The week of Monday, October 30: Wind power woes, AI, antitrust, tax, water, and much, much more.
The week of Monday, October 30: Wind power woes, AI, antitrust, tax, water, and much, much more
If there is one symbol, more than any other, of our glorious green future, it is the wind turbine, slayer of birds, bats, landscapes, and (some say) whales, workhorse of the renewables revolution, and linchpin of the new “sustainable” economy.
Facts, however, didn’t follow the script, and now the talk is of the taxpayer having to give (another) helping hand to some of the wind sector’s players, safely ahead of the awkward moment (give it a few years) when electric vehicle (EV) manufacturers start stretching out their begging bowls.
I recently wrote about how Siemens Energy, a manufacturer of wind turbines, had gotten into trouble, plagued by technological problems, Chinese competition, and rising costs. Its stock has fallen by 60 percent in the last six months. I also noted that Ørsted, a Danish company which, among other green energy related activities, operates wind-farms both onshore and offshore (it is the world’s largest offshore wind power developer) appeared to be running into difficulties. Its share price too has collapsed.
However, Ørsted’s management may still be eligible for a bonus. In 2022, the company’s incentive program was amended. Executive performance would be measured as much by Ørsted’s success in meeting ESG criteria as by its financial performance. Traditionally, bonus schemes have been designed (however imperfectly) to tie management’s financial interests more closely to those of shareholders. But in Ørsted’s case, management’s interests are now also aligned with the company’s stakeholders (whoever they may be) and what someone somewhere has defined as being in society’s greater interest, a change that effectively dilutes the value of the shareholder’s ownership position in Orsted. Corporatism at work!
Go to the company’s website to read that “the Ørsted vision is a world that runs entirely on green energy.” Ørsted is, apparently, “recognised on the CDP Climate Change A List as a global leader on climate action and was the first energy company in the world to have its science-based net-zero emissions target validated by the Science Based Targets initiative (SBTi).” It is “building the next great American industry.”
But it may now be doing so more slowly than anticipated.
The New York Times (November 1, 2023):
Plans to build two wind farms off the coast of New Jersey were scrapped, the company behind them said on Wednesday, a blow to the state’s efforts to cut greenhouse gas emissions and the latest shakeout in the U.S. wind industry.
The move, which will force Orsted, a Danish company, to write off as much as $5.6 billion, will crimp the Biden administration’s plans to make the wind industry a critical component of plans to reduce greenhouse gas emissions. High inflation and soaring interest rates are making planned projects that looked like winners several years ago no longer profitable…
The Financial Times (November 2, 2023):
S&P Global Ratings said it was placing the Danish company’s long-term ratings on “CreditWatch Negative” saying the “severity” of the $5.4bn losses — including $4bn in impairments — was larger than anticipated and that it had concerns over “the project management issues this reveals”.
“We have revised downward our view of management and governance,” S&P said on Thursday. It said Ørsted’s rating could be lowered one notch to BBB early next year after a meeting with management….
In 2020, when oil prices were plunging because of Coronavirus lockdowns and European governments were pledging to increase investments in renewable energy, Ørsted’s market cap briefly reached about $75bn, soaring above that of BP’s then beaten-down value. Today, Ørsted’s market cap has shrunk to $20bn (DKr143bn) while BP is valued at $102.7bn, boosted by the recovery in oil and gas prices during the energy crisis.
I’m old enough to remember being told that investing in companies (such as Ørsted) with good ESG scores were lower risk, and well placed to outperform. I’m also old enough to remember being told that investing in oil and gas was now a mug’s game.
Permutable.ai (April 2023):
Ørsted’s dedication to sustainability is reflected in its strong ESG score, which also highlights its social and governance practices. This includes their commitment to diversity and inclusion, as well as transparent reporting practices….
Ørsted’s impressive ESG score doesn’t just showcase its commitment to sustainability—it also positively impacts its financial performance. Research suggests that companies with robust ESG scores often experience better long-term financial performance and increased resilience to market volatility.
