Season 2 Episode 9: James Samworth – Edited transcript

Conversations on Climate Season 2 Episode 9: James Samworth – Edited transcript


Section one: from steel to renewables

Chris: James, thank you so much for taking the time out to speak to us today. 

Before you started out into the renewable energy and infrastructure world you spent 10 years in the steel industry. Could you tell us a little bit how you made that transformation from steel? Because it’s philosophically quite the opposite of what you do right now. 

James: I loved working in the steel industry. It was great fun; I learned a huge amount. But it’s a very tough and competitive industry, particularly for producers in Western Europe with their labour costs and energy costs and so on.

I decided I wanted to make a career change. I thought about the big challenges of my remaining working lifetime and thought that tackling climate change, and particularly financing that, was probably near the top of those challenges – and therefore there might be good opportunities in it.

I decided that was a big enough change to warrant taking a definitive step to make it happen. And so I decided to do the MBA to help on that journey. 

Chris: Very similar to myself; I spent too many years in investment banking, in law, and then decided that there should be more to life than this! So I went to the MBA and at the end of it came out in renewable energy. So for me it was a big transition step; was it similar for you?

James: Yes, they’re clearly very different industries. In my time in the steel industry actually, people didn’t talk that much about the carbon emissions. I guess that’s maybe a function of when it was, but also there was a slight acceptance that steel was fundamental to modern life. Emissions would ultimately have to be mitigated, but it felt a long time into the future and there were lots of other things to do first.

It’s obviously started to get much more into focus, and that’s part of the transition from, ‘we’ve got to reduce our emissions a lot,’ to, ‘we actually need to get to net zero.’ 

Chris: Going back to your experience at the time you graduated in the middle of financial crisis, trying to get into finance must have been pretty difficult. How did you go about that? 

James: It wasn’t plan A, to be unemployed halfway through an MBA, at the depths of the worst financial crisis since the thirties! It was a bit of a journey I suppose. I decided to try and network my way into any opportunity in private assets, private capital. I did a couple of internships, quite a long term one in private equity. Then I got a break. I got very lucky and Foresight were looking for somebody who was investment literate or trainable, but had a good understanding of process industries. They had an investment thesis (at the time more waste than renewables) that these sectors were going to go through transitions into becoming more mature process industries. They wanted someone who had come from that type of background, and that was my entry.

Section two: risk and judgement in green infrastructure 

Chris: Foresight must have been a very good starting place, it’s an excellent firm. Today you’re at Schroders Greencoat, which is another excellent firm. It would be slightly reductive to just call it an infrastructure investment firm, because it really has been a pioneer in the space. If I’m not wrong, it produced the first listed wind energy fund in the UK, and has been leading the way with the energy transition. 

What’s is your job and position? What’s life like in the room? 

James: I co-run the energy transition team at Greencoat, which in our language is in everything other than wind and solar. I guess most of what we do is wind and solar. We are a renewable energy infrastructure investor; we acquire operating assets, some construction stage assets, and we do a little bit of development. We might be doing a bit more in the future. We have quite a lot of investments in wind, a reasonable amount in solar. We have some biomass, some anaerobic digestion, some waste recycling businesses. And we’re starting to invest in some green hydrogen and renewable heating. 

Chris: What sets you apart? You are innovators and you do move the needle forward – what are the values and the mission that get you there? 

James: It is nice that you think of us as a leader. That reputation is a hard one to gain, and easily lost. So we’re very conscious of the need to do our job really well for clients. I don’t think there’s any magic, or secret sauce or anything. We try to invest in high quality assets. I was thinking when you asked the question of what Warren Buffett said he learned from Charlie Munger; he used to try and buy fair companies at great prices, and he learned to buy great companies at fair prices.

We try and buy great assets at fair prices and then manage them really well. All of our funds are long dated funds, so we try to be good partners for people for the long term, whether that’s our clients or our counterparties or our co-shareholders. Developers too – we have numerous repeat relationships with people whom we’ve acquired from, in some cases, literally dozens of times. We try to do what we say we’re going to do. We can’t always, but we work hard to do as good a job as we can for our clients and we take our duties seriously. 

