We expect major upheavals in the financial markets over the next few years. In this article we explain our cyclical framework for these challenging times and why you should invest in commodities now.
Published: 16th of June, 2021
t o r c k c a p i t a l m a n a g e m e n t
Energy Revolution – Part 5
Delayed transformation of the heating sector creates backlog of demand for critical minerals
12th of October, 2021 - torck capital management AG
In our last blog article, “Mineral Demand Driven by Electrification of Transport Sector”, the electrification of the transport system was at the centre of discussion. Being one of the most fossil fuel-intensive sectors, we discussed how the trend in the adoption of EVs worldwide is expected to both drive half of the demand growth for critical minerals from clean energy technologies and to significantly contribute to the goal of net-zero emissions by 2050. The heating and cooling sector is another main contributor to the current level of global greenhouse gas (GHG) emissions. The acceleration of the electrification of the heating and cooling sector is, therefore, a crucial component of the next stage of energy transformation. Its decarbonisation potential and the significance of the transformation within the sector for mining companies are the subject of this article.
In fact, heating and cooling demand accounts for around half of global final energy consumption (see Figure 1), of which in turn 50% is consumed in industrial processes, while another 46% is used in residential and commercial buildings – for space and water heating and, to a lesser extent, for cooking. The remainder is used in agriculture. Most of the energy used in heating and cooling comes either from fossil fuels or inefficient uses of biomass (i.e. the burning of wood, crop residues and animal dung for cooking and heating in areas that lack access to energy). Consequently, the sector is a major source of air pollution and accounts for over 40% of global energy-related CO2 emissions. Even in areas where power grids are lacking or access to energy is otherwise inadequate, (decentralised) renewables-based solutions can play a vital role in addressing the sector’s level of GHG emissions.
And the demand for heating and cooling is set to keep growing. In our first blog article on “Exponential Opportunities: The Need for an ‘Energy Revolution’” we discussed the consequences of global warming that were felt across the globe this summer. Even in a best-case scenario of greenhouse gas emission reductions the IPCC forecast that the world is likely to temporarily reach 1.5°C of warming within 2040. Cooling demand has already tripled globally since 1990, and as extreme weather events are predicted to become more frequent and intense the demand will keep growing.
To be in line with the IEA’s Sustainable Development Scenario (SDS), which maps out a way to meet net-zero emissions by 2050, the share of clean energy technologies such as heat pumps, solar thermal heating, low-carbon district energy systems and biomass boilers, as well as hydrogen boilers and fuel cells, needs to exceed 50% of new heating equipment sales by 2030. However, the heating equipment market continues to be dominated by fossil fuel-based equipment and less-efficient conventional electric heating technologies, which make up almost 80% of new sales. Therefore, energy use for heating and cooling remains largely based on fossil fuels. In 2019, 77% of heating and cooling demand was met with fossil fuels and non-renewable electricity. 11.9 % were additionally covered by the traditional use of biomass (see Figure 2).
Policy makers have so far given limited attention to the policies required to accelerate the transition of heating and cooling to renewables. At the end of 2019, only 49 countries – mostly within the European Union – had national targets for renewable heating and cooling (see Figure 3).
Nevertheless, sales of heat pumps and renewable heating equipment such as solar hot water systems have increased slightly, representing more than 10% of overall sales in 2019. The direct use of modern renewables – including sustainable bioenergy, solar thermal and geothermal heat – met 8% of demand for heat and cooling, with renewable electricity accounting for an additional 2% (see Figure 2).
Currently, fossil fuels continue to benefit from government support in many parts of the world, which has resulted in inefficient market prices that do not accurately reflect externalities. Subsidies for fossil fuel consumption were estimated by the IEA to have reached $400B in 2018 – 19 times the support provided for renewables, which came to approximately $166B in 2017. As a result, the clean energy transition in the heating and cooling sector has been delayed by deterred investments into renewable solutions.
However, the clean energy technology transition in the heating and cooling sector has emerged as an urgent priority for countries striving to fulfil their climate commitments under the 2015 Paris Agreement. Policy makers now have to overcome higher capital and fuel costs for low carbon solutions through financial and fiscal incentives, such as tax credits, loans schemes, direct subsidies and accelerated depreciation. The complexity consists in the range of technology options, both in terms of the primary energy supply and the conversion available to support the transition, and local variations including climatic conditions, existing infrastructure such as district heating networks or gas grids, and available local renewable resources. The IEA has identified five transition pathways and focuses on district heating and cooling as a key enabling infrastructure towards efficient and renewable heating and cooling.
Of particular interest is the pathway of a renewables-based electrification that supports quick and substantial reductions in carbon emissions wherever the electrification of end uses in buildings and industrial processes is possible. This pathway is expected to further drive the demand for critical minerals as it combines efforts to increase the share of renewables in the power sector and electrify heating and cooling solutions at the same time. Mainly, the deployment of mineral-intensive variable renewable energy from solar and wind will be required to meet a higher electricity demand from the heating and cooling sector. Together with EVs, the electrification of the heating and cooling sector could help to raise the share of electricity in total global energy consumption from 20% in 2018 to 49% by 2050. The expansion and upgrade of electricity networks required to accommodate the rising electricity demand will be discussed in more detail in a later blog article, but the demand for copper and aluminium for electricity grids could double by 2040 in the IEA’s SDS. Currently, costs for copper and aluminium represent around 20% of total grid investment.
The range of electric heating and cooling technologies in buildings and industry, as well as their end uses are shown in Figure 4.
From the technologies listed, heat pumps could play a major role in the energy transition by electrifying heating and cooling in both buildings and industry. Efficiency gains from the deployment of heat pumps are ranging from two to four times higher than conventional heating systems. In the buildings sector alone, the switch from fossil fuels to high-efficiency heat pumps is expected to be the main driver of GHG reductions from 2020 to 2070. Yet they still meet only a small share of global building heating demand – around 5% in 2019. However, in many countries heat pumps have already become the most common technology in newly built houses and their share of building heating demand triples by 2030 in the IEA’s SDS. Subsidies since 2015 have proven effective to accelerate the uptake by offsetting the comparatively high upfront cost.
Long-standing district heating and cooling networks also play an important role in the transition of the heating and cooling sector as they allow a large-scale penetration of renewable sources. These systems combine one or more sources of heat with networks of pipes that deliver hot or cold fluids to a residential block, a neighbourhood, a district or even an entire city. District heating and cooling is generally more energy efficient than decentralized systems and offer a cost-effective way to particularly heat and cool urban areas. Currently, the supply of district heating and cooling is dominated by fossil fuels such as coal and fossil gas. However, these systems provide opportunities for a shift to renewables such as bioenergy, geothermal energy, heat pumps using renewable electricity, and solar thermal energy. Gas grid infrastructure and storage, moreover, can be upgraded as needed to accommodate the deployment of renewable gases (biogas, biomethane, green hydrogen). The process of coupling power generation with heating and cooling is illustrated in Figure 5.
The planet's future depends on the transformative decarbonisation of societies, which, in turn, depends on the use of clean, sustainable, renewable energy to meet the heating and cooling needs of the world's population. Solutions are ready for the taking, with a little push from politics, as are the promised rewards for investors of mining companies that ensure the adequate supply of critical minerals for the transformation to be realised.
Continue reading with part 6 here.
About torck capital management
torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – launched at the end of September 2021 – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.
Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.