When key stakeholders are examining sustainability solutions, they aren’t spending enough time on whether these solutions are actually capital efficient from energy return on investment and productivity perspectives, said Patrick Kent, portfolio manager and head of the small-cap equities team at Newton Investment Management Group, during the Canadian Investment Review‘s 2023 Global Investment Conference.
The haste to focus on one angle — decarbonization — may cost us in the long run, he cautioned.
Productivity is energy use — the conversion of net energy available into efficiency, he said, noting the conversion is what drives the global economy. Any discussion about a carbon budget or depletion of natural resources must include the context of the efficiency their usage provides, as well as their cost in order to make the system function, he added.
“If net energy and the conversion efficiency drive the economy then we have to think about that energy production or net energy [as] the . . . [investment] in creating it.”
Although renewables are very energy intensive to make, technological improvements are helping many renewable resources climb up the scale in terms of energy ROI, said Kent. Solar and wind are improving over time and, more importantly, there’s quality adjustment because they create electricity, which has a high conversion rate of efficiency.
There has been a lot of talk about creating more renewables, with companies and governments spending trillions on building out these resources, he noted. But transitioning all energy use to renewables is incredibly capital intensive, he added, suggesting companies and governments look more closely at promoting more efficiency gains.
“Every industry where electricity becomes a bigger component of the inputs shows higher efficiency . . . because electricity converts to work at over 90 per cent efficiency. That’s why . . . we have to do a quality adjustment, when we look at, say, solar or wind production. These are producing electricity directly. So even though the [energy] ROI looks very low at a system level, when you take into account the conversion efficiency, as we change over to electrify processes, we improve that efficiency quite a bit.”
Electrification in most processes is almost an inevitability, said Kent, noting whether or not the shift is pushed through subsidies, the reality is it will get there no matter what because it’s just more efficient. “The way . . . energy efficiency will increase, is [by moving] more and more things towards electrification. There is no way to get to . . . [a net-zero] carbon grid without continuing to have nuclear as a component of this.
“One of the most unsustainable and capital destructive things we do is making things like corn ethanol and somehow convincing ourselves that this is a solution to decarbonize,” he added. “By comparison, nuclear has enormous energy density and very few carbon emissions associated with it. And . . . it produces electricity.”
There’s talk of new technologies around small, modular nuclear, said Kent, and there has also been a huge surge in private investment in fusion. “There are companies that are moving this [industry] forward in the private space . . . and I suspect we’ll hear some pretty compelling things from them in a few years. In the meantime, we do have fusion — and nuclear is here.”
He also questioned whether hydrogen, which is capturing the attention of some institutional investors, is worth pursuing at all. “Hydrogen is . . . the smallest, most corrosive element in the universe — it reacts with everything. . . . We have to split it to create it, which takes energy, lowering that conversion efficiency.”
Since there are still services — like cement and steel production — with high heat processes, Kent reiterated that stakeholders need to consider combining small modular nuclear with hydrogen production.
Despite his confidence about the compelling nature of some emerging renewable energy technologies, he said it’s difficult to imagine humanity escaping from its reliance on fossil fuels by the middle of the 21st century. “Never in history have humans stopped using one energy source because another became available.”
Read more coverage of the 2023 Global Investment Conference.