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Fossil fuels: Here to stay or heading for extinction?

The pathway to net zero is not easy, nor is it linear, particularly for companies in parts of the world where conventional fossil fuels are still widely used for energy generation.

Beyond the headline net zero commitments and frequently reoccurring climate platitudes, reducing carbon emissions in line with global targets will require some seriously heavy lifting, particularly by companies with long histories of traditional energy generation.

In the case of MVV, a German regional integrated utility, and Utilitas, the largest district heating operator in Estonia, the roadmap for net zero greenhouse gas emissions is multifaceted and comprises significant technical and technological renewal as well as cultural change.

In the 13 years to the end of 2021, Utilitas, which operates three combined heat and power and now nine solar parks to heat 174,000 households in Eastern Europe, has invested more than €400 million to drive down its reliance on greenhouse gas emitting energy. During this time the company has replaced natural gas and oil-fired energy production with new biomass-fuelled combined heat and power plants as well as sourced waste heat from a nearby energy-from-waste plant. 

Utilitas is one of the 17 companies in Igneo Infrastructure Partners’ portfolio of 25 that have set a net zero emissions target .

To meet its commitment, Utilitas has estimated it will spend an additional €550 million on a series of programs to upgrade energy production and infrastructure to improve efficiency, secure green electricity supply with the construction of two renewable energy projects, and implement digital solutions to reduce consumption peaks which saves energy.

Plans are already in place at the district heating operator to install sea and wastewater heat pumps, invest in new and more efficient pumps, replace natural gas production with biogas, construct new onshore wind and solar projects as well as introduce smart substations to enable real-time automatic management of the networks. 

Source: Igneo Infrastructure Partners

The plans and capital earmarked for Utilitas’s transformation are among the more detailed in the group of 25 companies, but emblematic of what sits behind a commitment to net zero.

Igneo is aiming for all of its portfolio companies to have in place by 2023 a long-term goal for achieving net-zero emissions by 2050 or earlier. Portfolio companies should also articulate short and medium-term emissions reduction targets.

Reducing emissions, not avoiding them

Setting a net zero target doesn’t necessarily mean just investing in companies with low carbon intensity

Setting a net zero target doesn't necessarily mean just investing in companies with low carbon intensity. In fact Igneo measured an increase in its portfolio’s carbon footprint in 2021 compared to the previous year. The firm measures its portfolio’s carbon footprint using the weighted average of tonnes of scope 1 and scope 2 CO2e emissions of its portfolio companies per million Euros of net asset value.

Igneo attributes the increase in its portfolio’s carbon footprint during the 12 months to 2021 to acquisitions of relatively high emitting businesses, enfinium and MVV.

Mannheim-headquartered MVV Energie is a good example of the approach Igneo takes working with companies despite exposure some other investment firms might consider to be a ‘show stopper’ such as coal power generation, as highlighted in this recent insight.

Like many regional utilities in Germany, MVV looks back on a history of over 100 years and has traditionally relied on conventional fossil fuels to generate power and heat for its customers. MVV’s total carbon footprint is dominated by its Scope 1 emissions from gas and coal-fired co-generation plants.

After months of detailed planning, in October 2021, MVV published a new target to reach net zero by 2040, a decade ahead of the timeline Igneo places on its portfolio companies as part of its ‘Climate Action 1, 2, 3!’ program. The company has also committed to interim goals including reducing Scope 1 emissions by 80% by 2030 and reducing Scope 2 and 3 emissions by 80% by 2035, both against a 2018 baseline.

Beyond 2040, MVV plans to become climate positive, removing carbon from the atmosphere by sequestering it at its biomass and energy-from- waste plants.

MVV’s roadmap to its ambitious net zero goals include commissioning a new natural gas plant in Kiel to replace an old coal plant, upgrading an energy-from-waste plant in Mannheim supporting the city’s district heating network and providing incremental capacity to allow gradual decommissioning of Mannheim’s major coal plant. It also has on its roadmap the opening a new energy-from-waste plant in Dundee, Scotland, as well as renewal of an older energy-from-waste plant that had been earmarked for decommissioning. 

Important Information

This material has been prepared and issued by First Sentier Investors (Australia) RE Ltd (ABN 13 006 464 428, AFSL 240550) (FSIARE) (Author), which forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (MUFG), a global financial group. A copy of the Financial Services Guide for FSI ARE is available from First Sentier Investors on its website. Igneo Infrastructure Partners (Igneo) is an unlisted infrastructure asset management business and is part of the First Sentier Investors Group.

This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation.

Any opinions expressed in this material are the opinions of the Author at the time of publication only and are subject to change without notice. Such opinions: (i) are not a recommendation to hold, purchase or sell a particular financial product; (ii) may not include all of the information needed to make an investment decision in relation to such a financial product; and (iii) may substantially differ from other individuals within First Sentier Investors.

To the extent permitted by law, no liability is accepted by MUFG, FSI ARE nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that FSI ARE believes to be accurate and reliable, however neither MUFG, FSI ARE nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of FSI ARE.

Any performance information has been calculated using exit prices after taking into account all ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.

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