Some research suggests that. Some research also once suggested that the sun circled the earth.
CSRWire (November 2018):
Ørsted, one of the world’s largest green energy developers, is named Sector Leader in the 2018 GRESB Infrastructure Assessment, for significant steps taken to incorporate sustainability into operations and communicate performance to investors…
In the GRESB assessment, Ørsted achieved the highest overall score in the “diversified” asset sector, reflecting the company’s mixed portfolio of offshore and onshore wind, bioenergy, thermal power, and energy services.
“We disclose to GRESB because their ratings are used by a number of our important institutional investors who invest directly in our offshore wind farms,” says Robert Helms, Head of Asset Management at Ørsted.
“The assessment helps benchmark our progress and sustainability performance against peers and shows investors that we are a high-performer in ESG. We’re delighted to be named a GRESB Sector Leader,” he adds.
ESG is what it is.
But Ørsted’s problems are not unique to that company.
The New York Times (November 1, 2023):
On Tuesday, BP, the London-based energy giant, said it would write down $540 million on three planned wind projects off New York, after the state authorities declined to renegotiate their terms. BP says it is assessing future plans for the projects in light of the decision…
The industry is dealing with equipment shortages as result of pandemic-era supply chain issues, and trying manage a growing number of orders for wind turbines as governments seek to meet green energy goals. And escalating interest rates, as central banks around the world try to curb inflation, have caused financing costs to soar.
As so often with climate policymakers, these “goals” have been set without adequate consideration of how they could be achieved. Central planning is what it is. And it is interesting to read that among the culprits are “escalating interest rates.” But if interest rates are “escalating,” they are only doing so from the ultra-low levels that were the result, in part, of heavy government intervention. That was never going to last forever, meaning that after a period in which, on some calculations, rates had hit four-thousand-year lows they would at some point begin to revert to the mean. In absolute terms rates are still not high, suggesting that some of these projects were based on fundamentally unrealistic assumptions (more on that below).
The Times is quoted as saying that “rekindling interest in developing offshore wind off the East Coast now depended on ‘a reset of what offshore power needs to cost.’”
And will that “reset” involve higher prices for consumers?
A question that answers itself.
The New York Times:
Consumers will also probably pay more in their electric bills for power generated from offshore wind, as developers demand higher prices and protection from inflation.
Probably?
And will these setbacks mean that the phase-out of existing, affordable, reliable but now anathematized sources of power will be “reset” to reflex this new reality?
Another question that answers itself.
These troubles are likely to be a major blow to the administration’s plans for 30 gigawatts of offshore wind capacity (which is by no means the same as the amount of wind that will actually be generated) to have been installed by 2030. Nine of those gigawatts are supposed to be located off the East Coast.
The New York Times (November 2, 2023):
“Frankly, even by this past summer we were recognizing the inevitability of missing the 30-by-30 target,” said Kris Ohleth, director of the Special Initiative on Offshore Wind, a nonprofit organization that advises companies and policymakers.
Oh.
Writing in the New York Times a few months ago about the difficulties faced by wind operators in the U.S, and beyond, Stanley Reed and Ivan Penn explain one underlying problem:
The procedures for obtaining the rights to build wind farms vary in different countries but often involve an auction of seabed leases followed, sometimes years later, by agreements that set the price paid by power companies for the electricity generated.
It’s thus not hard to see why, in a more inflationary, higher interest rate economy, it might make economic sense (despite penalties and sunk costs) for wind operators to walk away from projects to which they are already committed. Best guess: From now on most contracts will be structured in ways that either reduce such mismatches or properly prices in the risk that comes with them. That probably will be (more) bad news for consumers.
It’s also worth looking at the efficiency of the wind turbines themselves.
