here a DD focused on RNG and Natural Gas developments in the USA, as previous one was more broad and had the intention to outline the state of the industry worldwide.
As you may know, California has always been at the center of attention as the most advanced state in terms of decarbonization efforts. Yet, it seems that not all decisions paid back in terms of quality of life and certainty of business activity.
Californian Natural Gas power plants shut down, electricity imported from other states:
Indeed, California, different from what someone would expect, has not a good and reliable supply of electricity, probably because it pushed too aggressively for the state's 100% electrification goal (see attached picture). During the most recent blackout in August 2020, some Electric buses were forced to shut down, in order to reduce electricity demand. In the next decade, virtual power plants' alike experiments will be more popular, therefore it is reasonable to expect a better match between the demand & supply of green electricity. But it will take time and for safety reasons, it would be better to rely on different sources of energy.
- 2020-08-21 Washington Examiner: California forced to defend green goals amid blackouts
- 2020-08-23 Oil & Gas 360 : Green California has the nation's worst power grid
The first question that arises, reading these topics, is about the never-ending announcements of companies like Nikola $NKLA (very dubious business potential) and Tesla $TSLA (amazing company with incredible potential) about the incoming, quick and easy electrification of Heavy Duty Transports.
Hydrogen Alternative Focus
Nikola revealed its lack of technological breakthrough when it was revealed that General Motors had the intention to market a Hydrogen trucks with the Nikola brand and…… GM Fuel Cells!! The drama related to the CEO trials made the rest. I am a huge fan of hydrogen , but as Cummins $CMI CEO confirmed, hydrogen trucks have a long long way to go before being adopted on a large scale (please note that Cummins acquired Hydrogenics in Sept. 2019 (second global leader after $BLDP in hydrogen fuel cells). According to Cummins and others, in the next years electrolyzer segment will grow first. Note that the hydrogen fuel needed for hypothetical trucks on California's road would need green hydrogen, thus it will put more stress on the grid.. Even if it is not focused on the US, I recommend readers this report of David Fickling about global green hydrogen potential by 2050.
According to David Fickling, hydrogen could meet 24% of the world’s energy needs by 2050, but it would likely take 31’320 TWh of electricity to hit this level. Last year, the entire world generated just roughly 26’000 TWh, of which 10’000 were coming from zero-carbon sources. By 2050 it may be achievable, but there are shorter deadlines for the transport sector. Actions today are required to match 2025 and 2030 emission targets.
If we want a high percentage of green hydrogen, a huge amount of grid investments is required today; high-tension grid infrastructure needs 5-10 years to be completed, therefore it is reasonable to say that hydrogen will be a sound reality for mobility from the late 2020’s on, not earlier. In addition, the potential of exhausted salt mines that could store hydrogen for months is just theoretical for now.
It is worth to remember that the sources for electricity generation in Europe are diversified and are not ready for a 100% renewable energy scenario:
- Germany renounced to nuclear power in 2011 and will renounce to coal by 2030, and the country is massively investing in gas pipelines, so it is very likely that it will not renounce to Russian gas.
- France relies heavily on nuclear power, with some of these power plants being soon too old to remain active. Therefore, traditional gas generation will be a likely alternative to overcome this problem.
- The UK closed all its coal power plants but decided to keep open nuclear and gas facilities.
- Italy relies heavily on gas and does not have any nuclear power plant.
None of Europe’s largest countries can afford a 100% green electricity sector that can satisfy both current demand plus the incremental demand coming from the green hydrogen sector. Therefore, some fossil fuel (natural gas) and nuclear plants are here to stay for the longer term.
