The Marijuana Industry's Dirty Little Secret

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Tuesday, May 14, 2019   /   02:32PM  /  By. Ian Jenkins of OilPrice.Com / Header Image Credit: CB Insights


 

The cannabis industry is hiding a dirty little secret.


According to Evan Mills, a California-based energy and climate change scientist, the marijuana industry has a major problem…and it's likely to get worse before it gets better.


"Legislators and energy agencies have largely turned a blind eye to the carbon footprint of indoor cultivation, which already belches out greenhouse-gas emissions equal to that from 3 million cars in America," says Mills.


In fact, just one marijuana cigarette creates over 10 pounds of carbon dioxide pollution.


An entire kilogram of finished product?


That produces a staggering 4600 kg of CO2 emissions to the atmosphere.


As far back as 2011, the then-illicit industry was racking up an energy bill of $6 billion per year in the U.S. That's double the energy spent by all pharmaceutical companies combined!


And this was before commercial sized indoor growing facilities started popping up across the United States.


The runaway-growth in the cannabis industry, fueled by rolling de-regulation and a high demand forecast, is bringing with it a growing carbon footprint.


But luckily, a handful of companies are trying to repair the damage. Firms like Cannabis One are bringing smart clean energy policies to the pot industry.


"You've got to be smart," says Cannabis One CEO Jeffery Mascio,"or sooner or later, you'll have to turn out the lights."

 

 

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Growing Demand


The single most important factor in the cannabis sector has been growth—driven by rolling de-regulation and de-criminalization (and, in Canada, complete legalization).


In the United States, dozens of state governments have passed legislation, legalizing marijuana for medical use, or de-criminalizing it for recreational use—and the market has been growing by leaps and bounds as a result.


"You've never seen anything quite like this," says Jeffery Mascio, CEO of Cannabis One Holdings, a company that develops and markets cannabis products in Colorado, Washington and Nevada. "It's a new industry that's sprung up practically over-night."


Since 2011, legal marijuana sales have increased dramatically—fueling the growth of an industry which in the United States is worth $10 billion and employs 250,000 people.


In 2017, marijuana stocks exploded on to the market, led by some heavy-hitters like Canopy Growth Corp. In 2019, and sales are estimated to grow by 38% to $16.9 billion.


In Colorado, legal pot sales reached $6 billion in 2018. The industry has really taken off in the Rocky Mountain state, serving as a contrast to California, where the roll-out of legalized weed has been a bit bumpier. Colorado now earns more than $200 million in taxes from legal dispensaries.


By 2025, analysts predict the legal marijuana market could be worth $146.4 billion.

 


Impact on Energy Demand


Most people imagine pot growers like modern farmers—tilling the earth, planting their crops, gathering the harvest.


But in fact, most cannabis cultivation is done indoors, in specially-designed growing facilities that utilize heat lamps and temperature control to maximize yields over a year-long growing season.


When you factor in additional energy costs, like fertilizer and water, cannabis is one of the most energy-intensive crops out there.


Cannabis cultivation generates $6 billion in energy costs each year, and uses about 10x more power per square foot than a standard office building.


In Denver, 4% of all electricity goes to cannabis cultivation. Total power consumption in the cannabis sector has nearly tripled since 2013.


In 2017, about 1 mWh went towards cannabis cultivation—but projections have that figure rising to 2.79 mWh by 2022, an increase of 162%.


Compared to business or residential use, energy demand in cannabis grow houses is staggering. The average household in Boulder Country, Colorado uses about 630 kilowatt hours (Kwh). A grow house of 5,000 square feet, by comparison, uses 41,808 kWh—roughly enough electricity to power sixty-six homes.


And cannabis cultivation is a 24-hour business—the lights stay on, no matter what. So while most businesses and residences power down at night, growing facilities remain active, putting pressure on energy grids.


Most of the demand comes from appliances used in the growing process. Indoor lighting units are 500x times more powerful than normal reading lights, and four-plant lighting units use as much power as twenty-nine refrigerators.


In monetary terms, production from a grow house comes in at $2500 per kilogram—the energy used to produce one marijuana cigarette could produce 18 pints of beer.


For cannabis cultivators, this comes with a hefty price tag. One Colorado company spends $13,000 per month on electricity for a single grow facility.


For a vertically-integrated company like Cannabis One Holdings, electricity costs eat up a significant portion of revenues. "We're making money," says CEO Mascio, "but it costs a ton just to keep the lights on."


Right now, such costs may be manageable—cannabis is in high demand and prices per kilo are high. But as the market is saturated, that price is sure to drop, squeezing producers' margins.


In fact, falling prices and shrinking margins (as well as general concerns with reducing carbon emissions) are driving cannabis cultivators and state regulators to take aim at electricity use in the cannabis sector.


The amount of carbon emissions being pumped out by cannabis cultivators will double by 2020-so if the industry wants to stay green, it's going to have to make some changes.

 

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Solutions

Given the federal laws that continue to restrict cannabis cultivation, regulating energy use in the industry is primarily a state concern—and some states have started cracking down.

In Massachusetts, lawmakers have stipulated that grow houses of more than 5000 square feet must limit lighting power density to 36 watts per square foot. Reducing energy use in cannabis cultivation is part of the state's plan to cut emissions by 80 percent below the 1990 level by 2050.


Colorado, where marijuana is de-criminalized, has created a Retail Marijuana Code while lays down guidelines for energy use. The law mandates that "material changes" in how companies grow their crops must be approved by the Marijuana Enforcement Division.


