Power and Renewables Perfomance Review
Trafigura continued to build its presence in the fast-evolving power and carbon markets and to invest in new clean energy technologies.
Performance overview
In 2022, we made further progress in building our power and carbon trading capabilities and activities, and continued to invest in renewable energy generation and technologies. In carbon trading, we rapidly established a leading position in the voluntary carbon market, investing in high quality, nature-based carbon removal projects.
Nala Renewables, our 50:50 joint venture with international fund management group IFM Investors, pressed ahead with a range of projects in solar power, onshore wind and battery storage and is on track to reach its target of building a portfolio of projects with a cumulative generation capacity of four gigawatts by the end of 2025. Our investments in clean energy ventures also continued apace.
Overall profitability for the division was down 11 percent compared to the same period in 2021, as we continued to grow our activities and investments, and managed some temporary operational issues in Asia Pacific.
At the end of the 2022 financial year, we announced plans to combine our gas, power and carbon trading activities into a new Gas and Power division. We also created a new business line focused on renewable energy and strategic investments to provide greater management focus and impetus to this growing and important area of our business.
The events of the past year have further highlighted the need to invest in renewable energy to provide security of energy supply and improve self-sufficiency, in addition to meeting urgent decarbonisation needs, in an increasingly complex world.
Looking forward, the key focus for 2023 is working toward a final investment decision for the one gigawatt hydrogen production plant we are planning to build in Denmark through H2 Energy. We see hydrogen and hydrogen-derived fuels playing a big role in the energy transition, particularly in mobility.
Power trading
2022 was one of the most extraordinary years in the energy markets in general and in power in particular, with geopolitical events changing trade flows and impacting supply and demand. These shifts have the potential to permanently change the structure of the power market.
European markets experienced extreme volatility with prices rising from EUR200 per megawatt hour (MWh) at the turn of the year to levels over EUR1,000 MWh by the summer of 2022. These movements placed significant strains on the liquidity and risk appetite of market participants. As a result, the ability to hedge physical price risk in the futures market became much more challenging.
The Power Trading team managed the turbulent conditions, growing our business in Europe and the US and entering into several new types of transitions, including agreements to purchase battery capacity.
Overall, trading volumes increased in FY2022, while profitability was slightly down on the previous year. However, the team has made a strong start to FY2023.
The decision to combine our Gas, Power and Carbon teams into a new division will allow for closer cooperation across the energy generation spectrum from fuel to power, including carbon permits and renewable certificates, and help facilitate business development.
Looking ahead, higher capital requirements and greater regulatory intervention may lead to structural changes in the power market and also the competitive landscape. In particular, long-term hedging of energy offtake agreements may become challenging for some market participants.
Our focus for the next 12 months will be to expand our physical footprint in the power market globally and continue to build our customer base.
Carbon trading
In our first full year of operation, the Carbon Trading team was active across global voluntary and regulatory markets and also invested in carbon removal projects as well as investment in technology to provide greater transparency of supply chain greenhouse gas (GHG) emissions.
Net zero pledges now cover over 80 percent of global emissions across both the public and the private sector. In the public sector, a growing number of countries have plans for regulated markets that will put a price on carbon emissions. At the same time, the private sector continues to increase its ambition and level of corporate disclosure with the voluntary market growing to USD2 billion.
Among this year’s highlights was the first issuance of credits from Delta Blue Carbon, a mangroves restoration project in Pakistan. Covering 350,000 hectares of tidal wetlands on the south-east coast of Pakistan, it is the largest project of its kind in the world. We are an anchor buyer of the nature-based carbon removals credits generated by the project.
We also launched Agora, our emissions tracking joint venture with US technology company Palantir, during LME Week in October. Initially focused on providing greater transparency in the reporting and verification of mining and metals value chain GHG emissions, the scope of the platform will extend to energy, helping our customers calculate and manage their GHG emissions across oil, gas and power value chains.
Looking forward, a key focus for the Carbon Trading team will be the ongoing developments related to carbon in Article 6 of the Paris Agreement on climate change. This part of the accord allows countries to trade and facilitate capital into emission removal and emission reduction activities, underpinning a global carbon market for the first time. We are working closely with governments and the private sector to develop robust commercial trading frameworks for new decarbonisation and carbon removal projects.
