A New Low-Carbon Asset Class

Emerging low-carbon assets can compete head-to-head with fossil fuels, without subsidies and at scale. These Canadian examples are the tip of the spear.

Some difficult math has come to light that makes traditional investors nervous. To limit global warming to safe levels (2C) we’ll need to leave nearly three-quarters of fossil fuels reserves in the ground. Period. Those reserves sit on the balance sheets of energy incumbents, and form the basis of their stock price. Under pressure from institutional investors, energy incumbents – including, recently, ExxonMobile – have started to reveal their carbon risk: the risk traditional reserves will become stranded assets. That means a collapsing share price, and negative returns for investors.

There are two ways for investors in traditional energy companies to relieve that pressure. First, divest. Stanford’s recent announcement that they were divesting from all coal assets brought that strategy into the mainstream. Expect more action on that front as investors get savvy to the inevitable carbon constraints of the 21st century.

A more productive strategy, however, is to invest in new low-carbon energy assets that replace traditional reserves. Emerging cleantech stars offer new ‘cleanfield’ developments that can beat fossil fuel at its own game – today – with significantly lower long-term risk. Here’s the kicker – they’re a better deal from a purely financial perspective.

Let’s look at a few homegrown, Canadian examples.

Woodland Biofuels are a next-generation biofuels company, and produce ethanol (a replacement for gasoline) from cellulosic fiber – agricultural, forestry and municipal waste.  Their process ‘gasifies’ the biomass at high temperatures, then converts it via a proprietary three-step catalytic process into ethanol. It’s like taking an old sweater, ripping it apart into its threads, and stitching it into something more valuable.

At an OPEX of $1.15/gallon, they’re positioned to be the lowest cost fuel producer in North America – including the energy incumbents. Project IRR is comparable to, or better than, oil & gas development, with a lower risk profile and higher long-term upside.

Here’s an apples-to-apples comparison of a 25,000 bpde oil or gas field development versus a financing of Woodland’s equivalently sized ‘field’ of ten commercial plants:


Woodland compares favorably on a project finance basis, but it’s when we look at a full analysis of ongoing risks and future upside that it really comes out ahead. Best of all is the long-term upside of an investment in Woodland.

There is negligible future upside to a depleting oil or gas field. On the other hand, the initial equity investment (here ‘development cost’) provides significant upside on sales and licensing agreements (directly and with third parties globally).

There are others.

Morgan Solar will be in the market this year with their much-anticipated concentrated photovoltaic technology. By guiding lots of sunlight onto small, but very efficient, solar cells they can significantly lower the cost of energy production: to around 5/kwh. That means solar projects that deliver returns in excess of 30%. The recent investment by a large Kuwaiti fund, with an intent to build production capacity in the mid-east, confirms these economics.

Hydrostor’s underwater compressed air energy storage (UWCAES) systems break the impasse of renewable intermittency. Compressors store energy by compressing air, accumulators on the bottom of lakes or oceans hold that compressed air, and the system re-delivers energy to the grid by running that air through an expander. A system being built in Lake Ontario for Toronto Hydro will demonstrate their technology is a better deal than a natural gas peaking plant. In Aruba, they’ll store wind energy generated all night long, releasing it during the day. Bottom line: wind plus storage is cheaper than diesel generation.

Woodland, Morgan Solar and Hydrostor are just three of many cleanfield asset classes. Cleantech has matured. Many emerging stars can compete head-to-head with fossil fuels, without subsidies and at scale. Investors who want to drive the transition to a low-carbon economy don’t have to accept second-best returns.

This new class of low risk, high value ‘cleanfield’ projects have better IRRs, lower risk, and longer term upside than traditional energy investments. Social finance doesn’t get any better than that.

Editor’s Note: Tom launched his second book – Waking the Frog: Solutions for Our Climate Change Paralysis – just last month. Check out the book on his site, and read Jennifer Stoneburgh’s piece on it!

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