S2, E2: The Hidden Dimensions of Value
S2, E2: The Hidden Dimensions of Value
Series 2 Previously published on LinkedIn, March 8, 2023
In S2, E1: Slaying Thermodynamic Dragons , I asserted with numerous supporting examples, that the energy content of commodities such as oil and gas, had little or no influence on their market price. Yet even if you have read that and have an inkling you are starting to agree with me, it may still be too much to ask that you also believe that blue hydrogen can be derived from natural gas without any fixed price relationship.
After its molecular jailbreak, hydrogen has less energy content than the carbon compounds from which it escaped, plus it took energy to prise the bars of its captivity apart. Therefore, you may reason, my claims are ridiculous.
Setting aside the discussion of energy rich feedstocks to speak more generally, there is seldom a direct and enduring relationship between the market price of raw materials, and the commodified products that are derived from them. It is also worth mentioning before continuing, that adding genuine value is not necessarily a physically additive process; so for instance when something is refined it is not just a case of accessing wanted properties but removing unwanted ones. What is unwanted is unvalued and considered waste and this is something that must be reexamined.
A good example is mining; if you take copper ore at 1% with a 3:1 stripping ratio, 400 tonnes of earth would be processed to provide 100 tonnes of copper ore; that would yield 1 tonne of pure copper. What will be the environmental impact of that if our demand for copper comes anywhere close to what's predicted? Well nothing short of colossal. I will save the story of mining efficiencies and their implications on electrification for another bedtime.
Of course, financial viability depends on the costs associated with the energy put into the value-adding processes, remembering that even the waste must be paid for. The fact is though, the market does not care, it is only concerned with the prices that can be tolerated by the demand-side. A tonne of sewing needles would be more expensive than the steel they were made from, but if the market does not want them, the scrap value would be less than that of the original virgin steel. In such a case, the value added in the making would be lost to leave a sunk manufacturing cost, plus an economically degraded material. You may be thinking something like, 'well that just shows that added value increases the price'.
Not quite. Unless we get this horribly wrong, in the future, the carbon content of oil and gas will be negatively priced by a combination of offsets, pricing and taxation. That will provide the financial impetus for carbon acquisition that can be sold on its own market. Thus decarbonised products cheap by comparison. Some people claim that these measures are means to gerrymander markets but with that I must strongly disagree. Any fiscal framework provides the economic environment for all to operate within on an equitable basis; policy and regulation set the rules of the game so it makes sense that those rules should incorporate the ability to value things that are important. The markets should determine pricing dynamically, but they should never be allowed to guide what we value, because that has led to disastrous economic consequences in the past.
Emissions trading would make carbon that has been placed in safe storage very valuable, and the opportunity attached to capture i.e. the co-production of carbon for storage, effectively adds to the cost of emissions. This is because in addition to the liability for emissions there will also be an opportunity cost attached to non-capture. This is where I see the costs of blue products (principally decarbonised natural gas and waste processing) being significantly offset.
Realities and Motivations
The removal of carbon would therefore have to add value after all process costs had been accounted for. This is a huge task but one that is matched by equally huge incentive. Natural gas is one of the most dominant energy commodities and wherever coal has been displaced it has generally been due to natural gas. Where new coal mines are being opened as a matter of policy, for example in China, it is as a result of fears about access to natural gas. The energy for manufacturing the renewable technologies predominantly came from natural gas; as did the ability to mine the materials to build them. The processing of raw materials is dominated by China. The energy transition cannot be conducted on a zero-energy budget even if our dirty work is being done in a faraway country beyond the gaze of ESG.
Apart from being an atrocity on a scale that feels indecent to gloss over, the invasion of Ukraine disrupted grain supplies and created a natural gas shortage in Europe. We cannot wish the importance of natural gas away so my point is not that we should just keep using it but we must provide a route to transitioning the feedstock by decarbonising it. To do that we must make the supply side technology capable of transition (for example natural gas turbines that can be made hydrogen ready) and we must also provide the availability to stimulate the transition of demand.
It is vitally important to understand where value is being added during the creation of products so we can optimise those processes, but it is also useful in helping us determine where value might be extracted at the end of design life. Simply put this means:
Upcycle (repurpose) where possible to preserve as much of the functional availability as possible
Recycle to recover materials where there is no functional value left
Acquire the energy content from materials that have no recovery value
Finally, to close the loop on waste, capture and stably store whatever is left
By negatively valuing wastes (including emissions) and positively valuing their collection, they can be monetised so there is a financial benefit attached to their capture. This is the surest way to ensure the right environmental strategies are followed. Without the means to close the loop on waste, i.e. in a way that is financially incentivised, value simply leaks from the system.