In Boulder County, authorities require growers to utilize renewable energy or pay a $2.16 kwh fine. The fines pay for other renewable energy projects in the county area, through the Boulder County Impact Offset Fund. The fund offers cannabis growers access to renewable energy resources, offers education on efficient cultivation practices and encourages better energy use habits in the cannabis sector.


The key to improved energy efficiency will likely come from new technologies—including new lighting units being tested in British Columbia that are twice as effective as standard lights.


LED lights shine brighter for longer and use less power than standard lighting units—and some companies are already making the switch to cut down on electricity expenses.


Improved greenhouse practices through dehumidification, improved lighting and use of HVAC to retain moisture could save up to 70% per flower, according to one cannabis cultivator.


Utilizing green energy and harnessing renewable power for cannabis cultivation might allow cultivators to cut down on energy costs in a huge way. In Oregon, an energy trust has provided $400,000 in incentives to growers, who installed LED lights and a 56.4 Kw solar system, at a cost of $1.1 million—saving them millions in future energy costs.


Investments in new tech, new methods and new approaches will allow cannabis cultivators to stay profitable despite narrowing margins and falling prices. And that means the green boom will keep going.


Cutting down on costs has allowed up-and-coming firms like Cannabis One Holdings continue to expand into new markets. In April, CEO Jeffrey Mascio announced the acquisition of a Nevada-based cultivator, Evergreen Organix.


"With the addition of these popular Nevada marques to our growing portfolio," said Mascio, "CBIS continue to demonstrate its ability to execute on its stated strategy."


Such news is proof that the lights are staying on for America's newest growth sector—and that the cannabis boom has only just begun.

 


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Companies to watch as the cannabis industry scrambles to clean up its image:


Molson Coors (NYSE: TAP) (TSX: TPX-A)

Molson Coors is an iconic multi-national beer company, with brands that are recognizable across the United States and Canada. Besides just its Molson and Coors lines, the company has also ventured into more niche beverages to take advantage of the growing craft beer market, buying up brands like Leinenkugel's and Blue Moon.


Not to be left behind in the marijuana boom, Molson Coors is also developing a line of non-alcoholic cannabis-based beverages with its partner, the Hydropothecary Corporation.


Molson Coors Canada president and CEO Frederic Landtmeters noted, "While we remain a beer business at our core, we are excited to create a separate new venture with a trusted partner that will be a market leader in offering Canadian consumers new experiences with quality, reliable and consistent non-alcoholic, cannabis-infused beverages."

 


Aurora Cannabis (NYSE:ACB) (TSX:ACB)

Aurora Cannabis is one of the biggest names in the burgeoning marijuana sector. With a market cap over $14 billion, Aurora has carved out its position as a leader in the industry. And the company is still making moves.


Recently, Aurora sealed a supply deal with Mexico's Farmacias Magistrales SA, the country's first and, for now, at least, only federally licensed importer of raw materials containing THC.


In an announcement from Aurora, the company stated that the deal "firmly establishes Aurora's first-mover advantage in one of the world's most populous countries, where more than 130 million people will have federally legal access to a range of Aurora's non-flower medical cannabis products containing THC."

 


Canopy Growth Corporation (NYSE:CGC) (TSX:WEED)

After securing a major $4 billion investment from beverage giant Constellation Brands, it seemed like Canopy Growth was on the top of the world. The same day, shares in the company surged by 30 percent.


Though things have cooled down a bit since then after a downgrade from analysts of the Constellation Brands stock, Canopy has not stopped making moves in the market, most recently swallowing up renowned vaporizer producer Stor & Bickel Gmbh & Co., the creator of the iconic Volcano® Medic and the Mighty® Medic devices


The €145 million all-cash deal makes it one of the largest in the marijuana sector this year, and Canopy Growth is not likely to stop there.

 


Cronos Group (NASDAQ: CRON) (TSX: CRON)

Following its October slump, Cronos Group has seen a surge in trading volume, with a renewed investor interest in the company thanks to rumors surrounding the company's discussions with tobacco giant Altria.

 

The Canadian firm, though primarily an equity investor, has made some major moves in recent years, wheeling and dealing with some of the hottest names in the sector. Because of its forward-thinking attitude, it has drawn the attention of many major mainstream players, including the company behind Marlboro, Altria Group.


On December 7th, rumors were finally confirmed when Cronos made the official announcement of a C$2.4 billion strategic investment from Altria. "Altria is the ideal partner for Cronos Group, providing the resources and expertise we need to meaningfully accelerate our strategic growth," said Cronos Group's Mike Gorenstein, Chairman, President and Chief Executive Officer.

 


Auxly Cannabis Group (NASDAQOTH:CBWTF) (TSX.V:XLY)

Auxly is an up-and-comer in the marijuana industry, with a growing presence in Eastern Canada. The company, formerly known as Cannabis Wheaton, the streaming company operates with a unique spin, focusing on its investments and partnerships within the space.


Some investors are bullish on Auxly due to its rapid rate of growth. And its recent strategic partnership with Atlantic Cultivation solidifies that stance.


The $2.5 million deal gives Auxly a 50 percent equity stake in Atlantic, in addition to a right-to-purchase up to 30 percent of dried cannabis and cannabis trim at Atlantic's Newfoundland and Labrador facilities.


Hugo Alves, President and Director of Auxly commented: "This partnership with Atlantic, coupled with our premium craft producer Robinson's Cannabis in Nova Scotia and our world class innovation and extraction hub at Dosecann in PEI demonstrates Auxly's commitment to Atlantic Canada where we are building meaningful cannabis businesses that have a positive impact on the region."

 

 

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