Change (IPCC) estimates methane to be 28 to 36 times more potent over 100 years than an equivalent amount of CO₂. Unlike CO₂, methane has immediate commercial value when not emitted.

Despite EPA performance regulations around methane emissions switching between Presidential Administrations the energy industry remains focused on emission reductions across the value chain. ONE Future, a group of 40 energy companies, including several midstream companies, has been focused on reducing methane emissions since 2014. Within midstream, Kinder Morgan highlighted its 25+ year focus on emission reduction and the company’s 2019 actual methane emissions resulting in just of 0.03%. Williams Companies pointed to methane emission reductions as a way to achieve up to 15% of its 2050 net zero target while MPLX LP is targeting 50% methane emission reduction by 2025. On a broader energy platform, EQT and Southwestern Energy have invested in pilot projects in which gas will be constantly monitored for methane emissions to demonstrate production of Responsibly Sourced Natural Gas. Utility CMS Energy detailed plans to meet a net-zero methane target by 2030, spending $400 million/year and large cap energy companies including BP, Chevron and ExxonMobil are pursuing climate initiatives through OGCI membership. Cheniere Energy, the largest U.S. LNG exporter, announced plans to start tagging every LNG cargo that is shipped starting in 2022 with a GHG emissions report. Consumers and companies are progressively committed to achieving environmental targets and are willing to pay a premium to have emissions reduced from wellhead to end user consumption.

Of all the potential new energy technologies, hydrogen could end up developing into a primary long-term alternative as a decarbonizing fuel. According to BloombergNEF’s Hydrogen Economy Outlook, hydrogen is estimated to potentially make up 24% of the world’s energy needs by 2050, growing from limited industrial use today to displacing fuels used in power, transportation, and heating. Hydrogen as a fuel source offers potential for CO₂ abatement in currently hard to reach sectors, such as high heat use industry. Hydrogen produced by electrolysis that is powered by renewable generation, noted as green hydrogen, is carbon free but not yet cost competitive. Today, making green hydrogen using carbon-free electricity can cost four to six times more than making hydrogen from fossil fuels. Those costs are expected to fall with advances in electrolysis efficiency, lower costs of renewable energy inputs, and economies of scale from the industrial hubs being built around the world. New Fortress Energy is developing one of the first green hydrogen production projects in the U.S. The company’s gas fueled power plant in Ohio plans to run 15-20% hydrogen in its gas mix by November 2021 and 100% hydrogen in the next decade.

Power produced with natural gas with carbon capture (i.e. blue hydrogen) could be the most prevalent opportunity for hydrogen over the next decade. Blue hydrogen offers more affordable pricing driven by the vast amounts of gas reserves already identified globally. Blue hydrogen is scalable and can serve as a reliable fuel in the coming decades by leveraging existing energy infrastructure and allowing green hydrogen costs to continue to decline. Blue hydrogen can capture 95% of CO₂ emissions, nearly putting it on par with green hydrogen, but at a much more affordable price. There should be ample opportunity for these solutions, particularly near industrial complexes.

Energy infrastructure companies are beginning to invest in hydrogen infrastructure projects with natural gas pipeline and distribution companies analyzing how hydrogen could be transported through their pipelines. For example, operators have begun to assess the near-term ability to mix hydrogen into the natural gas stream in existing pipelines and generally believe current systems could handle anywhere from 10%-30% hydrogen with minimal capex. Pipeline embrittlement, if hydrogen content gets too high, and additional compression (due to hydrogen being less dense than natural gas) are areas where investment will be needed. Still retrofitting an existing pipeline will be much less costly than building a new pipeline. Pipeline companies, with their rights of way and engineering expertise, should be well positioned to retrofit existing pipelines or build new pipelines transporting hydrogen. By leveraging existing natural gas infrastructure, the energy transition can be accelerated to support the transition towards zero carbon fuels.

Battery storage, along with hydrogen are energy‐technologies with some of the highest potential to accelerate the pace of decarbonization. Lithium-ion remains the preferred, low-cost battery chemistry and companies are using software to optimize lithium‐ion battery storage. Other companies are exploring different chemistries using zinc and solid‐state to lengthen battery storage.

One hundred years ago, mobility changed significantly as the horse buggy was replaced by the Ford Model T. That transition took around two decades between 1920 and 1940. Today, the transportation sector is again on the precipice of significant changes as vehicles transition from internal combustion engines to electric vehicles. We expect electric vehicles to reduce carbon emissions in the transportation sector in the coming decade just as wind and solar installations drove down carbon emissions in the power generation sector in the last decade.

The transportation industry comprises approximately one-fifth of the 33.9 gigatons of carbon emissions worldwide, according to the IEA’s Net Zero by 2050 report. In Europe, countries such as the United Kingdom, the Netherlands, Sweden, Germany and France are phasing out the internal combustion engine or ICE vehicles over the next two decades. In the U.S., California passed regulations requiring half of trucks sold in the state to be zero emissions by 2035 and 100% by 2045. Electric vehicle (EV) penetration rates are expected to increase as the cost of lithium‐ion battery packs decline from $200 per kilowatt‐hour (kwh) today to $94/kwh in 2024 and $52/kwh in 2030. EVs could reach price parity with ICE vehicles in the U.S. and Europe between 2024 – 2026 and in China between 2028 – 2030⁸. To facilitate this transition, electric vehicles, battery storage, and EV charging stations will be critical components.

