Liontrust Sustainable Investment Annual Review 2022 - Flipbook - Page 17
Improving energy efficiency in industry
2022 was a very eventful year which saw a global energy crisis,
particularly acute in Europe, triggered by Russia’s illegal invasion of
Ukraine. Much of Europe relies on Russia for a large proportion of its
natural gas and attempts to replace Russian gas (due to embargos
following Russia’s unacceptable behaviour in Ukraine) meant there
was huge demand for natural gas of anything but Russian origin.
This pushed global natural gas prices up to all-time highs. This in
turn hit electricity prices which are affected by the cost of natural
gas. The super-high wholesale electricity price rises meant energy
users were faced with electricity bills multiple times higher than they
had been used to. This prompted emergency interventions by many
governments to tax super-normal profits from electricity generators
(this included many renewable generators) and cap electricity prices
for customers through various forms of market intervention or paying
very large subsidies to consumers and some businesses.
This has had a profound effect on the way governments think about
energy and prompted a new interest in security of supply (not being
reliant on fossil fuels from politically risky areas), higher conviction in the
role renewables can play in achieving this and also a realisation of how
important energy efficiency is. It makes even more sense to use energy
more efficiently, waste less energy, reduce energy bills and emissions.
An investment in energy efficiency becomes more economical the
higher the energy prices are because the payback period (how long
it takes to recoup your original investment) becomes very short. While
there was a panic into using more fossil fuels (coal for generation in
Europe) and calls to reopen the North Sea and support natural gas
(and even calls to open up fracking in the UK), we think the longerterm impact will be fairly muted. Unfortunately, sometimes it takes
a crisis to reassess a challenge, and the only positive out of all this
tragedy is, we believe, the resolve for increasing renewables and
energy efficiency has been profound and will have a lasting impact
in providing additional structural demand for businesses that provide
products and services into these areas.
We continue to work on this theme which can be applied right
across our economy.
Meanwhile there appear to be two investable areas which could
lead to dramatic changes to carbon emissions from industry: firstly,
one specific to the iron and steel sector, and secondly, more general
improvements in overall process efficiency.
Iron and steel production: Recycling steel is much more energy
efficient than primary iron ore production (using about 80% less
energy) but a limit on available scrap metal for recycling means
we can’t simply stop primary iron production. An alternative, more
energy efficient method of producing primary iron is Direct Reduced
Iron (DRI) and bringing this up to economic scale is key to improving
energy efficiency. There is a huge disparity in carbon intensity for
different steel producers that range from 3.2 – 0.6 tCO2e/ t crude
steel and we would focus on the most energy efficient companies
that are also being proactive in continually improving the carbon
intensity of their production. We do not currently hold any steel
producers in the SF Funds.
Software for process efficiency improvements: There are numerous
areas where process industry can use energy more efficiently and
the digitisation of production and optimisation to reduce material
and energy intensity is a theme we have invested in for many years.
Companies exposed to this theme include PTC (industrial design
technology), Ansys (simulation software for testing and design),
Autodesk (digitisation in building and construction), and Keyence
(sensors and vision used in industrial production to reduce errors and
improve materials and energy efficiency).
Liontrust Sustainable Investment: Annual Review 2022 - 17