Power and Renewables Perfomance Review

As the climate transition gathers pace, Trafigura is building a presence in fast-evolving power and carbon markets and investing in new energy technologies.

Overview

In November 2019, Trafigura announced the establishment of a new business line trading and investing in power and renewable energy. In the 2021 financial year, this vision took shape, with the ramp-up of electricity trading activities in Europe and the US, the creation of a carbon trading desk and investments in renewable power, battery storage and new energy technology projects.

The focus during this first full year of operation was recruitment, setting strategy and establishing necessary infrastructure. Nevertheless, we made a good start in trading both power and carbon. This activity generated underlying EBITDA of USD80 million. Combined investments by the Nala Renewables joint venture and our Clean Energy Ventures Fund amounted to more than USD68 million.

Achieving profitability in the first year of trading activity is very encouraging and underlines our view that the Power and Renewables division is set to become a third significant pillar of Trafigura’s trading business alongside Oil and Petroleum Products and Metals and Minerals. Of particular interest are the synergies with other parts of Trafigura’s business. Power trading is a natural complement to the company’s established positions in gas, for example, while carbon trading enables us to offer a range of new services to our clients, including carbon-offset investments.

Power trading

This is a time of significant upheaval in power markets, as a result both of COVID-19 and deeper structural shifts occurring within the power generation industry, notably the transition to renewables. Across 2020 and 2021, the world witnessed one of the most dramatic shifts in supply and demand balances for electricity in recent history, with the market going from significant over-supply to deficits in the space of just 12 months.

In 2021, as the demand destruction caused by COVID-19 began to fade, power markets rebounded strongly, especially in Asia, while consumption in the US showed renewed growth after years of flat or negative demand. The resulting market tightness was compounded by COVID-19-induced maintenance delays on key capital equipment, weather-induced shortfalls in renewable production in several parts of the world and spikes in natural gas prices due to the fall in Russian supplies. Extreme weather events such as the Texas freeze in February created additional volatility. The structural shift away from coal and nuclear towards wind and solar is also causing severe strains in the power system. The retirement of conventional generation assets is increasing the impact of renewable energy production on market pricing and reducing the amount of available flexible generation.

The Trafigura power trading team had an excellent first full year of operation, with decent profitability in challenging markets where increased volatility created new requirements for capital and where an influx of new interest in the sector fuelled competition for talent. We established full trading capability in key European and US markets as well as building analytics, models and risk metrics. In the US, capacity was enhanced by the acquisition of a 75 percent stake in a niche trading platform in Denver with a team of highly skilled power trading personnel focused on short term US power markets.

Physical trading, deal structuring and risk management services are likely to continue to rise in importance in power markets in the medium term to enable producers and consumers to mitigate the impacts of volatility, effectively monetise production and secure supply. These services are the kind that Trafigura has provided for nearly 30years in the oil and metals markets, and we see bright prospects for continued growth of the power trading team in the years ahead.

Carbon trading desk

In April 2021, Trafigura announced the establishment of a new carbon trading desk, focused on global compliance and voluntary carbon markets. Both categories of carbon market are the subject of increasing trading interest: the price of carbon allowances in regulated emissions trading systems has been steadily rising, while voluntary markets are becoming increasingly relevant to corporations in meeting their net zero commitments.

Trafigura’s carbon trading desk has three areas of priority focus: day trading and arbitrage in global compliance and voluntary markets; working with developers of carbon projects to structure and finance new transactions or the expansion of existing projects; and offering a suite of services to established Trafigura clients looking to reduce the carbon footprint of their supply chains.

The priorities for the desk’s first few months of operation were recruiting expert staff and securing the necessary registrations and authorisations. The team consists of professionals located in Geneva, Houston and Singapore, with expertise in trading, deal structuring and origination and technical knowledge to enable the assessment of removals and avoidance projects, United Nations and government policy and regional regulations.

Notably, the team has achieved some early success in securing long-term offtakes and growing spot traded volumes. There has been strong demand for services and we are helping producers and customers across a wide range of sectors to quantify, verify, reduce and mitigate supply chain emissions. An exponential ramp up of activity across the book is expected in 2022 as the regulatory and political environment continues to accelerate momentum to reduce emissions. This includes the recent historic agreement to approve the Paris Agreement Article 6 Rulebook at the COP26 climate talks in Glasgow, Scotland in November. We view this as an important step forward in facilitating the development of carbon markets globally and accelerating the flow of private sector capital to developing countries.

Nala Renewables

Nala Renewables is a 50:50 joint venture between Trafigura Group and IFM Investors established in September 2020 with the aim of investing in on-shore wind, solar and power storage projects. As 2021 was its first year of incorporation, the focus was on creating a management team and building the initial business pipeline.