Chris: That leads us nicely into the nuts and bolts of the job. I understand the risks associated with development – you have a green field and you need to get the thing built. That’s a lot of risk. But for a firm that specializes in buying already built assets, what are the specific skills associated with being a secondary investor? 

James: In terms of acquiring assets, probably the biggest judgements are economic. What power price are your assets going to secure in the 2030s and 2040s? You can’t sign a PPA going out that far, so you have to form some views and know how to price that. 

Equally, operating performance: as these technologies and sectors have matured, they have become more predictable. So there’s more of a fixed income-like component to that element, but equally that gets priced pretty tightly. The margin for error is pretty small. We have 50 engineers in our team having a really good understanding of the technologies: the specific models of turbines; the panel types; the inverters; every component. We hope to do our diligence as accurately as possible, and buy good assets at fair prices and then manage them really well for the long term.

Chris: How is risk conceptualized in buying these existing assets, taking a 15–20-year view on things? 

James: So it’s much longer than 15-20 years. We can be taking 40-year views. We own a 17-year-old offshore wind farm that has lots of life left. So there are lots of different types of risk, obviously: operating performance, commodity pricing, counterparty risk, reputational risks, compliance type risks.

We have what we hope is a relatively comprehensive risk management framework. We try to do all of those components as well as we can. We try to separate binary risks (no-go risks) from risks that you have to price at the end of the day. 

Chris: We’re obviously in a time where energy prices are massively volatile, nearly unprecedented prices right now. How do you think about the risk and the fluctuations in simple price? 

James: Generally, we don’t take directional bets on commodity pricing. We don’t say, ‘prices are high we’ll fix; prices are low we’ll wait,’ or whatever. We try to think about the risk profile and the suitability for clients. We try to describe and price the risks appropriately. 

We do enter medium or even long-term PPAs, where we believe there’s value to do so against our valuation methodologies and pricing signals. But we don’t have a philosophical element where we love this risk and we hate that one. We have a methodology that allows us to price different risk profiles in different markets. 

Chris: What about projects? To an outside observer, you can have two different hundred-megawatt wind farms with similar characteristics; what makes one a great investment and what makes the other a mediocre investment? How do you assess them? 

James: There can be a million different factors. Both are possibly good investments at the right price, that’s the other factor.  As I said, we have a lot of experience of what’s worked well, and some things that haven’t worked so well. Doing all of the due diligence about all aspects of the contracts that make up those projects, and analysing and valuing the projects properly is important. By way of example, we think that if you look at the variation in returns between different assets and different investors and so on and so forth, we have something like a 25-year time horizon with wind and 60% of that variance over 25 years is explained by the price you buy at, whilst 40% of 25-year variance is how well you run the asset over the 25 years. 

In bioenergy, in our team, it’s more the other way around; it’s 40% the buy price and 60% management. So if you buy at the wrong price, it’s really hard to ever make that up. That said, you’re not home and safe just because you made a good investment. 

Section three: a green asset class?

Chris: Let’s zoom out a little bit. It’s interesting that you say that people who work with you would generally be fans of renewables, but you’re more of a general infrastructure fund. Could you define infrastructure as an investment class?

James: It continues to evolve. Infrastructure involves generally large built assets, and generally long-ish term contracts. Sometimes not so much in renewables, but PPPs or concessions or things with explicit, direct, normally public sector counterparties, procuring goods and services for the general public. In the case of renewables you have quite a lot of state involvement normally, via either a subsidy or a fixed price power contract or some version of that. And in most forms of infrastructure as a financial product, there is a degree of inflation linkage. Sometimes that’s hard and firm, and sometimes it’s soft and assumed. 

Chris: Infrastructure, at least when I was doing a bit more of it, you wouldn’t think about it as green. It was building cement outlets, airports, ports. Not things that are in any way green really. I don’t want to put words in your mouth, but how green has infrastructure been historically, and is that changing? 

James: Yes. I’ll take back one step and then perhaps answer your question.

A lot of people who got into renewables early-ish, around the time I did or slightly earlier, mostly came from two worlds. They were either infrastructure people or they were energy people. And actually there’s a fundamental difference of approach between those two. That’s been one of the interesting melting pots of renewables, which is an infrastructure asset, but is also an energy asset. So it shares some characteristics, but not all, with general infrastructure. 

