‘The decarbonisation horse is out of the barn’

INTERVIEW: Walter Nasdeo of Ardour Capital and Nick Rohleder of New American Energy discuss market volatility, energy inflation and investment trends

Sep 28, 2021

Energy and commodity inflation is running rampant. The post-lockdown bull run is unlike anything the world has seen this century, with markets threatening to overheat. But none of today’s market turmoil can derail the decarbonisation megatrend that is funnelling ever-greater sums of capital into clean energy technologies.

That’s according to Walter Nasdeo, a straight-talking veteran Wall Street cleantech investment analyst. Nasdeo is managing director at boutique investment bank Ardour Capital, headquartered in New York City. He is also chief investment officer of New American Energy, a clean energy technology and infrastructure asset management firm and hedge fund, which is co-founded and co-led by investment strategist Nick Rohleder.

In a wide-ranging interview with Energy Flux founding editor Seb Kennedy, Nasdeo and Rohleder discuss:

the fallout from surging energy markets
solar PV cost inflation versus materials innovation
the use of forced labour in some Chinese polysilicon factories
the chances of achieving zero-emissions power grids by 2035
whether hydrogen can overcome cost and efficiency challenges to find its place in the energy transition

Walter Nasdeo of Ardour Capital (left) and Nick Rohleder of New American Energy

Seb Kennedy: Walter, let’s start with a brief overview of where you started in clean energy technology investment research, and your work at Ardour Capital and New American Energy.

Walter Nasdeo: We started Ardour Capital back in 2002 with the sole purpose of doing nothing but alternative energy, cleantech, renewables and sustainability. And that’s what we’ve done for just about 20 years now. So we know the space and we know where the skeletons are buried. There’s not a lot of people that can anecdotally discuss the milestones or dramatic failures that we lived through over the course of the of the two decades.

We met Nick Rohleder almost two years ago now, when he was starting New American Energy with his partner. Their experience dovetailed with that of Ardour Capital, allowing us to establish a merchant bank model. As opposed to just an asset management fund firm or just an investment bank, we do both, we cross over. I’m the chief investment officer of New American Energy. And I’m also the managing director at Ardour Capital. The New American Energy Fund has been up and running now for well over two years.

Seb: Tell me more about buried skeletons and dramatic failures.

Walter: OK. I went to a conference in 1999 and each analyst on the panel was asked, what’s your pick for next millennium. The Lehman Brothers analyst picks Plug Power, so its share price goes from two dollars to $153 in a matter of two months. And of course, there’s nothing sustainable there so then it goes right back down. And that’s what we have seen over the last 20-something years, peaks of excitement when everybody buys, then all of a sudden people go, ‘what do you mean they’re not going to be profitable for the next ten years?’ and the stock plummets again. We’ve lived through these cycles.

You also saw companies establishing business models that revolved around government subsidy programmes. While that’s not a bad thing, it overlooks how to build a competitive business going forward. There is a battery company that was doing all sorts of government business. And then one day their contract was up for renewal but Congress postponed that vote for two weeks and it blew up their quarter. It was going to happen, just not when they needed it and their quarter [was ruined].

Back then (early 2000s) we had very few discrete technologies trying to figure out how to get, first, a commercial revenue stream. Profitability wasn’t even in the discussion at this point. We were just trying to figure out how to sell products without government assistance. Government support is fine as long as it’s additive to a commercial revenue stream.

Today, it’s a very interesting time to be involved because we’ve never seen the development that we’re seeing now. We’ve never seen the focus, we’ve never seen the demand. I mean, this technology used to be pushed and now it’s pulled. Developers and financiers are getting excited because now people want this stuff, you don’t have to ram it down their throats anymore. They’re calling for it. We have to hurry up.

That’s a big aspect that has changed so much in my 20 years here. Before it was, ‘who’s going to buy this? I don’t know. We got to go find somebody’. And typically they would go to the military or some sort of branch of the government. Not anymore.

Seb: With this wealth of hindsight, how do you see current energy market volatility impacting investment trends? Will this accelerate the corporate renewables drive in a bid to lessen company exposure to fossil fuels? Or will the failure of renewables to protect consumers from wholesale price swings convince policymakers to incentivise investment in energy/gas supply security, to the detriment of cleaner alternatives?

Walter: This is a question we have been asked numerous times over the past two decades. We have seen oil price volatility, natural gas volatility, refinery disruptions due to weather events, etc. The short answer to this is that any adverse effects on renewables [are] short lived and minimal. [T]his is not a zero-sum game. Investment in one does not systemically equate to a lack of investment in the other.

