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Investing in Natural Resources In a Changing World (Part II of V)

Investing in Natural Resources In a Changing World (Part II of V)
– The Fossil Fuel-Free Energy of the Future

Issues to be addressed in this paper

In Part I of this research paper, I focused on primary energy, i.e. all the energy forms used in power plants every day to generate electricity. Most importantly, I argued that fossil fuels, which account for no less than 85% of primary energy worldwide today, will be phased out as soon as there is a viable alternative.

Many seem to believe that renewables, mainly wind and solar, offer such an alternative but, given the current technology constraints, I argued that relying on renewables for most electricity generation before the underlying technology improves would be a mistake. In this second part, I will look more closely at some of the ongoing research programmes that, if successful, could eliminate all need for fossil fuels.

I deliberately say all. For years, I have argued that oil will almost certainly not be completely phased out any time soon, as oil is a critical ingredient when manufacturing various plastic products. New research that I have been introduced to in preparation for this paper suggests otherwise, though, but more about that later.

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In terms of ongoing research into a fossil fuel-free future, I have chosen to focus on two particular programmes:

  • Conversion of electricity to hydrogen; and
  • Introduction of fusion energy.

I am sure there are one or two other interesting projects underway, but all the research I have come across in preparation for this paper suggests that the eventual solution will be one of those two and probably a combination of them both.

Before going any further, I should point out that neither the hydrogen programme nor fusion energy is ready to be rolled out tomorrow morning. In other words, as the pressure to reduce greenhouse gasses mounts, policy makers will look at other solutions, and that is where SMR nuclear enters the frame. SMR nuclear is not a fundamentally new technology, though, but rather an adaption of an already existing technology, and it was discussed in much detail in Part I. There will therefore be no further mention of it until we reach Part V.

In the following, you will note that I make lots of references to Denmark. There are two reasons for that. Firstly, Denmark is a pioneer in the area, i.e. many cutting-edge findings come from there. Secondly, DTU (the Technological University of Denmark) has kindly provided much of the research that I use in this paper. Thank you to them for doing so and thank you to Anders for making the contact.

Talking about Denmark, a survey recently conducted there suggests that the average private household wants a green solution but only if it is cost-competitive. The Danes are known to be relatively conscious about our environmental challenges, so the fact that they prioritise cost over environment tells you what policy makers are up against.

How hydrogen can replace fossil fuels

There are at least two reasons why it makes sense to convert electricity to hydrogen. Firstly, as mentioned in Part I, both wind and solar are unreliable fuels. It may be too windy, or the sun may be obscured by clouds for much of the day. In other words, sometimes you generate too much, and at other times not enough, electricity if you rely on renewables.

Secondly, although governments all over the world are keen to electrify as much transportation as possible and as quickly as possible, not all transportation vehicles are equally suited to being electrified – HGVs, aircraft and ships in particular, all of which run on fossil fuels today. A green solution other than electricity for those types of transportation vehicles is therefore needed.

Hydrogen can be found in water (H2O). Using the electrolysis technique, H2O is split into its two components – hydrogen (H) and oxygen (O) – see also Exhibit 1 below. At first, the hydrogen released is a gas but, by having it react with CO2, it is turned into liquid hydrogen (methanol) which is much less flammable and safe to use in transportation vehicles. Assuming the electricity used in the electrolysis comes from a renewable energy form like wind or solar, and that the CO2 required comes from power plants that burn biofuels, the net result is a dramatic reduction of anthropogenic CO2 emissions.

Exhibit 1: Hydrogen production in electrolysis

The technology works already but is deemed too cost-ineffective to be commercialised. According to DTU, fuel produced this way is still about 2.5 times more expensive than the fossil fuels used today, mostly because the catalysts used in the electrolysis are disproportionately expensive. As per Jens Nørskov, professor at DTU, the way forward is to identify more cost-effective catalysts, so that’s where DTU’s research is focused.

Having said that, a handful of heavyweights in Danish industry (Maersk a.o.) have recently formed a partnership which will:

… develop an industrial-scale production facility to produce sustainable fuels for road, maritime and air transport in the Copenhagen area. The partnership brings together the demand and supply side of sustainable fuels with a vision to realise what could become one of the world’s largest electrolyser and sustainable fuel production facilities.

(source: Maersk)

It is expected that the new plant will have a total capacity of 1.3 gigawatts, which would make it by far the largest facility of its kind anywhere in the world. The production from the fully scaled-up facility should reduce annual CO2 emissions by 850,000 tonnes.

The wider prospects

When converting electricity to liquid hydrogen, which can then be used to fuel vehicles which are unsuitable for electrification, you replace environmentally damaging fossil fuels with environmentally friendly electrofuels (aka e-fuels). At least in Denmark and probably worldwide, it is expected that, eventually, e-fuels will entirely replace fossil fuels in heavy transportation vehicles. As already mentioned, for hydrogen gas to be converted to liquid hydrogen, CO2 shall be required. Suddenly, CO2 becomes a valuable asset rather than the liability it is considered to be today.