The number of electric vehicles has continued to grow rapidly but off a very low base. The electrification of the transportation sector has evolved at various paces for the different automotive and freight fleets globally. According to the BloombergNEF 2021 Long-Term Electric Vehicle Outlook, there are 12 million passenger EVs on the road globally today and amounting to just 1% of the global fleet. Passenger EV sales are projected to skyrocket in the coming years, going from just over 3 million vehicles in 2020 to 14 million vehicles in 2025.

This rapid growth won’t be without challenges. Mineral resources such as lithium, cobalt, manganese, and graphite are critical components into making the electric vehicle and its batteries. The IEA projects demand for these minerals from electric vehicles and battery storage will grow at least 30x by 2040.⁹ As battery costs have come down through technological advancements, raw materials are becoming a larger part of the battery cost structure. If those input costs rise because of supply limitations that could offset price reductions seen from economies of scale.

There are also unanswered questions and concerns about the geographical concentration of these rare minerals. In 2019, The Democratic Republic of the Congo (DRC) and People’s Republic of China (China) were responsible for some 70% and 60% of global production of cobalt and rare earth elements respectively according to the IEA⁹.The single country concentrated risk for these minerals cannot be ignored. Onshoring parts of the global supply chains for these minerals such as refining or processing, if possible, could be a helpful first step in eliminating some of this concentrated risk. Finally, the same environmental and social concerns that exist for fossil fuels need to be considered in the production of rare earth minerals.

With the electric vehicle market poised for tremendous growth auto manufacturers will rely on and provide incentives to charging station developers to provide adequate charging infrastructure. Over $450 billion of investment is expected in charging infrastructure by 2040, with public infrastructure making up 45%¹⁰. The U.S. Department of Energy Alternative Fueling Station Locator showed over 49,000 charging stations as of June 2021. President Biden’s American Jobs Plan includes programs to build a network of 500,000 EV chargers by 2030.

Despite the large and growing number of charging stations, to change consumer perceptions around range anxiety, massive expansion will continue to be required. Drivers have been spoiled by the great number of gasoline stations across the country and investments will be required to assure there are an adequate number of places to recharge EVs. We expect the charging networks will ultimately be defined by consumer needs. There are EV chargers in retail areas where drivers can leave their car to charge while doing other things such as shopping or working. Other types of automobile fleets will require, and likely outsource, charging infrastructure development including car rental agencies, delivery services, and large consumer brands. Finally, the proliferation of ride sharing provides an investment opportunity for charging infrastructure used by employed drivers. Both Uber and Lyft have partnerships with EV charging station providers and Uber has stated on its website it will invest $800 million through 2025 to help drivers switch to electric vehicles.

Improved battery technology will reduce battery anxiety and will likely increase the adoption rate of EV transportation. While in-home charging is expected to be the primary power source for traditional car owners, additional value lies in location and rapid development of charging speeds seen in DC Fast Charging model. With more consumers operating electric vehicles, increasing charge rates from DC Fast Charging will be critical to the electric vehicle growth story. EVgo forecasts a 100-mile charge time could be as low as 5 minutes at a 350kW DC fast charging station versus 3.3 hours for a Level 2 charging station.¹¹

The final major industry which can help drive decarbonization is agriculture. Agriculture is unique among the sectors already discussed because of its potential to help achieve net-zero emissions thorough negative carbon intensity. Greenhouse gases arise in numerous ways including the decomposition of mineral fertilizer, methane from rice production and the digestive process from ruminant livestock such as cattle used in farming. Capturing methane emissions from landfills and biosources and producing renewable natural gas and renewable diesel respectively, are two of the largest areas of focus. Both alternatives are considered nascent but are rapidly growing and will offer opportunities for midstream companies to participate in the energy transition.

Renewable natural gas (RNG) is the product of naturally occurring methane produced when waste products decompose and undergo a treatment process turning the resulting methane mix into a synthetic natural gas. RNG takes organic waste that would otherwise decay, emitting methane, and instead replaces fossil fuel based natural gas, making it GHG neutral. RNG is considered carbon-negative if it is produced from waste products that once absorbed carbon dioxide. Today, a majority of RNG is a product of landfill gas, but similar processes undertaken on farms, at wastewater sites and using food waste also can produce RNG.

The production of RNG in the U.S. is estimated to have totaled nearly 60 trillion BTU in 2020, relative to over 34,000 trillion British thermal units (BTU) of fossil fuel-based natural gas. Most RNG projects are a product of local government incentives as costs of production and distribution of RNG remain far from competitive with fossil fuel-based natural gas production. RNG production from landfill gas costs anywhere from $7 to $20 per mmbtu with other sources costing up to $35 per mmbtu.

While RNG economics are driven by tax credits today, midstream energy companies are getting involved in the RNG supply chain. Kinder Morgan, in July 2021, announced an acquisition of Kinetrex Energy, an RNG producer and supplier. The RNG business is highly complementary to KMI’s existing business, as RNG is molecularly the same as methane and can flow on KMI’s network of gas pipelines. Williams Companies (WMB) is blending RNG produced on dairy farms and landfills into its natural gas streams and numerous gas utilities are developing plans to integrate RNG into their gas distribution systems as they continue to receive social and regulatory pressure to reduce carbon footprints.

The opportunities for renewable natural gas should continue to grow in the coming years. SoCalGas, which serves over 20 million customers and is the largest U.S. natural gas distribution utility, plans to deliver 20% renewable natural gas to its customers by 2030.¹²