Week 18: Is biomass an energy source for the future?

In this issue: ▸ The ESG outperformance narrative is flawed ▸ Biomass is a hot potato (politically) ▸ So what is biomass? ▸ Biomass by the numbers ▸ And much more...

Dear all,

I hope you are doing well, and that you are ready for this week’s ‘ESG on a Sunday’.

The topic this week is biomass and what role it can and should play in the transition to a sustainable future.

ESG outperformance, really?

But, unfortunately, we need to start somewhere else, and it’s a tough one: According to new research, the ESG outperformance narrative is flawed.

The research shows that the widely held belief that “sustainable” investing delivers outperformance is a mirage and the above-market returns are actually achieved by exposure to so-called style factors long known to boost investment returns.

The claims of positive alpha in popular industry publications are not valid because the analysis underlying these claims is flawed “with analytical errors”, enabling the documenting of outperformance where in reality there is none. 

Recently, a NYU paper found that the majority of more than 200 studies published since 2015 concluded that ESG boosted returns. There is little doubt that these studies have helped open the floodgates to ESG investing, with self-proclaimed ESG funds attracting $340bn of inflows over the past two years, according to EPFR.

However, the fresh research – an analysis by Scientific Beta, a “smart beta” index provider linked to the Edhec Research Institute – disputes the claims that ESG funds have tended to outperform the wider market, or, in industry jargon, generate “alpha”. 

Biomass is a hot potato (politically)

Over the last couple of weeks we have touched upon nuclear and hydro. Today we dig deeper into the topic of biomass. Speaking of digging, it really is a very complex topic and far more politicised than many of the other energy sources.

I did expect some of that since the latest EU taxonomy negotiations resulted in a mostly positive outcome for biomass as a source of energy for the transition to a sustainable future.

There are number of reports available and a number of different views. Many of them are very polarised, and some are jolly positive. One thing is clear though: Biomass is here to stay and it is going to be one of the cornerstones for the energy transition in many countries around the world. 

So what is biomass?   

Biomass is plant or animal material used as fuel to produce electricity or heat. Examples are wood, energy crops and waste from forests, yards, or farms.

Since biomass technically can be used as a fuel directly (e.g. wood logs), some people use the terms biomass and biofuel interchangeably. More often than not, the word biomass simply denotes the biological raw material the fuel is made of.

Biomass is defined as any plant matter used directly as fuel or converted into other forms before combustion. Included are wood, vegetal waste (including wood waste and crops used for energy production), animal materials/wastes, sulphite lyes (also known as “black liquor”) and other solid biomass. The word biofuel is usually reserved for liquid or gaseous fuels, used for transportation.

The IPCC (Intergovernmental Panel on Climate Change) defines bioenergy as a renewable form of energy. In 2017, the IEA (International Energy Agency) described bioenergy as the most important source of renewable energy. IEA also argue that the current rate of bioenergy deployment is well below the levels required in low carbon scenarios, and that accelerated deployment is urgently needed.

Among renewable energy sources, bioenergy (energy from bio-based sources) is the largest pool of renewable energy. Currently biomass covers approximately 10 percent of the global energy supply, of which two-thirds is used in developing countries for cooking and heating.

Biomass by the numbers

Leading countries on biofuel production in 2019 were US, Brazil and Indonesia.

However, among the countries that make greater use of biomass we find countries such as United Kingdom and the Nordic countries and Poland.

Biomass currently represents almost 60% of the EU’s renewable energy, more than solar and wind power combined, according to the EU’s statistical office, Eurostat. And even though wind and solar are growing fast, countries such as Austria, Denmark, Finland, Latvia and Sweden would have been unable to achieve their 2020 renewable energy targets without biomass. Bioenergy is basically the backbone for these countries’ full stop. 

In the EU, Germany is the leading producer of solid biomass. Production volumes reached an estimated 12.8 million metric tons of oil equivalent, which was 2.6 million metric tons more than France, ranked second. Total primary energy production in the EU amounted to 96.9 million metric tons in 2019.

