James Smith
Premier Miton Global Renewables Trust Manager
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
The race to net zero
The race to net zero is well and truly on but creating and delivering an energy market that considers the cost, security and carbon emissions of our power sources requires a holistic approach to the energy mix of tomorrow.
One fuel that will not be part of that long-term mix is coal, which has been almost completely phased out in the UK and much of Europe, except for some central and eastern parts. While in the UK we have seen the ‘warming up’ of old coal fire power stations during periods of high winter demand, in the long-term the future of this energy source is finite.
Nuclear is now also on a downward trajectory given the sheer time and cost it takes to build a modern nuclear power station. Meanwhile Russia’s invasion of Ukraine has fundamentally altered Europe’s natural gas supply.
Then there are renewables
The added advantage of renewables over gas and coal is their minimal carbon emissions, and the main advantage over nuclear is the speed at which they can be deployed. In addition, renewables are now the lowest cost form of electricity production. Renewable energy sources may dominate electricity production in a net-zero world.
But there is one fuel that is often overlooked as a sustainable energy source, and that’s biomass (used to produce “bioenergy”). The extent to which bioenergy is used may come as a surprise to many. According to the International Energy Agency, bioenergy is the largest source of renewable energy globally, accounting for 55% of renewable energy and 6% of global energy supply. Further, bioenergy has increased by 7% per year between 2010 and 2021.
Feeling the burn?
A common response to biomass is: how can burning biological matter be sustainable or carbon neutral? But biomass, in terms of its carbon emissions, is conceptually circular. The tree used to produce the biomass has absorbed all the carbon that is released on burning, so over a typical cycle of 30 years, there is no net addition to carbon in the atmosphere, unlike burning fossil fuels. Better still, advances in carbon capture technology mean that carbon can be captured and then permanently sequestered. In this way, biomass goes from being carbon neutral to carbon negative.
Responsible biomass companies, including those based here in the UK, source certified wood waste from the forestry industry, which produces vast quantities of low-grade wood and sawmill residue that cannot be used commercially but can be used to produce biomass pellets. This material is effectively a waste product and so its use in the production of bioenergy ensures the reuse of a material that has already been harvested and would otherwise have had little or no use. Additionally, the removal of waste wood material from the forest floor reduces wildfire risk.
While there is still a carbon cost of making and transporting pellets, this is a fraction of the carbon released by burning coal or gas. Using the biomass close to where it is produced, in a raw unpelletised form, makes it even more environmentally friendly. Once you factor in the security of supply benefits of biomass – bioenergy can meet demand whatever the weather– it plays an important part in the future energy mix that provides secure and low carbon power. In addition, many coal power stations are “co-firing” with biomass, and this has led to increased demand for biomass pellets from Asia.
While using forestry waste may be dismissed by some as simply burning trees, investors should bear in mind that forest coverage in the US and Canada is stable, and new trees are planted to replace those felled, making this a sustainable resource. North American forestry is a heavily regulated industry with strict environmental standards.
Made in Yorkshire?
There are relatively few available investment possibilities for retail investors as this remains a niche area. Perhaps the best-known player in the industry is Drax Group, which is in the interesting position of being both a biomass pellet producer in North America, while also being a large consumer of biomass at its Drax power station in Yorkshire, where it plans to add carbon capture technology. Another option would be US pellet producer Enviva.
The US Inflation Reduction Act is supportive of bioenergy, and given the substantial North American forestry industry, it is likely that the major investment opportunities will be located there. Drax for instance, is planning to build two new biomass generation and carbon capture plants in the US.
Alternatively, investors may access the several forestry investments available, both individual equities and forestry funds.
The final word
When it comes to the viability of a sustainable energy market, we must not fall into the trap of making the perfect the enemy of the good. While our future energy mix must pay more heed to cost, security and carbon emissions, biomass should be taken seriously as an important fuel source and an essential part of the renewable energy mix.