The key problem, intermittency (the wind doesn’t always blow) is well understood. What’s less well known is that wind droughts can last for longer than is generally realized, and that they can be compounded by Dunkelflaute (or, for those who prefer something less Teutonic, anti-cyclonic gloom). Typically, this occurs in winter, when sunshine can be elusive. There’s a good reason why reducing humanity’s reliance on the weather has traditionally been regarded as progress.
Intermittency implies the need for back-up. This and other issues were discussed by James McSweeney, clearly no friend of wind turbines, in an intriguing piece for The Critic earlier this year.
McSweeney:
The [British] Government has bet the house on undersea cables with other countries solving the intermittency problem — with periods of high wind in Denmark compensating for periods of low wind in the UK, for example. A similarly inspired German team recently looked into this idea, only to conclude that “even at a European level, dispatchable backup capacity of almost 100 per cent of the nominal capacity of all European wind turbines has to be maintained”.
In other words, for every 1 MW of wind energy capacity you build, you need to build another 1 MW of reliable generation to back it up. That means twice the power stations and many more transmission cables for the same amount of electricity.
That sounds expensive, and it would be (the on-and-off nature of being a back-up can, as McSweeney explains, add to that cost still further).
If fossil-fuel powered back-ups are to be phased out, the alternative would (absent sufficient nuclear power stations to replace them) be battery storage. U.S. battery storage capacity is increasing, but much more will be needed. As Paul Denholm of the National Renewable Energy Laboratory explained to CNBC, for the first 20 percent to 40 percent of the electricity in a region to come from wind and solar, battery storage is not needed. Thereafter it is.
McSweeney argues (reasonably enough) that the cost of providing battery storage should also be factored into any calculation of the cost of “cheap” wind power. These batteries are not inexpensive, and McSweeney suggests that shortages of key minerals will help push them up further. Even if that it is too pessimistic, and even if better and/or cheaper storage solutions are devised, something else is going to drive up the cost of renewable energy: the need to make major additions to the existing network of transmission cables, a need made more pressing still if the grid is to be able to cope with the demands put on it by more widespread adoption of EVs, and the electrification of, well, everything.
CNBC:
“We have been able to build a fair amount of wind and solar without adding new transmission, but we’re really kind of running up to the limits, especially for wind, because there’s not a whole lot of transmission located in the places in the country where it’s super windy,” Denholm said. “So we absolutely do need to build more transmission to tap into those super-high quality wind resources, particularly in the middle of the country.”
The transmission system in the U.S. is built for the electricity capacity that is already on the grid, and building new transmission lines that run hundreds of miles can take anywhere from 10 to 15 years, John Moura, the director of reliability assessment at the North American Electric Reliability Corp., told CNBC. “The type of transmission we’re talking about here are 1,000 [or] 2,000 miles long, large projects.”
Currently, when a utility wants to add electricity to the existing grid, it has to pay for the upgraded transmission line and for the interconnection, which is where multiple local grids are brought together. Those grid upgrades are expensive, and the permit process is slow.
All this will have to be paid for, too.
One surprise (to me anyway) in McSweeney’s article was the argument that the price of renewables equipment had been kept down, not (as widely assumed) by innovation but by the effect of fracking on energy prices:
In [ February 2022], US investment firm Goehring & Rozencwajg estimated that most of the fall in the price of renewable components — including solar panels and batteries — is owed to the 90 per cent decline in fossil fuel costs brought on by the US shale revolution. As renewables require a much higher ratio of energy invested (in the form of diesel for mining and transport, coal for steelmaking etc.) to energy produced than do fossil fuels, they argued, a rise in fossil fuel prices would rapidly increase the cost of renewables.
Goehring & Rozencwajg:
Amazingly, no one has connected declining energy costs and cheap capital with the proliferation over the last decade of energy-hungry, capital-intensive projects such as wind, solar, and lithium-ion battery manufacturing. We think the two are fundamentally linked. What will happen when energy prices normalize and interest rates rise—as is happening right now? The impact will be far more consequential than anyone realizes.