If you want to know more about solid biomass, this portal and report is very, very good. And this paper is equally good.

If you want to explore the data further, this is a very good place to start.

But there are certain challenges…

One of the biggest problems related to large scale biomass supply is the energy density that is needed to decarbonise heavy CO2 emitting industries.

The logistics involved in developing a biomass-based power project can be daunting. Sourcing, transporting and storing biomass are issues that need to be addressed.

Additionally, the biomass feedstock shape (chipped, pelletized, rounded, baled), strongly influences the bulk density and affect the transportation economics.

In addition to the bulk and energy density, large scale biomass supply is affected by a wide range of bottlenecks including raw material initial cost, biomass producers involvement, environmental regulation and sustainability.

But there are other concerns that have caused a lot of debate.

Last year, a group of climate activists filed a lawsuit against the EU to challenge the notion that forest biomass is carbon neutral, a principle which is currently enshrined in the bloc’s renewable energy directive.

According to this group “the treatment of biomass as carbon neutral runs counter to scientific findings” which shows that burning wood for energy typically emits 1.5 times more CO2 than coal and 3 times more than natural gas, the plaintiffs claimed.

The European Court of Justice dismissed the case, saying the activists had failed to demonstrate how the directive was of “individual concern” to them. Which is by all means almost funny.

You can find the lawsuit here and here, and I do recommend reading it. It gives entire new ‘flavour’ to biomass discussion.

So is biomass sustainable or not? 

Like fossil fuels, biomass releases carbon dioxide emissions upon combustion. While there is an argument for carbon balancing – due to the carbon dioxide that is removed from the atmosphere by trees and plants during their lifetimes via photosynthesis – these are nevertheless emissions that could be avoided if other renewable sources like wind or solar were used instead.

In addition to CO2, burning biomass fuels results in the release of various other harmful gases such as carbon monoxide, NOx (nitrogen oxides), and VOCs (volatile organic compounds), which all contribute to air pollution.

Providing the feedstocks used in biomass power plants – frequently in the form of wood pellets – requires large areas of forest and woodland to be cut down. Proponents will argue that all trees are replaced with new ones, that can grow, remove carbon, and be used for future energy needs.

But this cycle requires strict adherence to sustainable land management and responsible agriculture throughout the supply chain. And as biomass power stations grow in number, demand for these materials will multiply accordingly – exerting greater pressure on a natural resource that is already under threat from other industries.

There are biodiversity considerations too, because while an area of forest might be replaced to grow anew over time, the wildlife and ecosystems that are displaced by these actions are faced with a more immediate challenge that is not solved by planting young trees.

While renewable technologies like wind and solar will likely dominate the future energy mix, biomass-fired power generation has also emerged in this transitional period. Many former coal plants are in the process of converting their existing equipment to run on biomass feedstocks. Meanwhile, biofuels will be important alternative energy carriers to fuels like diesel and petroleum, to be used in transport, heating and some industrial processes.

The full supply chain of biomass must be considered, and all emissions associated with the production, processing, transport and use of bioenergy need to be included if we are to find biomass truly sustainable. 

IN OTHER NEWS…

Passive or active ESG funds?

Can passive funds be truly compliant with environmental, social and governance concerns? And if not, does this open up opportunities for a more active way of investing?

Here’s a very interesting article from Raconteur – including some good arguments (mostly for the active side). 

Lagarde calls for a green capital markets union

Europe needs to develop a “green” capital market union to generate cash for sustainable investment and remain the location of choice for investors issuing green debt, ECB President Christine Lagarde said on Thursday.

Europe is aiming for a leading role in the shift to sustainable growth and the European Union is planning to issue 225 billion euros of green bonds as part of a recovery project.

However, the bloc’s capital markets remain relatively underdeveloped.

That’s it for now. Have a great week everyone!

Best regards,
Sasja