Abstractions of Value
Pricing is about availability but the availability of what? When a feedstock is traded, what is being physically sold is the energy substrate, or the material that carries the energy. The logistics of transportation owing to the physical and chemical properties have a large bearing on price and yes, those are availability drivers too. To get the energy out the user must break chemical bonds to create an exothermic reaction and in combustion, the most common process, this is triggered by ignition. Yet this is a universal principle that applies to other chemical processes and even with nuclear power, there must be some form of triggering activation energy that sets off the reaction at the atomic or sub-atomic levels.
The availability of usable energy in any unit of energy feedstock depends on both the availability and efficiency of the equipment and process used to extract it. The other side of this equation is the waste that is left over.
I am in favour of embedding the value of energy content in the price of energy substrates via a new market instrument. I have done some work on that and what has become clear is that it does not make sense unless the emission potentials are also encoded in price. This is not a different type of pricing because in a sense they are all reducible to types of availability that can be traded on their own markets, viz.
Availability-value: this relates to the physical availability of a unit of feedstock on the market
Intrinsic (energy) value: this relates to the availability of energy-content within the unit of feedstock.
GHG or waste-value: this relates to the availability (potential) of emissions and its negative value
Energy and emissions therefore have a relationship that is specified by the efficiency of the process used to extract work/useful heat or free energy. What holds this all together in a stable state is the energy substrate, or, the molecular environment within a given volume of feedstock.
The Business Case for Capture
Carbon can be made more valuable [...] by reducing its excess availability, ... Removing it from places where it is not wanted depends on creating places where it is.
The economic case for carbon capture is predicated on negatively monetising emissions and creating markets for carbon trade. If carbon is made valuable in storage it will be extracted from produced fluids and combustion at point of use and if that can scale successfully, the reduction in carbon availability would bring Direct Air Capture (DAC) into economic range. None of this can happen without carbon trading since altruistic DAC is not a scalable concept.
If this all seems too abstract, i.e. that stored carbon could have a value, is it any more strange than having hundreds of tonnes of gold in repositories to underwrite currencies? What drives the price of precious metals is their rarity which is another way of saying they are not very available. Carbon can be made more valuable (and therefore more worthwhile to capture) by reducing its excess availability, by which I mean, more than needed in the environment. Removing it from places where it is not wanted depends on creating places where it is.
World shortages result of geopolitical fault-lines but no matter what the product is, in a competitive market, the prices are not set by the producer. Hence, competing businesses may have widely different overheads and profits for the same market share. Obviously, no product can survive if the market does not sufficiently value it and businesses that cannot accommodate their production costs within the marketable price of their products, must inevitably fail. The supply-side costs are therefore supply-side risks and will remain so with adequate measures in place.
The Value of Consumer Choice
Waste is the destruction of value and that cannot be done without consequence.
To protect consumers the market must be carefully regulated and audited to ensure monopolistic practices or cartel-like behaviour does not creep in. This is not a fait accompli when considering that the markets and their assurance providers (e.g. credit rating agencies) have been notoriously untrustworthy.
A competitive environment is beneficial to the consumer because it implies choice and mitigates monopolistic risk. Why then would having the option of hydrogen heating be worse for consumers than having no choice apart from electrical heat?
Wouldn't the ability to develop some aftermarket hydrogen conversion strategies, help to speed up the fuel transition for road transportation? Is it really better than we passively wait 30 years to allow obsolescence take its toll on the worldwide fleet? Should we instead, as some would have it, just scrap these vehicles overnight without any consideration of where the energy comes from to process the waste? Waste is the destruction of value and that cannot be done without consequence.
Ultimately, when buying anything, the price you are prepared to pay is based on your subjective opinion of value. Similarly, but for reasons that may not be immediately obvious, the value of energy to the individual is also entirely subjective. I will touch upon this again in the remaining two articles in this series but if you want to understand this point in more detail now, see an article I wrote last year Abstractions of Proof and Why your Value Judgement is a Climate Risk | LinkedIn. It was intended to be a useful primer for the articles to follow this year.
Is it possible that the price of domestic hydrogen heating could rise relative to that of electric heating? Yes but only to the extent that the market values the differential benefit. Individuals might have a preference for cooking over a flame and that may influence how they value gas but of course, not at any price and the wholesale market must be satisfied it is at a price that it can pass on. If, as detractors claim, hydrogen cannot be economically split out, then the market will reject it. This is a stupefying claim and in the next episode of this series, I will not only tell you why, but also show what you have to believe in order for it to make sense.
Opponents of hydrogen are very vocal in their claims about cost, efficiency and even environmental impact but disregard the cost and impact of mining materials needed for batteries, solar panels and wind turbines. It will take extraction to an entirely new level. We do need to electrify but to fool ourselves that all we have to do is to wish it into existence, without any consideration of what it is going to take to get there in terms of transitional steps, is to jeopardise everything.
In the final part S2 E4/4 Why We Tin Tomatoes, I introduce the forth dimension of value and show that one of the things it applies to is green hydrogen.
Next: S2, E3: False Equivalences