One could argue that we haven’t solved the CO2 problem by burning e-fuels rather than fossil fuels. Whatever we burn, CO2 will be the outcome. However, the researchers at DTU argue that is a silly argument. If anything, we won’t have enough CO2, if we fully convert from fossil fuels to e-fuels, they say.

The process is also known as Power-to-X, where “Power” stands for electricity and the “X” suggests that electricity can be converted to x things. Interestingly, Power-to-X is no new concept. During World War II, the German army had only limited access to fossil fuels but, by using a method known as Fischer-Tropsch, it converted coal to a liquid fuel. Towards the end of the war, the entire German army used this fuel. The economics were poor, but Hitler had no choice.

The economics of Power-to-X are similarly poor today, but it is still early days, and the technology will almost certainly improve. Furthermore, as we produce more and more electricity from renewables, there will, almost by definition, be long periods of time where we produce too much electricity, and that alone will reduce the cost of Power-to-X meaningfully and thereby widen the scope of commercially viable applications.

In research laboratories around the world, liquid hydrogen is already being used to produce many chemicals. Likewise plastics, all of which require oil in the manufacturing process today, and the opportunity set is even wider. A while ago, the researchers in Denmark came to the conclusion that their approach was too narrow. Converting society from using fossil fuels to using e-fuels when going from A to B or producing various plastic products with e-fuels are two great opportunities, but they are far from the only ones, they realised.

Take for example the escalating demand for protein-rich food which is a function of rising living standards across emerging markets. Rising living standards is great for society, but it stresses the world’s freshwater resources, as no less than 60% of all freshwater consumed worldwide today is consumed by the agricultural industry. Researchers have now found that, by combining CO2 with various bacteria, electrolysis can be used to produce protein.

What shall be required?

Summing up the status of the Power-to-X research programme, there is pretty compelling evidence that we have a feasible solution on our hands which is as green as it gets. That said, commercialisation is predominantly a function of cost so, first and foremost, we need to bring the cost down. If liquid hydrogen is about 2.5 times more expensive than fossil fuels, only the wealthiest countries can afford to convert and, even in those countries, the impact on economic growth would be devastating if we were to convert today.

A critical hurdle to a cost-effective solution is our ability to identify more effective catalysts. Almost all catalysts used today are rare materials and thus quite expensive. We need to identify new catalysts that are not only more effective but also less expensive which is why much research is dedicated to this particular area.

A second, and equally important prerequisite is the ability to scale up. The world consumes about 100 million barrels of oil equivalents per day – quite a formidable number which is not easy to replace. For that to happen, a gigantic amount of capital will have to be invested in plants like the one in Copenhagen that I mentioned earlier.

Fusion energy – the real game changer

However promising Power-to-X is, the real game changer will be fusion energy when it is eventually rolled out. The technology has now reached a stage in research laboratories where “energy out” exceeds “energy in”. In other words, from this point, it is largely an engineering job to make it commercially viable. The scientists have now delivered what they set out to do.

Before going any further, let me explain what fusion energy actually is. In short, it is a nuclear energy form, but it is very different compared to the nuclear energy form we know today, which is called fission energy. Allow me to quote a few paragraphs from my 2018 book, The End of Indexing:

Fusion is the most basic form of energy in the universe. It is what powers the sun and the stars, where energy is produced by a nuclear reaction in which two atoms of the same lightweight element, usually an isotope of hydrogen, combine into a single molecule of helium.
When scientists attempt to replicate that process, the most important ingredients are sea water and lithium, both of which are in ample supply; hence vast amounts of energy could be produced at a very reasonable cost - at least theoretically. Even better, the fusion process does not suffer from all the safety issues that accompany traditional nuclear power. So far so good, but there is a problem – and a big one at that.
Researchers can produce plenty of energy from fusion but not in a controlled way. The best example is the hydrogen bomb, where a huge amount of energy is released in a highly destructive manner. If the same amount of energy could be released gradually – in a controlled manner – we would have found the eternal solution to planet Earth’s energy requirements.
We would have virtually unlimited access to cheap energy, and greenhouse gasses would be a thing of the past. There would be little nuclear waste, and productivity would rise dramatically across the world, effectively dealing with the debt overhang. These factors in combination would resolve some of the biggest challenges mankind is faced with today.
Having said that, creating a controlled fusion reaction has proven very difficult. Because the nuclei have the same charge, they will electrically repel each other. To overcome the natural repulsion of the nuclei, you must give them sufficient energy. That means heating them up to about 12 million degrees but, as you heat a gas or plasma up, it expands and the atoms move further apart.
The trick is to contain the heated plasma long enough that the nuclei have the chance to collide and overcome the repulsive force. Researchers have now reached that point and have achieved energy breakeven, but there is still a long way to go, before the technology can be rolled out commercially.