In terms of the greening of infrastructure, renewables have gone from being a smallish niche market to being really very mainstream. The renewables market in the UK has probably 110-120 billion pounds worth of built assets now; that there’s compared to, say, 90 billion of water companies. It’s already properly mainstream. 

In terms of other parts of infrastructure, we are seeing a very rapid change to try to decarbonize the whole economy. That’s one of the lessons of people digesting the fact that as long as we are still emitting more carbon than we absorb, the temperature will keep rising. It won’t stop increasing until we stop emitting. So all of those sectors that you mentioned – cement, steel, and similar sectors – have to decarbonize. We have to find ways to decarbonize steel, cement, shipping, heavy industry, etc. All of those sectors have got the memo now and are working out what they do, on different timescales. 

The Committee on Climate Change in the UK has done a great job of mapping out what that needs to look like. Not just 2050 as some aspirational, arbitrary target, but what the journey and the steps need to look like to get there. And you can’t get there without tackling some of the hard to abate sectors. 

Chris: And you don’t get there by reopening a coal mine to refuel your steel industry! 

James: I don’t get too excited about that, I have to be honest. This challenge gets solved by changing demand, not by throttling supply. We have to displace those materials and those emissions with something that is economic as a replacement. Where the coal comes from, I’m not fussed about. I wouldn’t vote in favour of it, but equally the steel industry has to decarbonize and that will eliminate the need for coal. So if you are thinking of investing in anything in the fossil fuels, you need to think about where’s your customer in the 2040s. 

Chris: Yes, but the reaction to the war in Ukraine in a lot of cases has been the reopening of coal. We’ve been displacing gas by taking on different fossil fuels. If you’re opening up a new coal mine in in the UK that’s a 30-year asset, if not more. 

James: But it won’t last 30 years. It will fail.

Chris: It shouldn’t last 30 years and it should fail. But there are lots of investments that are being made now that, unless they’re going to be heavily supported and subsidized with long-term guarantees, then as an investor you’re not going to be opening them.

Otherwise, just rationally, economically, it wouldn’t make any sense for people. So if you’re building in 20 or 30 years of emissions into that, it just makes that journey to net zero that bit more difficult.

James: I agree with that. Equally on the coal point though, a few things have got conflated. Yes, we’ve had a need to switch away from Russian gas and find other sources of energy. And indeed, Europe reduced its energy consumption by about 20% this winter. About half of that was temperature, but about half of that was actual temperature-adjusted demand reduction. But what actually caused a lot of German coal to come back online was the closure of German nuclear, and the failures in the French nuclear fleet. That wasn’t coal that wasn’t gas to coal switching, that was nuclear to coal switching. And if you look at the renewables build out, that coal’s not going to last for very long. There was a bit of noise here in the UK about some coal power plants being warmed up and run for a few hours – but it was just a few hours. We are sub-1% coal over the year in the UK now. 

Chris: And of course a big part of the reason that there were failures in the French markets for nuclear was global warming. There was a drought.

James: There was some of that; there were also some weld failures and safety cases, some of those plants are getting a little bit older for sure. But yes, your general points absolutely right. Climate risks are accelerating, without question. There is a reasonable likelihood of there being an incredibly strong El Nino this year, so we could see truly record temperatures in the back end of this year and into next, and that’s what we’re all trying to work to mitigate. But I think things are going to get a hell of a lot worse before they get better.

Chris: Unfortunately, I think you’re absolutely right there. That brings us back to our overview of the infrastructure market. One of the big selling points of infrastructure is that it’s long term, it’s boring, it’s predictable. But with the effects of climate change being increasingly felt, is there any change in your valuation methodologies when you look at the risks that climate change puts on otherwise ‘boring’ infrastructure assets? 

James: Yes. We own hard physical assets, and a solar farm can flood as easily as any other asset. You have to do the same assessment. You mentioned risks, and that’s an element that we study pretty carefully. We do look at, and have disclosed for a few years now, the physical risks and the transition risks using the TCFD framework (Taskforce for Climate-related Financial Disclosures) to try to disclose to all of our clients and investors, including obviously our listed funds, how we analyse and see those risks.