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 onshore wind, solar and power storage projects.
Since its inception, Nala Renewables has been transformed from a concept to an early stage business with some of its first assets operational or in construction. Nala Renewables now owns and is developing renewable energy generation and storage assets in Belgium, Chile, France, Greece, Netherlands, Poland and the US. To date, the company has grown its renewable energy asset portfolio to 2.8GW and is well on track to meet its 4GW target by the end of 2025.
A key focus for the last twelve months has been to build and strengthen the team, acquire late stage assets and secure new development partnerships for greenfield development opportunities in several different countries.
In the last financial year, Nala Renewables has focused on building its presence in Chile where it initially acquired a portfolio of 110MWp of ready-to-build solar assets.
This acquisition set the foundation for Nala Renewables' regional cluster approach for expanding its pipeline. More recently, it has acquired a further 60MWp in Chile, and it plans to increase its presence in the country further over the coming year. Nala Renewables has set up a regional office in Santiago to oversee its activities in Latin America and provide local expertise as its portfolio begins construction and operation.
The company also expanded into the Greek market with the acquisition of a 106MWp ready-to-build portfolio of solar assets and entered into development agreements in Spain to build an early stage project pipeline.
In each of these countries, Nala Renewable’s plan is to continue its expansion to complement its existing portfolios to create scale and a deeper presence.
Assets that have entered construction in the last financial year include a 198MWp wind project being developed by North American clean energy development and investment platform Swift Current Energy, which Nala Renewables acquired together with Buckeye Partners. This asset is targeting commercial operations in the first quarter of 2024.
The Balen Battery project, which involves investment of up to EUR30 million to develop one of Belgium’s largest battery energy storage systems at Nyrstar’s zinc smelting facility, is also in construction with commercial operations targeted to begin in the first quarter of 2023. 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.
Investments in clean energy ventures
In 2019, Trafigura established an internal venture capital-style fund to invest in start-up companies and projects developing alternative and renewable energy technologies.
The focus for investment is three-fold: to gain access to experienced teams and intellectual property in early-stage companies working in sustainable energy; to support the conversion of their intellectual property into viable development projects; and ultimately to help develop new markets and business opportunities for Trafigura.
Investment decisions are guided by an investment committee comprising four members of Trafigura’s Management Committee, thus ensuring all decisions are fully aligned with Group strategy.
To date, we have made over USD60 million of investments in priority hard-to-abate or tough to decarbonise sectors, including hydrogen-based fuels for mobility, electricity storage and emissions capture and utilisation. These investments are already providing us with unique insights into sectors that will be extremely important to our future strategy as well as project opportunities in which we are also investing. Our investments allow us to generate valuable insights into markets that have yet to be formed. We envisage that hydrogen and hydrogen-based fuels will play a large role in the shift to a low-carbon economy and that carbon capture will be required by a number of industries for years to come.
Similarly to its core activities, Trafigura works with leaders and peers in these respective sectors, such as SK Gas, Shell, Chevron and Saudi Aramco, but also with newer market entrants, such as Breakthrough Energy Ventures sponsored by Bill Gates.
In 2022, we invested in two companies: C-Zero, a technology developer of low-carbon hydrogen production; and Malta Energy, a technology developer of thermal long-duration energy storage. Both of these investments represent new accomplishments for Trafigura in their respective spaces. C-Zero can leverage access to competitive natural gas to produce hydrogen without CO2 – this will be especially well tailored to production projects in the US, the Middle East and even Asia where there are no CO2 storage sites today. Malta Energy provides a way of storing very large volumes of electricity as heat in salt – similarly to how the sand on a beach stays warm after the sun has set. This type of technology will be essential to provide baseload-type renewable power, buffering the variability of wind and solar and eventually provide cheap, low-carbon electricity for the production of fuels and the decarbonisation of industry.
Going forward, the Clean Energy Ventures team will continue to support its current portfolio of investments and expand into the carbon capture and utilisation schemes (CCUS) space.