Perhaps that too can help explain the mess in which the wind sector finds itself. In October, 2022, Goehring & Rozencwajg reiterated their view.
The best hope for keeping component prices down may rest with China, a country where many of the usual economic or human rights constraints on corporate behavior do not apply, especially when Beijing sees a market it can dominate. Thus China now enjoys a roughly 80 percent share of solar equipment manufacturing capacity. Wind turbine manufacturers are complaining increasingly loudly about the impact that Chinese competition is having on their business.
But even if Chinese imports could keep the price of wind turbines lower than they would otherwise be, the cost of that would be the deepening of the green economy’s reliance on China, a reliance that, geopolitically, is already disturbing enough. Not only that, if China does to wind what it has done to solar, that is where many more of those much-vaunted “good paying” green jobs will go.
In his penultimate paragraph, McSweeney writes:
At some point, politicians are going to have to choose between propping up an industry which makes everyone worse off, and riding out the financial storm of writing-off decades of public and private investment. The sooner policymakers face up to this, the more damage can be averted.
Don’t hold your breath.
ESG Talk in Miami
On November 8, we will, together with the Economic Club of Miami, hold a discussion on ESG. This will be held at 5:30 p.m. at the new location of Biscayne Bay Brewing, in the Old Post Office building in downtown Miami. I will be discussing this vexed topic with Siri Terjesen, Associate Dean at Florida Atlantic University. Anyone interested in attending this event can find out more details here.
Capital Writing
As part of a project for Capital Matters, called Capital Writing, Dominic Pino is interviewing authors of economics books for the National Review Institute’s YouTube channel. This time, he talked to columnist Matt Lewis about his book Filthy Rich Politicians. Here you will find an edited transcript of a few key parts of their conversation, as well as the full video of their interview.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 143rd episode, David was joined by former vice chairman of Morgan Stanley, Paul Hatch. Paul’s 40 years of experience on Wall Street and background as a naval officer provide a fitting backdrop for a conversation on Wall Street, markets, and where incentives matter in capital markets. It is both a business reunion for David and Paul and a thrilling conversation for listeners.
No Free Lunch
Earlier this year, David Bahnsen launched a new six-part digital video series, No Free Lunch, here online at National Review. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy…
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson, and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
AI
We can’t escape artificial intelligence (AI), not because the Terminator is hunting us down but because the media can’t stop talking about it. Whether it is ChatGPT, self-driving cars, or Elon Musk’s humanoid robots, the AI conversation sometimes seems to be everywhere. The misconception that AI can think for itself is almost as pervasive, which adds to the public’s anxiety about being replaced.
Hysteria around so-called thinking machines is rampant…
Jack Solowey & Jennifer Schulp:
“We are being lied to.”
So begins the “Techno-Optimist Manifesto,” an exhortation by venture capitalist Marc Andreessen to unleash markets and technology to aggressively improve humanity’s material and (in some sense) spiritual well-being. According to Andreessen, the lies of the techno-pessimists include that technology risks “ruining everything” and therefore must be shackled.
Securities and Exchange Commission (SEC) chairman Gary Gensler has long been in the running for the federal government’s chief techno-pessimist…
The evolution of AI is clearly going to come with some risks, perhaps considerable risks (as well, of course, as opportunities), but a greater danger may well come from heavy-handed state intervention, even more so when fueled by some sort of panic.