Principally our assets are there to contribute to the fight against those risks. That doesn’t mean that we can ignore either the physical or the transition risks. For example, one of the bigger risks to what the future power price will be for renewables is actually how much renewable capacity get built, because you have this phenomenon of cannibalization. When the sun’s shining then all the solar is generating at once, or when the wind’s blowing strongly, all the turbines are spinning. Because they have very low, close to zero marginal cost in marginally price markets, that can have very significant effect on the economics. It’s complex. We have to stay well abreast of it. 

Section four: riding market waves

Chris: One of the big reasons people invest in infrastructure is for diversification. It’s an asset that will be giving you low returns in good times, and in bad times will be giving you low returns as well. It’s a solid and a consistent performer. Those bad times are here now; they’ve arrived and they brought an awful lot of inflation with them. Has that infrastructure investment thesis borne out in valuations your current experience?

James: The three biggest things that move the valuation of our assets would be power price assumptions, inflation assumptions, and the discount rate. If you think about how those three interact, what really matters is the real interest rate.

We have seen an increase in real interest rates, so an increase in discount rates. Effectively, what we have in renewables is explicit inflation linkage, so almost all GB subsidies or PPAs are explicitly either RPI or CPI linked. Most continental Europeans aren’t, those are nominal. So in the last 12-24 months, we have obviously benefited from the increase in energy costs that you’ve seen; albeit that in most jurisdictions that we operate in, we have had some form of windfall tax take some of that benefit.

Our net valuations have been up, and our listed funds have performed fairly well. But yes, we have seen an increase in discount rates, and we’ve seen that feed through into pricing. We tried to be disciplined through quite a big change in base rates, in adjusting our discount rates and our returns accordingly. Obviously that means that our funds are now forecasting returns that are quite considerably above where they were 24 months ago. 

Chris: But it also makes new investments a bit more difficult because traditionally with infrastructure you try to get a healthy degree of leverage.

James: We don’t use much leverage. Across almost all of our private funds, we have either zero or very little leverage. I might be wrong, but we have around 200 million of senior debt against 4.2 billion of equity across the fund – so virtually none.

In our listed funds, we have some fund level leverage. But that probably averages 30-35% loan-to-value. So we have a lot of equity. We think that’s prudent in environments where you have quite a lot of commodity risk via power prices in your enterprise value. Over-levering commodity prices has generally not worked out well over decades. You can get lucky for periods, but we don’t think that’s wise. Our core client base is pension funds. When I mentioned taking our duties seriously, that’s ultimately who we’ve got to look after is the pensioner that’s relying on that income for his or her retirement.

Chris: Interesting. As other assets get riskier – and people were taking all sorts of crazy punts when money was more freely available, and very significant asset classes have completely collapsed over recent times –has there been a rush towards more solid, stable investments? Or has it also been difficult for your infrastructure funds to be raising capital?

James: So on a relative basis, yes, you’re right. We’re not Bitcoin. But again, that will vary by market. I know we will talk about defined contribution pension schemes and the future there, but our core client base has been the defined benefit schemes, particularly on the private side. With the gilts crisis last autumn, that led to them having a big fall in both assets and liabilities because of their LDI hedging programs, and the increase in discount rates. Most of them actually end up with a better funding ratio than they had before, because their assets fell less than the liabilities. But because assets like ours had performed fairly well, they’ve ended up a much, much larger percentage of people’s portfolios than they were before. This is what people have called the denominator effect. That’s happened quite generally across private markets. They have quite a large allocation to illiquid assets, so a lot of DB pension funds won’t be making many illiquid commitments for quite a while. That inevitably has slowed fundraising across private assets: private equity, private credit, real estate infrastructure and so on.

That has also brought forward for many of them the time horizon under which they might look to insure away their liabilities, because you need to have a high funding ratio to go to the insurers to get them to take the liabilities away. It’s accelerated very significantly a transition that was already going to happen, but over a 10, 15, even 20-year time horizon, that’s been brought forward quite a lot.

Chris: As touched on there, you’ve just launched a new long-term asset pension fund. Could you tell us a little bit about that? I believe it’s the first of its kind.

