Category Archives: Infrastructure

Green race II

There’s going to be a new kind of entrepreneurship; not necessarily one that is building businesses with an established revenue stream or for a current market need, but one that bets on the needs of a future that the world wants to be creating. And the upcoming green race might unleash this new breed of entrepreneur more strongly than before. In the post-pandemic era where people might have got sick of government stimulus allowing billions of capital to slosh around the system, risking inflation and simply making the richer rich, fiscal policy might be returning to the center-stage as the new means of keeping the public voting base satisfied.

The green race is going to drive new winners in the economy as entrepreneurs who have positioned themselves to make the critical investments needed for the economy. Especially the ones that going to create the very jobs that politicians plan to trumpet about. Being able to think ahead and consider the kinds of businesses desired both by the public sector in an economy that is highly pro-market will be rewarded. The risk is that the public sector decides to take on the direct investments themselves rather than to ‘incentivise’ the businesses to do so. This is why the pro-market orientation of the government is important.

For the markets where the government have the tendency to perform direct intervention or deem infrastructure investments way too strategic to be left to private sector, the green race may take those economy in a different direction. They may choose to create new state-owned and managed entities to make new direct investments or to use the existing ones. And the green jobs will be created within state-linked enterprises. Civil servants who are savvy in these areas will tend to gain within such systems.

Either way, there are going to be new ways smart people will be gaming the system.

Sunsetting infrastructure

At some point in my career I got involved with projects with utilities in Australia. First with electricity distribution networks, then with gas utilities as well. They are all energy networks or utilities because my role as an energy transition consultant is to help players in the economy to navigate the challenges and struggles around our transforming energy landscape. They are struggles that the players and our economy must go through in order to emerge more resilient and climate-relevant.

Electricity networks are seen as important for the energy transition – the drive to decarbonise the energy system – so much so that The Economist ran a cover in April this year that shows a man hugging a transmission tower and the cover text reads “Hug Pylons Not Trees“.

Gas networks and pipelines are on the other end of the spectrum. There’s a lot of concerns around what is going to happen and the expectations of a death spiral. Activists campaigning against the gas networks can sometimes claim that they should be written off completely while contradicting themselves that the assets should not be allowed to depreciate quickly given they still have some operating life or runway. There is a role for gas networks to actually consider the challenging question of getting renewable gas into their network and the struggle has to do perhaps with the question of which gas. Would it be hydrogen, or biomethane, or what? And on the other hand, will they need to transport carbon dioxide? Perhaps captured ones from the industry? What role can the pipelines or network play?

If we keep thinking about molecules and figuring out which molecules, we’ll be somewhat stuck. The trick it seems, is to consider potentially taking the lead. It is still fascinating that Jemena actually took the lead to initiate the Malabar biomethane injection project and saw through it to the recent operation with the first biomethane injection into a distribution network in Australia. Biomethane in most cases is the straight-forward solution – one that is tricky to pull off but can be handled just from supply-side as the end-use equipment will not have to switch from the ones that already use natural gas. Therefore, it is the logical choice for gas networks to start taking the lead on. Perhaps in the next two to three years, it would soon be a no-brainer. But for now, we do what we can to further accelerate the transition.

Hydrogen ecosystem II

When I first penned the blog post on hydrogen ecosystem, I had a couple of ill-fitting ideas that I thought could come together but I did not successfully pull them together beyond putting them in a single blog post. What I really meant to say is that the government will need to do more work understanding and studying the nuances of the ecosystem and industrial value chain that makes sense for green hydrogen and then perhaps take action to ease the struggles of the market in developing projects.

The thing about green hydrogen is that it is something that requires quite a fair amount of new infrastructure. And the situation is uncertain because governments are thinking that maybe electrification will be more dominant and want to avoid investing in white elephants. Or they think that it is all a zero-sum game due to budget and resource constraints and that investing into transmission and distribution which meant favouring electrification would naturally be inconsistent with investing into more gas infrastructure.

