London — Global merchant commodities firm Hartree Partners is targeting UK businesses with a behind-the-meter generation and carbon offsetting service it hopes will free up capital for hard-to-abate processes, the company told S&P Global Platts Aug. 6.
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Climate regulation is inevitable for small and medium enterprises, Hartree believes, so getting the segment ahead of the curve makes business and environmental sense.
Founded as Hess Energy Trading Company in 1997, Hartree has over 100 traders and originators in 12 global offices. In 2014, following a buyout by Oaktree Capital, the company moved into owning as well as trading assets.
"We've built 50 MW of gas peakers in the UK market," Hartree partner Adam Lewis said.
"Most players in this space are generally asset owners and engineers as opposed to traders. They come to us to manage their assets but we've turned them down -- we're opening up our trading optimization skills to our customers rather than our competitors," he said.
The new business, Hartree Solutions, is targeting SMEs with annual energy bills of GBP500,000-plus ($556,000-plus).
"SMEs are under-served by the current crop of energy service providers," head of sales Andy Harper said.
Hartree will model company energy data and provide a fixed-price deal based on customer needs. This could include a mix of solar PV, gas cogeneration, battery storage and (if regulations allow) small scale wind technologies, all behind-the-meter, offsetting grid import power.
The trading company would then finance, construct, maintain and operate the generation assets long term.
The customer receives a single pence per kilowatt-hour price. Hartree carries the market risk, assuming a level of optimization benefit and passing benefits on in the single fixed rate.
Hartree is forecasting up to a 30% saving on average costs in the SME segment.
"That fixed pence per kWh price includes carbon offsetting," said Harper.
"If we deploy gas CHP [combined heat and power] and some roof top solar, we can calculate gas burn and how much power the customer is going to take from the grid. We bundle that together and include what it costs to offset those emissions into a discounted rate," he said.
"The aim is to help customers transition to a low-carbon business by freeing up capital for difficult-to-abate processes, while the simple-to-abate elements we offset in this initial phase," he said.
UK manufacturers who have had massive increases in energy costs over the last three years, have genuine concerns about price volatility, and have no control over non-commodity costs, Harper said.
"We're heading into unprecedented times, volatility is going to be exponential, 18 hours of negative prices is not going to be uncommon in future years," Lewis said.
"Blindly running your assets without any understanding or reaction to the markets is going to be extremely inefficient from a price and a carbon angle -- and much of this is about the carbon angle," he said.
The marginal unit
A novel aspect of Hartree's optimization is its sensitivity to the marginal unit's carbon intensity.
While on-site generation would meet the client's needs first and foremost, with any surplus exported to the grid, if the marginal grid unit is less carbon intensive, on-site generation can yield to it.
"I believe we're the only company that can set the optimization profile of a gas asset based on marginal carbon. We can turn that asset off if the current marginal unit on the grid is lower in carbon intensity than that generation," Harper said.
The client chooses where it sits between the bounds of maximum savings and maximum carbon reduction.
"If the client, irrespective of whether he is offsetting those carbon tons, wants this kind of optimization, we can guarantee that the on-site unit will always be greener than the grid, or we turn it off and import," he said.
Demand for offsets
Rapid cost reductions in renewables and carbon abatement technologies over the last 20 years "is what makes this possible," said Hartree's head of environmental products, Ariel Perez.
"What we are talking about is a re-investment of savings from optimizing a power asset with us, into decarbonization technologies and opportunities on the left side of the cost curve," he said.
The offsets act as a transition tool until different technologies from different industries and processes come of age, he said.
"We're seeing increased demand for emission reductions, and we believe strongly that will manifest into increased demand for Verified Emission Reductions because technological abatement is not available at anywhere near the same prices," Perez said, noting no technology could yet reduce carbon at scale for less than Eur50/mt ($59/mt).
"Traditionally we've seen demand from firms involved in voluntary decarbonization schemes such as CORSIA, now we're seeing demand from shipping companies trying to get ahead of IMO [International Maritime Organization] regulations, and we're seeing it from tech companies that enjoy large margins, high equity valuations and are massive electricity consumers with big carbon footprints," he said.
Hartree views itself as an aggregator of verified carbon offsets (with its own layer of due diligence), decreasing the risk buyers face if, for instance, they work directly with an offset project developer.
"Because the product is so heterogeneous we think we're a long way from there being an exchange contract like you have on EUAs or CERs, at least on a forward exchange," Perez said.
There are spot platforms like CBL that allow the purchase of issued tons, "but you need to pre-pay and for most corporates that is not a possibility and does not dramatically improve their financing situation," he said.
In short, Hartree sees demand for offsets coming from "just about everywhere [not currently regulated], particularly hard to abate sectors, which have very little choice but to use some form of environmental commodity market," Perez said.
This was ahead of increased climate regulation, "which will come," he said.
EUA trajectory 'logical'
Turning to regulated markets, Perez viewed the current run in the EU Emission Trading System as logical, if a little overdone.
"Let's look at it like this. The global COVID bill is going to be about $10 trillion. There's roughly 40 billion mt of carbon in the world. Only about 20% of them are priced. So a global carbon price at $25/mt basically pays for 10% of the COVID bill for governments around the world," he said.
Governments had signaled an intention to expand the scope of trading schemes and increase the level of abatement ambition.
"All that really means is that we need to go higher on the marginal abatement cost curve to secure more expensive emission reductions. The ETS is quite logical in starting to price that in, just as it was in 2017 and 2018 when pricing in fuel switching," Perez said.
Further, the market was starting to price in inflation.
"There are not many better inflation hedges in the commodity market than CO2, Perez said. "The carbon market is in the early stages of becoming a financial asset that delivers more than the ability to convert a certificate to a metric ton of CO2."
Finally, the ETS would draw inventory this year -- less than before the coronavirus pandemic, but still inventory would reduce this and next year.
"We're in a phase of structural inventory destruction. Very little can be done to reverse that, save changing the MSR [Market Stability Reserve] rules. We're going to be drawing inventory from 1.7 billion to 833 million mt or lower over a five-year period. People should not be so surprised that the market is tending to rally," he said.