James: We’ve got the first and the third, or two of the three, currently approved, which we’re very proud of. DB pension funds in the UK started shutting 20 years ago to new members, and very few are open today in the private sector. Many in the public sector are still open. 

Defined benefit pension schemes were replaced overwhelmingly with defined contribution schemes. But we’ve got this demographic change now of the big DB schemes having closed, but still having a long tail of liabilities because many of those members are still working, never mind into their retirement. They might still have 50, 60 plus years to go. 

But the defined contribution schemes started with younger members. They’re early in their career, they’re not earning as much, they’re not contributing as much, so they’re young pension schemes, they’re growing pension schemes, and they’re growing very fast. Their risk tolerance, their risk profile is slightly different. There’s also a fundamental difference in that the individual is taking investment performance risk, not the sponsor in the case of the DB scheme. So it’s a different profile there. 

It’s no secret that the DC market is growing very fast. But it’s not huge today, and in terms of investing in infrastructure you do need a bit of scale to sensibly invest, because you need to make reasonably sized investments. You should never be backing just one manager, even one as good as Schroders Greencoat. You need to spread your investments across infrastructure. And actually not many schemes are yet at a scale where they’re really able to invest in infrastructure. Some are starting to get there, which I guess has driven the government in thinking about what structures the DC market is going to need. The LTAF structure, the long-term asset fund is interesting because the individual takes the risk and can decide to move his or her pension. You have a greater liquidity need in DC schemes than you need in DB. Government spent a long time trying to think about structures that would allow them to invest in illiquid private assets for the return, the diversification, all the benefits you were describing that generally we’ve seen in private markets in the last 20 years or so, while having sufficient liquidity to operate well for the benefit of members.

We think that market should be a really good one for us. It’s been great to work with the Schroders team to develop those products. We would’ve really struggled to do that on our own. Frankly, we need a whole range of capabilities that we don’t have but we can get as part of the wider Schroders firm. So far, it’s gone down well. 

Section five: decarbonisation, storage and the future of energy tech

Chris: On one side green infrastructure is a hot topic – there’s a lot of conversation about the need for a lot of investment. But on the other side you have infrastructure which is traditionally very slow moving, very hard to do. Even with renewable energy infrastructure, it can take an awful long time from conception until build. What are the key drivers of the green infrastructure market? And as a secondary question, what impact are Joe Biden’s various acts, the European Union, and of course the situation in Ukraine, having on these drivers?

James: We know we need to decarbonize our entire economy to have a sustainable planet. That’s an enormous challenge. Energy is fundamental to modern human life. Anyone who questions that just needs to look at the prices people were actually prepared to pay for fuels and energy last year. It’s probably number three after food and water in terms of basic needs. If you look at the geographic South and the quality of life of people who have readily available energy as opposed to those who don’t, it’s absolutely fundamental. So if we have to decarbonize and energy’s fundamental, then renewable energy is quite high up the list of things that are going to be needed.

The drivers were already very strong. Then Russia invaded Ukraine, so in Europe there’s a further impetus to accelerate some of that transition, that was already moving quite fast. Our business has grown at a reasonable rate for 10 years or so, and I don’t think we see that slowing down anytime soon. 

Then it’s obviously going to move beyond energy. We see the strategy of decarbonization as first, decarbonize power. That’s the easiest thing to decarbonize. We know how to do it, and we can now do it very cost effectively. It is cheaper than coal and gas pretty much anywhere in the world now, even allowing for intermittency and storage and flexibility and all of that stuff.

So decarbonize power first, then use that clean power to decarbonize everything that you reasonably can. Fortunately, electric vehicles are going to make a huge dent in passenger car emissions. But obviously that’s only an actual benefit if that power is clean to start with. Similarly for building heating, heat pumps will decarbonize most heating and better air conditioning systems using heat pump type technology will take a lot of the load there.

That’s probably a lot of the challenge of the rest of this decade and the 2030s. And then you’ve got the harder to abate sectors that we were talking about earlier. Steel is 9% of global emissions, cement is 8% of global emissions, shipping is about 6%, aviation is about 4% or 2% or something, so those are probably going to need some combination of hydrogen and maybe some carbon capture. And agriculture is a massive one we haven’t covered yet. We’ve got a little while for the harder to abate sectors, but not masses of time if we need to build the technologies, the supply chains, the capabilities, the knowledge, the whole industries to decarbonize those. If you look at the climate maths, we’ve got to be making a real dent in those by 2035. We’ve got to be pretty much there in the 2040s. So those investment decisions are being made now.