Remember also that a considerable amount of resources flowing into […] renewables come from the private sector. Stakeholder demands are leading to board-driven corporate mandates to reduce carbon footprints. These mandates lead directly to buying decisions that benefit the current health [of society] along with future development of the space. Also, in terms of energy security, renewables provide a much more secure power paradigm as these technologies are distributed by nature. E.g., numerous small power grids as opposed to a centralized grid.

So, while we may see a short-term focus on fossil fuels, I don’t think we will see any adverse effect on the ongoing development of renewables.

Seb: What’s your view of rising solar costs and material inflation? Is this a temporary blip or is the solar segment entering a new cost paradigm? What role can technology, ancillary technologies in particular, play in reversing that trend?

Walter: Yes, it is temporary. As with any blip, you see disruption. Then you see people focusing on the problem and figuring it out, whether it’s at the mining level, the manufacturing, or the engineering level, and then they drive the cost back down again. The silicone issue, the ingot issue, is a challenge and it has been for a long time, and those supply-demand inequalities pop up periodically. But I think one of the things you’re going to see is better use of the amount of silicon that is currently being used to squeeze more electrons out.

For example, perovskite is very interesting and advancing rapidly. Layering these into the panels in these crystals gives you better efficiency. You’re going to see more bifacial panels using the same amount of silicon to catch the residual back-bouncing photons. You’re going to see more materials [innovation] where you’re doping polysilicon with elements like phosphorus, arsenic, antimony. These elements have extra electrons, which increases overall efficiency.

They’ve started making larger wafers to reduce assembly costs. As opposed to using smaller wafers and making more panels, you can use larger wafers to basically make the same amount of panels with less cost involved.

And then one area that doesn’t get a lot of press is advancements in thin film, particularly reel-to-reel thin film, which promises to drive costs down dramatically. When that happens you’ll start to see the whole BIPV [building integrated photovoltaic] market really open up so that you’re able to put photovoltaic materials into windows, frames, roofing materials. And that would be based off the advancements in reel-to-reel.

You’re also going to see miniaturisation of electronic components. We’re seeing a lot of that. And as that happens, that feeds into smaller, lighter and less expensive end products, whether they’re fuel cells, batteries or solar. There’s a dovetail effect with developments in other areas feeding into the energy [transition].

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Nick Rohleder: Another thing that is going to have a significant impact is cost of capital. We have low interest rates and growing investor interest. When you look at the green bond market and how tight the pricing is, the paper behind a lot of [solar] capacity additions has been drastically lower cost than in the past. Financial engineering is also assisting downward price pressure.

There are materials inflation issues that are largely transitory, this is an 18-month issue. Capacity additions will hit with record low cost of capital in conjunction with heavily sophisticated cost control implemented through digitisation in these facilities.

Seb: OK, so what you’re saying is don’t bet against human ingenuity? That we will work our way around this cost blip by pulling all the levers at our disposal — technological, financial — and that solar PV costs will resume their downward trajectory?

Walter: Yeah, what’s important for people to understand is the horse is out of the barn here. Decarbonisation is going to happen. It has to happen. There’s too much money and reputational risk associated with the development of alternative energies now. Large companies, large boards of directors are saying, we’ve got to do this, get green and sustainable. We have to change the way we do business. So momentary blips or irregularities in the pricing continuum are really kind of irrelevant to the overall goal of reducing the carbon footprint, reducing our usage of resources.

People ask me, ‘what happens if we get another very tight conservative administration in three years?’ It doesn’t matter. Are these government subsidies helpful? They are sometimes. A start-up company could use it. You can layer it on and squeeze a couple of extra percentage points on the profit, a couple of pennies to the EPS [earnings per share], that’s fine. But that’s not how they’re building business models anymore.

Seb: What are your views on the reshoring of upstream polysilicon manufacturing capacity, which the Biden administration wants to do as part of its crackdown on abusive labour practices in China? Is this a big opportunity for investors to start new polysilicon factories in the US or elsewhere?

Walter: I’m not sure, it’s expensive. In order to build a foundry, to pull silicon and make ingots is very expensive, time consuming, and it does need a significant amount of permitting. I don’t see somebody making that type of commitment to go out and build an ingot pulling factory in a higher cost domicile with the hope that China will never figure this out.

When I was in China we spent a lot of time visiting solar companies. We went to Suntech, Trina Solar, Canadian Solar. Suntech had a huge factory floor, and there were probably seven or eight thousand people in there at workbenches with mountainous mounds of cells. And with a handheld soldering iron they would lay the cells out on the laminate and solder each cell together, take it to the laminate machine and laminate it.