In reality however, green hydrogen is made from renewable energy and hence the alleviation of electricity grid issues that foster more wind and solar can also support the development of a green hydrogen sector. The key here again is that the government needs to have better knowledge of how different parts of the value chain works and the value they are contributing.

Only in appreciating that, the governments can make the right moves.

Hydrogen ecosystem

Industries in an economy do not stand alone. This was an idea long appreciated by the Singapore government and that was how they continually managed one of the most successful continuous investment attraction programme. Of course it was dynamic and evolved with times and development of technology. The Economic Development Board of Singapore was relentless, and they did a great deal of work mapping industries and value chains, understanding how they connected with each other, working out how they work, and collecting feedback non-stop from their consistent interaction with the industry.

With the energy transition, a lot of government wants to attract and drive more renewable energy investments in their countries. Southeast Asian governments look with interest as Vietnam ran one of the more “intense” feed-in-tariff programme that propelled them into the top solar power generation market in the region. Taiwan had a successful programme as well, and led some of the North Asia Pacific economies in driving development of their offshore wind sector.

Yet we are probably hitting diminishing marginal returns with such policies thinking that the market can do wonders. For one, solar panels are almost pure capital goods, the cashflow profiles are very predictable and easy to model – especially when you have a long term power purchasing agreement. Capital investors can understand such projects more easily and willing to put funds into projects directly. Newer technologies and the next frontiers of the energy transition won’t be so simple.

Battery storage systems and green hydrogen production will require more policy tweaks and efforts from the governments. Battery energy storage systems do not have very established business models around them. Users can use them for energy arbitrage – that is, to buy electricity from the market when prices are low and sell them when it’s high; or to provide ancillary services to the market such as various reserves or supporting frequency and voltage regulation. Or the users benefit from reliability guarantees coming from the batteries. Green hydrogen on the other hand, has so many different applications and potential offtaker but is difficult to transport and store.

These means that the new technologies require a lot more new infrastructure investments or definition of regulations and policies to stabilise their markets and be de-risked enough for investors to come into the community and start their businesses.

Market for green premium II

Airlines are in the business of transporting people around. Or maybe it’s about curating and creating the best experience in air travel? Or about building a brand? Or is it about bringing people to places and catalysing activities, businesses for locations that would otherwise be overlooked by travellers? Seen that way, the fuel cost of an airline would always be considered a cost. Therefore, to keep cost low, or deliver the greatest profits, the airline will see their fuel as a commodity.

What if the choice of fuel they use starts impacting the customer segments they are targeting or they can serve? What if using sustainable aviation fuel allows them to attract more premium customers? What if they could sell their air tickets at a higher price when they are demonstrably emitting less carbon dioxide? And what if doing so also help them comply with some ICAO requirements?

The market for green premium turns various cost parameters in businesses into a tool for something else. There’s an opportunity to use these new parameters to disrupt the business. Years ago, the low-cost carrier disrupted some of the most traditional airline businesses. Would a low-carbon carrier do the same? What other elements of the whole airline business can be refashioned to fit the whole sustainable, low-carbon identity?

Market for green premium

The energy transition and decentralisation of energy had quietly started shifting the capital markets since close to a decade ago. While the traditional energy players continue to compare the cost of green energy against the cost of their own fossil fuel based energy, they found no reason to diversify their business. Even in face of some subsidy, or some Feed-in-Tariffs, they were reluctant to invest.

There was no scale, and they thought they were going to face more competition and erosion of any green premiums they could secure. But then the capital holders started taking notice. The projects were simple enough to invest into. Solar farms had minimal requirements from an operational perspective, and represented to some degree a pure capital good where almost all the cost are paid upfront for a stream of revenue in long term.

From a risk perspective, it was safe. And so long-term funds which needed safe investments at moderate yields started piling in. The utility scale projects expanded, driving down the cost of equipment, and fostered more innovation there. Here is a case where, the technical simplicity of the operations enabled investors to bypass the typical operating businesses to get into the underlying projects themselves. All of a sudden, it is not about looking for the premium anymore. Because you’re alright with scale.