Chris: And we’re still on the wrong path. We need to be doing 7% compound reductions, and this year we’re probably at a 2.5% increase. We’re the wrong around. 

It’s interesting that you mentioned that renewables are already cost competitive with gas and coal even considering a long-term energy storage. What do you see as the solution to long-term energy storage? What technologies do you think will be solving that, that makes you feel confident to make that statement?

James: Probably four, and they all do different jobs. It’s clear that short term balancing will be done by batteries. Lithium ion continues to fall in cost and improving performance and other technologies may come behind it, but the combination of both utility scale batteries and the batteries inherent in the EV fleet as that rolls out are going to do a lot of the short-term balancing. But it is really short term; it’s hard to see batteries going beyond a few hours. At the really long duration end, it’s going to have to be some form of gas or liquid storage. Hydrogen and/or its derivatives is probably going to be the fundamental technology. Natural gas is the shock absorber now. I think hydrogen or hydrogen stored as methanol, ammonia et cetera, probably does quite a lot of the long duration, the inter-seasonal storage.

So that those aren’t prohibitive we’re going to need a lot more interconnection between power markets. The wind’s always blowing somewhere, the sun is always shining somewhere. That reduces the intermittency need. I said four but there’s actually five; pumped hydro does a job in the middle, somewhere between many minutes and days. Pumped hydro is very good for that can be supplemented with interconnectors, because pumped hydro is obviously dependent on geography and geology and where you’ve got the reservoirs and the reserves and so forth. The interconnectors mean you can rent or pay for other people’s pumped hydro reserves. Then there is the demand side response. I don’t mean people turning the lights off when power demand is high. Smart homes and smart charging of cars and heat pumps actually allow a lot more flexibility because you don’t have to be on the whole time. They can turn off for an hour or two when power is really expensive, and use the thermal fabric to modulate temperature more gradually. The demand side is going to play quite a big role too. 

Section six: bioenergy and the CCS puzzle

Chris: Fantastic. Moving on to other areas you work on in your current position. Could you define what bioenergy is?

James: Bioenergy is deriving energy from some biomass that was alive relatively recently, as in within the last couple of decades. We have focused on domestically sourced, normally but not exclusively waste-derived, biomasses. We own two waste wood combustion plants that take end of life products (floorboards, roof trusses, old IKEA furniture and the like) and burn those for energy. That is carbon neutral because the net forestry stock, if approximately constant, takes in the same volume of CO2 as admitted when that material is burnt. 

We have a straw fired power plant that takes actually quite a small fraction of the straw that is the residue from cereal crops, and produce energy from that. And we have a forestry residue project up in Scotland that provides combined heat and power for local whiskey distilleries, and the grid. Then we have some anaerobic digestion projects that take a combination of crops and agriculture waste and byproducts (chicken litter, brewery waste, sugar beet) and digest those mostly to produce gas for the gas network, and CO2 for the food and drink industry. Those are our main biomaterials. We haven’t done any of the large scale imported biomass. 

Chris: Old timers in the environmental sector will remember the biomass and energy crops bubble and these types of issues. But it sounds like you’re not you’re only using waste materials?

James: We have been very conscious of the food versus fuel debate for a long time. We didn’t do any of the early biofuel investments in corn ethanol and the like. Any form of bioenergy presents a land use challenge. And land use challenges generally are one of the more difficult things environmentally, for the planet’s health, how we manage biodiversity, how we manage all of the ecosystem services that we need to support life. That is a big challenge. All forms of renewables are to some extent land intensive, that is one of the major lessons of David MacKay’s landmark book from 2008. We are conscious of that and we try to make sensible decisions.

Chris: There is a lot of discussion around say willow for biochar – that really efficient growth that you can then be using in a process.

James: Maybe. One of the reasons I say maybe is as I sketched out earlier, our view of the decarbonization trajectory. One of the bigger unknowns is how we do the last 20%. Most people think we will need maybe 10 gigatons or so per year of carbon capture in some form, be it nature-based solutions or actual carbon capture and storage under sea. How are we going to do those negative emissions? 