BLUE HYDROGEN CANNOT BE IGNORED – The argument is different if we include in the discussion blue hydrogen along with carbon capture. In this scenario, we would need massive incentives and research investments in carbon capture technology, which now are still at an early stage. According to the European Commission President Ursula Von Der Leyen, who spoke at the World Economic Forum in January 2020, the EU will define the structure of a continental carbon tax by the end of this year (pre-COVID-19 intention, very likely now that the details will be published in 2021). For this reason, large trade partners like the US and China were advised to start their own studies on the tax, if they do not want their goods to be taxed at the highest possible carbon emission rate.
HYDROGEN TRAIN FOCUS – An interesting case in this regard is the Hydrogen train developed by Alstom and Hydrogenics (now Cummins Inc.) whose adoption has been delayed considerably. Alstom was able to sell its innovative product to some German and French regions. Nevertheless, in most of the cases hydrogen will come from fossil sources (Rhyne region etc.), with cleaner alternatives being provided at a later stage. In the region of Schleswig Holstein, where the green potential was massive, Alstom could have got the greatest commercial order for a hydrogen product worldwide; however, the green fueling station was at the heart of a controversy between the company and the tender offer authorities of Schleswig-Holstein. For this reason, 52 trains were allocated to the battery train manufacturer and the Alstom (Hydrogenics) & NEL consortium lost the tender offer. The proposed fueling station was massive for the time, being around 20 MW capacity, but the cost of it was at the expense of the consortium.
BEV Infrastructure focus
Tesla instead kept postponing the launch of its Tesla SEMI. You can read again the last conference call transcripts which clearly states that the biggest issue from a product perspective is the fast charger technology, whose time of realization and commercialization is yet unknown. From a macro perspective instead is unclear how California may afford to charge thousands of Tesla SEMI with its current electricity grid.
How does $CLNE fits into all this?
If you look at 2020 Q2 CC of $CLNE , management made a quite useful comparison for H2 fueling stations and BEV charging stations for heavy-duty. They told the story of a recharging facility in Los Angeles that was going to be built for $5.5 million to recharge 24 heavy-duty trucks in a day’s time, in like 20-hour time, using the equivalent of the electricity needed for 44’000 homes (!!!). Thus, it is reasonable to expect not many fleet operators to switch soon to BEV trucks.
About hydrogen refueling, management commented on the experience they got operating a hydrogen station in California with on-site hydrogen generation through electrolysis:
“Get a load of this, it requires about 20 gallons of water (each gallon is 3.785 liters) for every gallon of hydrogen you produce. So march that out on a nationwide scale. And the idea that we're going to do it with renewable sources at a station is going to be very daunting, okay?
I think that as you look at commercial truck stops with hydrogen, you're probably looking at something on the order of $15 million to $20 million, or more, per station. So this is a very expensive proposition because you're basically creating a whole new network. And really, the most successful stations around the world, and there's only a handful of hydrogen, is you're reforming natural gas.”
It is clear why some fleet operators are switching to Natural Gas Trucks. Amazon in February and the Port of LA recently, with the decision to equate BEV and other Zero Emission trucks to the Natural Gas ones.
US Congress "Californification" , not so fast
In the past legislative period, there were some bipartisan attempts to support RNG and Natural Gas mobility. US Congress has indeed shown some interest in the subject. Last June, a bipartisan effort was introduced in both the chambers of the US congress. The bill is called “Growing Climate Solutions Act” and would allow farmers to generate revenue streams from different forms of carbon capture. Most notably, methane from livestock is mentioned in the legislation. If enacted at the federal level, decarbonized gas would receive a renovated interest from many different stakeholders. Being a bipartisan deal, as farmers represent a prized electoral category, it should be enacted regardless of the next election results.
President Biden needs to show to his party and the American people that he is doing something about the environment. That is why he advertised the Ford BEV pickup and keeps saying that government's fleets will be electrified. As always, the political reality is much more complex than the headline announcements, and RNG has a lot of room to grow in this space.
Already in 2020, RNG represented 53% of all Natural Gas used in transport in the USA . As noted in a previous DD, in California RNG is 90% of NG used in transport.
Let me know if you have further questions!
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