And so check out the British prime minister’s AI summit, which is currently underway. Upping the usual excuse for bad policy — “for the children” — Sunak is claiming that “we owe it to our grandchildren to take urgent action on the risks posed by artificial intelligence.” Note the call, not just for action,
but urgent action — another sign that heavy-handed state intervention is either on the way or — looking in the direction of the White House — is already upon us…
Electric Vehicles
Back in June, I wrote about a new hazard at the car-rental desk: Being handed an unwanted electric vehicle (EV). I returned to this topic in September. In both cases, Hertz, which has made the largest commitment to EVs of any of its peers, did not emerge well…
Lithium sales are tanking as the demand for electric vehicles cools. North Carolina–based manufacturer Albemarle Corp., the largest lithium provider for electric-vehicle batteries, reported a much lower quarterly profit than expected this week…
Antitrust
Now that the Justice Department has rested its antitrust case against Google before federal judge Amit Mehta, I can’t help but feel nostalgic…
Wind power
I’m old enough to remember when investments in green energy, with their ESG stamp of approval, were touted as a way of reducing risk or, even better still, of doing well by doing good. . ..
Climate Policy
In May, the Environmental Protection Agency (EPA) announced proposed rules to regulate carbon dioxide emissions from new and existing power plants. Our modeling at American Experiment found these strict regulations would cause massive rolling blackouts in America’s heartland by forcing reliable, abundant forms of traditional U.S. energy — like coal and natural gas — out of use.
On top of blackouts, these regulations will also result in higher power bills and greater dependence on hostile foreign energy sources….
Could we ever see rationing systems (other than price) to restrict the amount of greenhouse-gas emissions for which we are responsible?
It’s an idea that is floating out there, which makes this story about a service now being offered by a British bank of interest. It should be emphasized that this is something that the bank’s clients can opt into if they wish (it’s strictly voluntary) and all it does is offer information and recommendations, nevertheless. . ..
Tax
Much of the Democrats’ expansion of IRS funding should be repealed. There’s a strong argument for increasing funding to improve taxpayer services and modernize technology, but only $8 billion of the $80 billion in extra funding was for those purposes. The vast majority of the spending is for increased enforcement (read: audits, which will be on middle- and lower-class taxpayers in addition to upper-class ones) and general operations (read: Democrats paying off the National Treasury Employees Union, which represents IRS workers). The IRS doesn’t need the $14.3 billion that Johnson wants to take from it, and the American people wouldn’t miss it if it was gone.
But that simply doesn’t have anything to do with aid to Israel, and America’s national-security interests should take precedence in a national-security bill…
Dan’s exactly right that Jeff Bezos did the smart thing by moving out of Washington. The state has proposed a new wealth tax to target its wealthiest residents. Bezos is one of the wealthiest people in the world, and he was on the hook for a big chunk of the tax’s projected revenue….
The personal-income tax is a penalty on work, investment, and families. As the saying goes, if you want less of something, tax it more. In Oklahoma, our tax code has penalized work and investment for more than a century. It’s time to change that dynamic.
The Fed
If nothing else, this is a reminder that the holiday from reality represented by the era of ultra-low interest rates is over. The consequences will not be pretty.
WeWork, which leases office space and sells it to companies and individuals who use it on a shared basis, might be the ultimate zero-interest-rate phenomenon. There are business ideas that make sense when you can borrow money for free that no longer make sense when money has a price. For a decade, the Federal Reserve held interest rates near zero, and businesses such as WeWork sprang up. These businesses never had clear plans to actually make a profit. Such businesses could exist when borrowing was essentially costless, but now reality has reemerged, and interest rates are positive again.
Labor
I wrote a piece today arguing that public-school teachers’ strikes should be illegal. It was prompted by the ongoing strike in Portland, Ore., where the entire district of 45,000 students has been closed since Wednesday. Just as Calvin Coolidge said there is no right to strike against the public safety, there is also no right to strike against the public education, and 37 states already prohibit teacher strikes by law…
Water
On October 4 the California State Water Board held a hearing to discuss how it will implement Senate Bill 1157, passed by the state legislature in 2022, which lowers indoor water-use standards to 47 gallons per person starting in 2025 and 42 gallons in 2030. The title of the hearing was “Making Water Conservation a Way of Life.” Rationing would be a more apt term for what’s coming for California’s households…
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