Chris: 10 gigatons is a lot.

James: It is quite a lot. If we have 50 Gt gross emissions now, I don’t think we’ll do 10 by carbon capture and sticking underground. Just do the maths on how much space there is underground, how quickly that’ll run out. It can’t work. We need an industry putting twice the volume back in to the ground that we are currently taking out as fossil fuels. That feels quite punchy to have that operating in 30 years’ time. So managed bioenergy, maybe some biochar but plays a role in some of those negative emissions; but how exactly that plays out, there’s a little bit of time for the market to find the right answer.

Chris: Yes, for the difficult to decarbonize sectors where it’s almost impossible to completely decarbonize them. There will be some need for some carbon capture storage utilization in the end – it’s a question of what it looks like. 

Direct air capture – I know it’s difficult and energy intensive, but do you have a view on that?    

James: Our view is that it’s difficult and energy intensive! I worry a bit with all these things, direct air capture and geoengineering and so on and so forth, that they’re a bit of a silver bullet. ‘Don’t worry, that’ll fix it;’ or, ‘we’ll be able to do it for a £100 a ton, so we don’t need to invest in anything that costs more than a £100 a ton to abate.’ Those numbers could be out by a factor of four. We just have no idea what this is going to cost. If you think about it from a risk management perspective, managing the health of the planet is one of the most important risk management tasks we all have. How much do we want to bet on these magic bullets coming along in 30 years’ time and fixing the problem for us? Nuclear fusion, iron oxide in the oceans and so on and so forth. 

I don’t go as far as some in the environmental movement that say it’s a fossil fuel-funded distraction to allow them to keep operating. But I do worry that some people fix on those as end goals, when    we know the task that needs to be done for the next 10 or 15 years. We need to build masses of renewables. We need to scale up EVs, we need to stop we stop buying combustion cars. We need to decarbonize heating through heat pumps and we need to (probably) build a hydrogen economy for decarbonizing a lot of the hard to decarbonize sectors.

At the same time we should working on natural capital, we should be working on how we’re going to do that carbon capture. But the maths says that isn’t really needed until the 2040s. 

Section seven: is there a place for hydrogen?

Chris: So it sounds like you’re positive about the role of hydrogen in the future. Hydrogen itself is a very complicated subject, there are rainbows of different types of hydrogen. Where do you see hydrogen has a place and where doesn’t it have a place? 

James: Time will tell. We think it will be used for decarbonizing some of those hard to abate sectors. So not just as an energy vector, but also as a reducing agent in steel making for example, displacing the coal. Maybe hydrogen for DRI. I’m sure electric furnaces will continue to grow; it’s a very mature technology, they’ve been around for a long time and they are mostly decarbonized by using scrap. But we’ll probably use hydrogen to make DRI to make steel instead of coking coal. Hydrogen will be quite a big input for energy and reduction purposes in cement manufacture. I think e-fuels of some forms, something like e-methanol where you obviously need a CO2 molecule to go with the hydrogen molecule to make the methanol. We don’t need the CO2 molecule for shipping. Green ammonia for agriculture, we touched on that earlier. 

Where we think it’s really hard to think that hydrogen plays much of a role is in heating. It’s just so expensive to go to all that trouble of making hydrogen from renewable electricity, piping it, transporting it, burning it, all the losses that you get in each stage compared to a heat pump. Even if you have some fossil component in the in the electricity, and we won’t have much fossil component in the electricity by the 2030s, heat pumps will simply outcompete hydrogen. It will be too expensive to use for heating, never mind the health and safety risks of actually having hydrogen in the home.

Chris: We had here in the UK the government Hydrogen Strategy 21, which was high on fanfare and low on detail. Which seems to be relatively typical of UK policy in the renewables space. It’s not very coherent. What do you think is the problem with the UK’s renewables strategy, and what’s the solution? What policies would you like to see put in place to help with the level of deployment that we so badly need? 