Sometimes, growing and developing a market is about finding customers who are willing to pay a higher price; but other times, it is about finding investors who are willing to accept a lower expected return for other attributes.

Case on climate change

It’s almost surreal that the explanation of climate change, its far-reaching consequences and the warning of the lack of action as well as the foresight on the reluctance to switch from fossil fuels is so cogently made in 1985 before the US Congress.

And today, we still have what we have happening in the US. Meanwhile, other developing countries are massively adopting green energy, unlocking the opportunities and growth which comes from the energy transition.

The economic downsides of displacing the traditional, carbon-intensive activities were huge in 1985, but compared to the manner we allowed the activities to have expanded till today, humanity seemed like it’s dancing towards the edge of the cliff.

Demand side perspectives

The modern, capitalist, market economy is powered by demand. Demand for products, goods and services. And what drives these demand? Some would like to say, marketing, advertising. But more fundamentally, social comparison, desire for affliation/connection.

So the idea of market competition gets turned on demand itself. In other words, the seller turns to the buyer and say, “He’s got this, so you have got to get it.” This mechanism is so widespread and so completely ignored by economics that at a macro-level, it overturns more fundamental notions of allocative efficiency. The fact that demand is in itself premised upon the actions and long-term strategies of supply, makes the equilibrium in the market impossible to pin down.

There is no long term convergent points and what development has come to be is simply the ability for supply to generate more and more of its own demand.

Recycling woes

When you deposit a recyclable item into the rubbish bin or down the chute here in Singapore, did you know that it means the item will actually never be recycled? It will definitely end up in the incineration plant where everything is burnt. Metals are sometimes recovered but that is just about all. This is because everything collected in the green waste bin by the licensed public waste collectors have to be sent to the incineration plants.

On average, incineration removes more than 90% of the waste matter, leaving a residue which is buried in our offshore landfill at Pulau Semakau. Soon, when the Integrated Waste Management Facility in Singapore is built, there might be more post disposal sorting that takes place after our public waste collectors retrieve the waste. But before that, despite the possible economic incentive of picking out suitable waste materials or matters to be recycled before incinerating the rest, the market is unable to respond to them.

Incineration keeps going and expanding in Singapore as waste volumes increase because that had been a proven solution that is difficult to challenge even when contending technologies and approaches works. If it ain’t broke, why fix it? Yet as our landfill approaches the point of its maximum capacity, we cannot keep kicking the can down the road.

Traffic jams

We spent more than 4 hours along a short 2km stretch of the Singapore-Malaysia second linkway last Saturday morning. It didn’t exactly feel that long as I was in good company and found it entertaining to watch how the buses, lorries, motorcycles and some defiant motorists use the left road shoulder as their fast-track lane.

It was interesting how some of the vehicles steered by really experienced drivers weaved in and out of the road shoulder and then moved to the middle lane at different points of time. The drivers were assertive but relatively patient, finding every opportunity they have to inch forward and wedge between the gaps between 2 cars in the adjacent lane.

There seem to be some kind of logic in the flows and it is questionable if there’s any kind of real queuing justice in the entire journey because there were merging and then diverging lanes. Fortunes of the vehicles could quickly change at these points. And everyone had to be on their toes.

It’s tiring to be driving in a jam because not only are you not making any progress forward but you’re competing to gain just tiny advantage and constantly watching that advantage to avoid losing it. I find this to be an analogy of living in Asia where there’s a lot of competition over very small rewards. Innovation is numerous and difficult to compare. There seem to be some invisible hand that is not just sorting and ordering of quality of ideas but who are behind those ideas. Who you are may determine if you would be penalised for using the road shoulder, and what you know might help you gain a small upper hand or two but overall, the society is held back by the cross-cancellation of the various innovative forces.