Nick Anderson & Hamish Chamberlayne, portfolio managers for Henderson’s Global SRI strategy, discuss ‘electrification’ and why it could be one of the most powerful disruptors for the autos market and for energy storage companies.
Whether the established car companies want to accept it or not, the recent scandal surrounding Volkswagen may only just be the beginning of an increased regulatory burden for emissions-producing vehicles. Climate change has the potential to be one of the most defining investment issues of our times: currently transport contributes to 23% of global greenhouse gas emissions, making it a significant target for government curbs. This risk presents an opportunity for companies at the forefront of pioneering new energy technologies.
Driving a change in leadership within autos
We believe that ‘electrification’ will become the most powerful disruptor in the autos market. The advances in lithium-ion (Li-ion) battery technology mean that fully electric vehicles are becoming a more viable option for the average consumer in terms of cost, range (distance per charge), and driving experience (eg, low noise, zero emissions, greater internal space), such that they could threaten the dominance of combustion engines and traditional auto manufacturers within the next 10 years.
We think the most exciting entrant into the market is California-headquartered Tesla Motors, incorporated in 2003 with the primary goal of accelerating the adoption of sustainable transport by commercialising electric vehicles – initially for the luxury segment but with ambitious expansion plans for the mass market. Electric cars are on a declining cost curve, as battery technology becomes cheaper, whereas traditional cars are on a rising cost curve as environmental legislation and emissions regulations become tighter. Crucially, Tesla’s battery costs are expected to decline by up to 60% over the next five years.
Tesla and Panasonic: a powerful partnership
Tesla is planning to increase its vehicle production to a staggering 500,000 cars per year by 2020. In order to secure sufficient battery supplies, it is partnering with Japanese electronics giant Panasonic in building a ‘gigafactory’, which will double global Li-ion battery manufacturing capacity. Due to begin commercial production in 2016, the Nevada facility will be powered by renewable energy, allowing it to be a ‘net zero energy’ factory. The completion of the gigafactory, together with Tesla’s expansion plans into energy storage solutions for utility providers (electric grids) and the home market, is a significant source of upside for both Tesla and Panasonic, both of which we hold in our global portfolios.
Increased efficiency for electric grids
The economics of using batteries for energy storage is becoming even more compelling as the world transitions to a lower carbon economy. One of the key hurdles in the past has been the cost of storage solutions, but advancements in Li-ion chemistry and increased manufacturing capacity, which yields economies of scale, are continuing to drive down prices.
The main buyers of Tesla’s rechargeable ‘Powerpacks’ are expected to be large industrial customers. Utilities are a key market because storage solutions enable the more efficient use of energy already generated; they are better at meeting customer demand at peak times and do not waste generated energy at times of lower demand.
What makes Tesla’s Li-ion batteries really attractive for industry is that they are compact – for example, they fit into existing substations without necessitating additional land purchases – and they are very quick and easy to install. They also partner perfectly with renewable energy technologies – as they help smooth the peaks and troughs associated with variable output from solar and wind farms. Considering all of these benefits, it is perhaps not surprising that Tesla’s CEO, Elon Musk, has said that half of the world’s power plants could potentially be shut down by effective stationary storage.
Climate change to continue to impact profitability
At present Tesla sits within our Sustainable Transport theme, but given the possible growth in demand for its energy storage solutions, there could well be a case for it moving to the Cleaner Energy theme as time progresses. Regulatory and technological risks associated with climate change are already beginning to impact capital market returns, and we think this will continue – as shown in the chart below by the rising share price of firms developing new technologies such as Tesla, and the falling prices of carbon producers, such as US coal company Peabody Energy.
Chart: disruption and carbon risk – already here
Source: Henderson Global Investors, Datastream, data as at 30 September 2015. Past performance is not a guide to future performance. References made to individual securities do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.
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New Zealand to Switch to Fully Renewable Energy by 2035
New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.
New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.
Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.
Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”
The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.
Zero net emissions by 2050
Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.
Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.
She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.
Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”
A worldwide shift to renewable energy
Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.
Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.
Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.
Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.
5 Easy Things You Can Do to Make Your Home More Sustainable
Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.
1. Weather stripping
If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.
Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.
Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.
2. Programmable thermostats
Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.
Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!
3. Low-flow water hardware
With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.
Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.
Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.
4. Energy efficient light bulbs
An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.
New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.
5. Installing solar panels
Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.
Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.
From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!
These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.