James: That’s slightly unfair on UK regulators – slightly. There are the hydrogen allocation rounds for electrolytic hydrogen coming through. Government is procuring 250 megawatts this year, in this round, of green hydrogen. It aims to procure 750Mw in the next round. That is a start to building an industry. They have tried to learn from some of the successes; the UK has been a world leader in offshore wind and hats off to some of the regulators who made that happen by listening to what long-term capital needed to fund those long-term assets. In fact one of them was so good we hired him! 

I hope we can build a hydrogen economy in stages. Where we haven’t got it quite right is more on the industrial strategy side. We’ve wrestled with this for a long time in the UK. The US is betting very heavily through the Inflation Reduction Act on domestic manufacturing, with conditions around US content to be eligible for the tax credits and subsidies and so on. That is driving tens of billions of dollars of investment into the US in manufacturing capacity. Similarly, Europe is putting in place things so we’ll probably see investment in European manufacturing. I honestly don’t know – and this is from someone who spent the first 10 years of their career in UK manufacturing – what is the best strategy for the UK. Is it to try to compete with that type of regime and build our own nascent industries; or to be a very attractive use-market for those and to specialize in deployment and rollout and do our job well, and therefore cost-effectively for UK consumers and taxpayers and so on.

I feel like long term, the UK’s going to struggle to compete with the industrial might of China, India, and the US. It needs to focus on where it has comparative advantage. But we need to be thoughtful and strategic about where we do support our manufacturing industries, and we’ve not done that well over time.

Section eight: growing into the next challenge

Chris: Moving on to supporting innovation and industries here, could you talk about your green agriculture and low carbon greenhouses?

James: They have been fascinating investments. We came at it mainly as a renewable heating project. A greenhouse needs heat – something like 3,800 hours a year, give or take, so 40% of a year – which makes it quite a stable heat load. Most heating systems might run 1500, 1800 hours a year.

What the developers doing our projects have done, is done a great job of marrying a really reliable heat source in wastewater treatment works that run 24/7, 365 days for very obvious reasons, and through that process generates a large quantity of heat. Now it’s not very hot but that warm water discharging into rivers currently contains a lot of heat, and so we can extract some of that heat via heat exchanges and pipe warm water across fields relatively cheap to an energy centre, and then use heat pumps to raise that water to what a grower needs, 50-ish degrees Celsius, to warm a greenhouse most of a year. They’ve done some really good engineering around how you integrate the energy centre and provide CO2 to the growers, which is also a fundamental input into horticulture.

We are not horticulture experts. We’ve never professed to be; we lease our glass houses to people who are horticulture experts, and the growers run those and they grow the crops and they sell them to the retailers and keep the shelves supplied. We have learned a lot about that industry through these investments. It’s a fascinating industry, and it’s been on the front pages quite a lot in the last few months as a result of challenges in the supply chains providing year-round supply to supermarkets. Large quantities come from southern Spain and Morocco and so on, driven in part by energy costs, where in those parts of the world they need less external energy as it’s warmer. But that does put greater supply chain risk into UK retail, so when weather events happen, we are suddenly very vulnerable. So we are making a contribution towards food security domestically, and doing so in a relatively low carbon way. 

Chris: That leads us neatly onto the closing question. I’ve really enjoyed this, it’s been a really good conversation. Let’s say someone from an MBA class or someone sitting in the steel industry is listening and they think, ‘I’d like to get involved in infrastructure, and try and make a difference in the energy transition, particularly with the idea of that innovation being supported.’ What would your pitch be to them? 

James: The pitch is probably easier than it was 15 years ago, because the need is now so obvious. It’s an incredible time to join this industry. There’s an incredible range of opportunities for people with good ideas, for people to build a career of all different types. This is no longer a niche industry. It’s a large industry and it’s increasingly mature. In some ways that makes it a little bit harder and a little bit more conventional, in terms of the hiring strategies and how people get in. But there’s also an incredible range of opportunities. 

As with any other career, if you find that intersection between something you’re really good at and something you really enjoy, then you’re probably in an okay place. I’d encourage anyone who has that passion and belief in a sector to try and find a way to pursue it. 

What are you really good at? What can you do? What can you do better than anyone else? What can you bring to a company or to an industry, to a role?

Chris: James, thank you so much for your time, it’s been a brilliant conversation. 

James: Absolutely, I’ve enjoyed it. 


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