Suntech told me when they advertised for five assemblers, they had over five thousand people stand in line to try to get the job. It’s considered a high-tech job, even though it’s standing at a workbench with a soldering iron. So I think that unfair or discriminatory labour practices could be remediated by China saying ‘we’ll give you an extra 50 cents an hour’ or whatever to cross whatever divide needs to be crossed in order to get that label removed. The market is too big for them to just say, ‘OK, we’re going to just turn our backs on the world and just produce [for our] internal [market]’. I could be wrong, but I don’t think that they are that short sighted.

Seb: You’re being generous, I think, to the Chinese, because there is very well documented catalogue of child labour and ethnic repression issues happening in the Uyghur region in Xinjiang, which is where the polysilicon capacity is located. So I can’t see them sitting down with trade unionists because that just doesn’t exist over there. It’s a very repressive environment.

Walter: I certainly wouldn’t consider myself to be pro-Chinese. I think it just comes down to the economics of the situation. China has developed itself into a provider of certain raw and intermediate materials at a cost that is better than most other providers can offer. Consequently, that seems to override a lot of the other issues in a global market.

Seb: You’ve got to look at why the price is so cheap, right? When you start digging into it, you see polysilicon factories powered by subsidised coal power stations, and exploitative labour practices. The Biden administration has been very clear, they’ve started to halt the imports of certain polysilicon components from that region of China.

Nick: Yes, there are labour issues in China right now. There are studies that have shown that there are oppressive practices amongst ethnic minorities and other vulnerable groups. But you’re already seeing China as a manufacturing centre get priced out by other countries in Southeast Asia where there aren’t abuses of ethnic minorities. Are there labour or other quality issues due to the status of these developing countries? The probability is yes, but they’re coming up the industrialisation curve with some form of democracy.

Broadly speaking, due to the growth in the semiconductor and alternative energy sectors, there are reshoring opportunities but only where there’s growth, it’s not [replacement of existing capacity]. We need a much more robust technology supply chain to the United States and Western Europe. But it’s a balancing effect to support self-sufficiency rather than an absolute hegemonic shift of who controls the supply chain.

Remember also that in Western markets there’s a completely different environmental standard about how to locate a newbuild polysilicon facility. The Chinese look at this from the perspective of, let’s build it as close as possible to the logistics centre, which is generally not that far from a population centre. Replicating that in Europe and the US is quite challenging: 20 miles from port versus 100 miles from port. That embedded logistics costs is where a lot of those differentials are.

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The reverse innovation factor that really gets the cost down is putting it right near whatever the critical infrastructure is. As we reshore these, they’re not going to be right next to the critical point of transportation, whereas that’s how the [Chinese] supply chain is set up.

Seb: OK, but that sounds like it could be a source for cost inflation. What you’re describing is losing some of the cost savings of co-location that the Chinese leverage by having everything in one place and disregarding emissions. You said that the solar cost increase is a blip, but that sounds like it could work the other way.

Walter: As these things start to happen, you’ll see methods of remediation come into play. Now, will there be some sort of friction in the costing if there is less output from China because of sanctions, or as they move to Taiwan or maybe Singapore or some of the other countries that could step up and fill the void? Yeah, there could be. And it could cause 12, 18 or 24 months of friction in the regular pricing models. But as it works itself through, typically, what you’re left with is better than what came before. From an economic perspective, it behoves them [China] to figure out a way to keep the large buying part of the world happy and buying their products.

What’s going on here will be evolution. I hesitate to use the term Moore’s Law, but it has been that type of effect. And as the effect has been happening, it’s gone from a 10-year cycle to a five-year to a two-year to a year. There’s a microscope on this space. The world is clamouring for new methods of producing power and fuel. The development cycle has really truncated.

If there are blips in the supply chain, how are they managed? Well, there’s a lot of smart people out there that have sat down and asked, ‘what happens if we can’t get it from China? What do we do?’ So there must be levels of redundancy in the supply chain. But it sounds like you don’t agree?

Seb: I don’t totally disagree. I think it depends on the pressures that are exerted upon the People’s Republic of China and the Communist Party. If they see that they’re losing economic power, then they will act accordingly. And that comes back to the political question. Until then, who knows? Maybe we’ll see a bifurcated market where Chinese imports are not permitted in certain countries like maybe Western Europe and the US, Canada, but they’ll still find a market in India, Pakistan, countries that are prepared to accept lower standards on their product imports.