A key milestone was the appointment in April of CEO Jasandra Nyker, an executive with over 20 years of experience in investing in and developing renewable and clean energy projects. Nala Renewables is headquartered in London with representatives in Geneva, Switzerland and Munich, Germany. Its priority markets in 2021 were the US and Europe and it made a good start in kicking off development in these regions.

Nala Renewables' most material transaction to date was the acquisition, together with Buckeye Partners, of a majority ownership of leading North American clean energy development and investment platform Swift Current Energy, a renewable energy platform aligned with Nala Renewable's strategy. Boston-based Swift Current has commercialised more than 1.1GW of renewable projects since 2016 and has a pipeline of over 6GW of solar, wind and energy storage projects located close to US demand centres in major power markets, including more than 2GW attributable to eight solar projects currently in late-stage development.

The Swift Current portfolio constitutes the majority of the 1.7GW development pipeline that Nala Renewables had secured by the end of the year.

Another early project involves investment of up to EUR30 million to develop one of Belgium’s largest battery energy storage systems at Nyrstar’s zinc smelting facility in Balen. Permit approvals were secured in 2021 and the construction phase is expected to be completed by the end of 2022. Utilising lithium-ion battery technology, the 100MWh battery project will be able to store 25MW for over four hours. The battery energy storage system will provide stability and balancing services for the Belgium grid, as well as help shift renewable energy production into high-energy demand periods.

Nala Renewables now owns and is developing assets in Belgium, France, Netherlands, Poland and the US.

Investments in clean energy ventures

In 2019, Trafigura established an internal VC-like fund to invest in various start-up projects involved in alternative and renewable energy technologies.

The focus for investment is three-fold: to gain access to experienced teams and intellectual property in early-stage, pre-revenue companies in the sustainable energy space; to support the conversion of their intellectual property into viable development projects; and ultimately, to help generate trading flows for existing or new Trafigura trading desks. The investment decisions are guided by an investment committee comprising four members of Trafigura’s Management Committee, thus ensuring all activities are fully aligned with Group strategy.

To date, six investments have been made of a total value of more than USD30 million in three technology areas of priority focus: hydrogen and hydrogen-based fuels; medium-to-long-term electricity storage; and emissions capture. They are already providing Trafigura with unique insights into sectors that will be extremely important to its future strategy.

The rapidly growing field of green hydrogen is linked to three of these investments, of which the largest is in H2 Energy, a Swiss-based company that was the first in the Western world to deliver hydrogen fuel cell trucks to commercial users and to create an ecosystem based on green hydrogen. H2 Energy’s trucks are already in operation for large transporters and retailers in Switzerland, fuelled by green hydrogen generated by hydropower. The company, working in partnership with Hyundai, Linde and Alpiq, leases fuel-cell trucks to users and provides the necessary refuelling infrastructure.

Alongside Trafigura’s investment in H2 Energy, the two companies have established a 50:50 joint venture, H2 Energy Europe, with the aim of investing in hydrogen trucking projects elsewhere in Europe. Its first focus is on developing a 1GW green hydrogen production facility in Esbjerg, Denmark, with the aim of supplying the Danish trucking market. The plant is expected to be operational by 2024-25 and to cost up to EUR1 billion.

The two other hydrogen-related investments are Hy2gen, a German-based developer of green hydrogen production facilities with a project pipeline of over 500MW of electrolysed capacity, and OneH2, a provider of scalable hydrogen fuel production systems in North America currently focused on the forklift truck market. Hy2gen is working with Trafigura and Copenhagen Investment Partners to establish a project in Sauda, Norway, which will produce green hydrogen from hydropower in Norway and use it to produce green ammonia for use in the shipping industry.

Three further investments are in the following companies:

  • US-based Quidnet Energy, which has developed a novel form of energy storage using geo-mechanical pumped storage technology to pump water under pressure into subsurface geological reservoirs. At times when variable renewable energy is not available, the water is released to drive hydroelectric turbines and power the electrical grid.
  • UK-based Bboxx, a company that provides decentralised solar powered systems that enable access to cleaner energy for cooking in developing countries.
  • Swiss-based Daphne Technologies, which provides innovative technology solutions to remove toxic and greenhouse gas emissions from fuel use in shipping. It can remove emissions such as sulphur oxides, nitrogen oxides and methane from the combustion gas of any fuel type, including heavy fuel oil, LNG, biofuels and ammonia.

Trafigura expects significant investment activity to continue in 2022, with at least four projects already in the pipeline for final investment decisions.

Julien Rolland

Head of Power and Renewables Trading