Let me give you a sense of how powerful this technology is. Converting hydrogen to helium releases about ten million times more energy than that released when burning the same amount of hydrogen. While a 1000 MW coal-fired power plant requires 2.7 million tonnes of coal per year, a fusion plant which is geared to deliver the same output will require no more than 250 kilos of fuel (lithium) per year.

Only a few grams of fuel are present in the plasma at any point in time. This makes the fusion reactor incredibly economical in its fuel consumption, and it adds important safety features to the process. In plain English, combining a half-filled bathtub of water and the lithium from one laptop battery will lead to about 200,000 KWh of electricity – about 30 years of UK per capita electricity consumption (Exhibit 2).

There is enough seawater to keep the show running for about 6 million years, and there should be enough lithium for at least another 1,000 years, or so the experts say. And, before you start worrying about the world running out of lithium – think of the fusion energy industry anno 2020 as the airline industry anno 1903, when the Wright brothers made their virgin flight. Long before we’ll run out of lithium, another fuel will have replaced it.

Exhibit 2: The two main ingredients in the fusion process
Source: Absolute Return Partners LLP, MacroStrategy Partnership LLP

The adaptability of fusion energy

Just like the Power-to-X technology can be adapted, so can the fusion technology although in a different manner – let me explain. Unlike conventional nuclear power plants, fusion plants come in all sizes and do not require any safety zone so, in principle, they could go up anywhere. One of the smallest reactors constructed so far is 3.3 metres in diameter and is powerful enough to supply electricity to about ¼ million people, so most local communities could have their own local power plant.

Apart from being far more efficient than fission (see Exhibit 3 below), one of the biggest advantages of nuclear fusion over fission (conventional nuclear) is the superior safety aspects. For example, fusion does not pose the same threat of a large-scale radiological incident as fission does. The hydrogen isotopes, deuterium and tritium, are the two isotopes used in the fusion process, and both are relatively harmless in modest doses. The small amount of fuel necessary to run a fusion reactor virtually eliminates the risk that a leak would contaminate a wide area.

Exhibit 3: Binding energy per nucleon – fusion vs. fission energy
Source: OpenText

Back in 2018, the US aerospace company, Lockheed Martin, obtained a worldwide patent on a compact fusion reactor to be installed onboard aircraft. Size-wise, Lockheed Martin’s reactor design easily fits into a shipping container. The fusion reactor is fed with 11kg of fuel, and the power generated would keep the aircraft running for about a year without refuelling. The company claim that their technology can be commercialised within a few years.

One obvious opportunity would be to use Lockheed Martin’s design in drones, which could then patrol the skies for about a year without refuelling, but the opportunities are virtually endless. Think of areas where reliability is critical – for example hospitals and desalination plants. Another option would be to use the technology to power homes in smaller communities. The research I have come across suggests that about 80,000 homes could be powered for a year by one of Lockheed Martin’s reactors without refuelling (source:

How do the two technologies compare?

As I said earlier, the man in the street may want a more environmentally friendly solution but only if it is cost-competitive. The cost of these new technologies is therefore of paramount importance. Although it is still too early to put exact numbers on the two technologies outlined above, certain comparisons can be made.

We know for example that, today, the operating cost of e-fuels is about 2.5 times higher than the cost of burning fossil fuels, and we know that cheap ingredients (sea water and lithium) combined with an extraordinarily powerful fusion process will reduce the operating cost of fusion energy to almost nothing. As I said earlier, converting hydrogen to helium releases about ten million times more energy than what is released when burning the same amount of hydrogen, so it is vastly more effective.

In other words, from an operational point of view, there is no comparison, but that is not the whole story. Establishing a network of fusion reactors will almost certainly cost a great deal more than building the corresponding number of Power-to-X plants. Adding to that, a very nuclear-sceptic public needs to be won over. Although the fusion technology is very different from the fission technology, it is still nuclear, which may turn many away.

For that reason, I wouldn’t be surprised if some countries completely reject fusion energy. Take Germany, for example, where the public sentiment on anything to do with nuclear is so overwhelmingly negative that it would take years of education for them even to consider it. And, in all fairness, given how CO2 becomes an asset in an economy fuelled by liquid hydrogen, one could argue that there is a need for this technology even if fusion energy looks more attractive from a cost point-of-view.

With those words, I will wrap up Part II. Demand for natural resources is growing – more people on planet Earth and rising average living standards amongst those people will see to that. Consequently, demand for many natural resources is on the rise, but it is also shifting. Climate change forces us all to change how we utilize our natural resources.

Should you want to know more about how best to invest in the new technologies referred to in this paper, you’ll have to wait until I get to Part V which is still a few months away. Part III, which I plan to finish within the next four weeks, will be about water – why water scarcity is a rapidly rising problem, and what we can do about it.

Niels C. Jensen

7 July 2020

About the Author

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.

In 2018, Harriman House published The End of Indexing, Niels' first book.