Walter: Yeah. But it’s always been like that. Early on, you had cell manufacturers in Germany. High technology, really high-quality product. But they were much more expensive. You had large solar developers buying cells from China and you would get a box of cells with eight, ten, fifteen percent wastage in the box. Then the large banks said ‘we will not fund any project that’s using any sort of Chinese cell or panel in the in the construction process’.

The market is and will continue to be bifurcated. That’s just economics. Will the Chinese dig their heels in? Until it has a profound economic effect on their industry, they probably won’t be eager to [reform]. But once it does, they will say we need that income, that revenue. What is the upside for us to not change? Will we be able to, like you said, sell to India or Pakistan or another developing country that says we don’t care, we just want the cheapest thing we can get? Yeah, but I do think those markets will get saturated because clearly the larger projects will be in Western-orientated markets, at least for the foreseeable future. And so if enough of those large projects are saying we can’t buy from China, that will have a big enough effect for the Chinese to say, OK, we’ve got to fix this.

Nick: If a sophisticated global pact clamps down on China and it becomes a 36-month issue, versus a 24-month issue, that’s going to create a stability issue for the mechanisms that operate a billion-person country and keep it running smoothly. Just the US and the EU alone could effectuate that if they wanted to. There are structural economic policy levers in place that will, I think, bring the Chinese to the table.

Seb: OK, let’s move on to hydrogen, which I know is a thematic area of investment for you. Let’s discuss the 30% roundtrip efficiency of using electrolysis to produce hydrogen, store it, then releasing the power. How can hydrogen overcome that to out-compete batteries or other solutions that are more energy- and cost- efficient?

Walter: Today we are not at the level of efficiency that we will be at in 10 years’ time. And I think your 30% is a little low on your round-trip efficiency. It’s very disingenuous for people to say ‘hydrogen will never work, it’s economically infeasible and you should go with batteries’. That’s malarkey.

You can’t assume away the problem. And a lot of people do that. Electrolysis is not 70% efficient. It’s 80% efficient. Is that a big deal? Well, as you amass all of your issues with the conversion and you’re missing by 10% or 15% on each one, you’re going to end up with a big bogey at the end.

Competitiveness depends upon what are you paying for electricity. Are you getting renewable electricity via private wire, are you getting grid power at off peak or peak rates? If you’re paying peak electricity, the model really is challenging but most people that make hydrogen via electrolysis are taking off-peak electricity, two cents a kilowatt-hour. If you’re paying 15 cents a kilowatt-hour it’s difficult. If you’re doing dedicated renewables, OK, you have your sunk cost and then above that you have free electricity.

Regarding ‘blue’ hydrogen, we see a lot of carbon capture technologies coming out. To offhandedly say that just prolongs the [emissions] problem, while on the face of it may be substantially correct, I think there will be methods of dealing with that as we progress.

On price, you could say, well, right now we’re looking at nine to ten dollars per kilogram [of hydrogen], and that’s just too expensive. That is true. But I have spoken to companies that can manufacture hydrogen under five dollars a kilogram. Theoretically and in small amounts, we have to see the rollout of that to an industrial level, but it can be done.

Seb: Is that electrolysis?

Walter: Nine to ten dollars is electrolysis. The other is steam methane.

Seb: With carbon capture or is this unabated?

Walter: It is unabated with a carbon capture module being prepared; it will end up with carbon capture. It’s very difficult to come from a standing start to zero carbon. You have to develop the technology while fulfilling the needs of the market.

If the technology is there, eventually it’s going to work because then it’s a function of engineering. We’re seeing significant material advancements in many different areas, the miniaturisation of electronics, advanced materials, we’re seeing fullerenes coming into play. These nanotechnologies are increasing efficiency and decreasing both size and cost.

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Seb: The US Department of Energy wants to reduce the cost of long duration storage by, I think, 90% this decade. Do you think that is that feasible? I guess they wouldn’t have put out this call if I didn’t think it was. How do you see that happening?

Walter: Materials. We’re at the very beginning of our decade, so we’ve got a long time in the world of science and development to get this done. We’re going to continue to see better conductivity materials being developed. Nanostructures that can help reduce not just the footprint, but also the cost models of some [energy storage technologies]. It’s only a matter of time.

There are too many people spending too much money and devoting too much effort to say that we have peaked and we’re not going to get any better, that ‘hydrogen is never going to get any more efficient to convert’, or that ‘battery lifecycles are not going to get any better’. A big limiting factor is the battery management systems, the software. We will see improvements these areas and many others.

My overarching theme to all of this is there is no panacea. So if you’re going to ask me what is the best technology for the future, I’m going to tell you, I don’t know. And the reason I don’t know is because they are application dependent. Every technology [finds its home].