Energy Musings - January 15, 2024
A bad start to 2024 for Biden's Green New Deal. First, it was about offshore wind, then EVs. Eversource is taking a huge hit to its offshore wind assets and Hertz is selling 20,000 Tesla EVs.
Hits To The Biden Green New Deal Continue
The first half of January has not been kind to the Biden administration’s “Green New Deal” agenda. It consists of racing to build offshore wind farms and pushing Americans into buying electric vehicles whether they want them, can afford them, or can charge them. The administration’s climate change policies Biden began changing the nation’s energy market on Day 1 of his presidency in 2021. They are central to Bidenomics. But that program is failing to gain favor with Americans who continue to feel the bite from the inflation Biden’s climate change, social justice, and DEI agenda helped create. Americans know they were better off financially under Trump and before the pandemic. Living costs are 20% higher. Sure, the inflation rate is down from the 2023 peaks, but it only means prices are not rising as fast as before. One area where people are feeling some financial relief is energy costs, especially for gasoline, which is all due to the efforts of the domestic oil and gas industry and its ability to overcome the hurdles erected by the Biden administration.
Offshore Wind
We thought offshore wind problems that dominated January’s opening week would disappear, but no such luck. Last Monday, New England utility company Eversource pre-announced a fourth-quarter earnings impairment related to its effort to sell interests in three offshore wind farms. The company said each of the two joint ventures that hold its interests in three offshore wind farms “updated its project construction forecasts.” The result is that their values are down and the company must recognize an impairment to earnings of $1.4 to $1.6 billion. The charge will be recognized in Eversource’s fourth quarter 2023 earnings results to be released in mid-February.
As the joint ventures are partnerships with Danish offshore wind developer Ørsted, possibly it may report an even larger impairment than it indicated possible last fall when it acknowledged the write-off of the costs for developing two wind farms off the New Jersey coast. Abandoning them came despite New Jersey’s offering to give $5 billion of tax credits destined for the state’s taxpayers.
Given the Eversource announcement, get ready for offshore wind to dominate the news in a few weeks. The revelations of underhanded tactics in approving offshore wind farms just today suggest we will be revisiting this industry soon.
Electric Vehicles
The latest problem for the Biden Green New Deal was last week’s announcement by rental car giant Hertz that it decided “strategically” to sell 20,000 EVs, or roughly a third of its global EV fleet, and replace them with gasoline-powered vehicles. The cars being sold represent most of the company’s North American EV fleet. This decision, announced in a financial filing, marks a radical reversal of Hertz’s support for the Biden administration’s push to force Americans into EVs.
Heralded by the Biden administration in 2021 when Hertz announced an agreement to purchase 100,000 Tesla vehicles over the coming years, two years later these vehicles are being sold. What went wrong? In two words – costs and demand.
Proponents of EVs have scoffed at the comments about EV demand moderating. However, the business people most in touch with the automobile market – car dealers, auto manufacturer executives, and now rental car officials – are acting on the data showing a slowing in EV sales. EVs cost too much and are a hassle to charge. The market is not developing as projected a couple of years ago and the prospect of a change in Washington administrations has these executives nervous that the Biden mandates will be overturned just as Biden overturned Trump’s policies in 2021. If you are the CEO of a public automobile-related company, making a bad investment decision could be a career-ending move. Self-preservation argues that caution is the better strategy.
The EV cost issue has been a long-standing problem for the industry. Early adopters of EVs were wealthy people less concerned with vehicle cost and more interested in being seen as trendsetters. Paying a premium for a vehicle is less of an issue for these buyers as they routinely purchase high-priced luxury vehicles. They also can afford the higher insurance cost of EVs.
The charging issue for these buyers is seldom a problem. They own homes. They have garages. Installing a charger at home is not an issue, and the cost is not prohibitive.
These EV owners are also less inconvenienced by having to plan where to charge their EV when taking a road trip. They have the time and can afford to spend on food and lodging if the time on the road is extended due to charging compared to the time needed to refuel a gas-powered vehicle. A recent road trip from Chicago to New York City, undertaken by a Fox Business reporter, was estimated to take 13 hours in a gas-powered car but took nearly 17 hours in an EV due to charging time.
Some EV buyers have announced they are selling them after confronting the cost of vehicle repairs and higher insurance bills. Hertz cited repair costs as a reason for reversing its EV commitment, especially to Tesla. As noted by Hertz CEO Stephen Scherr, “[C]ollision and damage repairs on an EV can often run about twice that associated with a comparable combustion engine vehicle.”
Hertz executives said that a problem with repairs is that Tesla is a relatively new auto company. Therefore, Tesla doesn’t have as many replacement parts on hand and trained repair technicians as other car companies have, Hertz executives have said, making it costly and time-consuming for repairs. Scherr told investment analysts recently: “Remember, in the likes of GM and other [automakers], there’s decades of establishment of a broad national parts supply network.” He went on to say, “There’s an aftermarket of parts that is there, that is less mature, obviously, in the context of Tesla.”
Scherr also noted that its EVs are involved in more crashes. Teslas make up 80% of Hertz’s EV rental fleet. “Our work with Tesla is to look at the performance of the car, so as to lower the risk of incidence of damage,” he said, “and we’re in very direct engagement with them on parts procurement and labor and the like.” While reducing repair costs is key, cutting the time needed for the repairs is also important as that increases their available rental time.
The accident rate for EVs has been greater than for the company’s gas-powered vehicles. Hertz attributes the higher accident rate to renters not being experienced with the technology. EVs accelerate faster than gas-powered vehicles, and they are heavier. Hertz has limited the acceleration of its Teslas to help reduce vehicle accidents.
Scherr also acknowledged that demand for EVs has been less than Hertz had expected. That is not surprising given the slowing sales rate and the public’s declining interest in buying EVs. There are only so many EV owners and curious drivers who are renting EVs. We have read stories on social media of people renting EVs but who were frustrated by the technology and locating charging stations. They often returned their rentals for charging, or, in some cases, to trade it in for a gas-powered vehicle.
About 80% of Hertz’s EV fleet is Tesla vehicles, and EVs make up about 11% of Hertz’s total rental fleet. Thus, the sale of its Tesla fleet involves slightly less than 5% of its total vehicle fleet. However, Hertz’s problem is that it had just grown its Tesla fleet when Tesla began slashing prices to boost demand. Over the past year, Tesla has cut sales prices by about 30%. Such a move also depresses the value of used Teslas. That is a problem for Tesla owners seeking to trade in their current model for a new one since their existing vehicle is worth less. Tesla’s sales cuts also cause used Tesla buyers to wait to see if there are further cuts that push down used EV prices.
This becomes a financial problem for Hertz because lower resale prices impact the current value of its rental fleet. The reduced fleet value must be reflected in the company’s financial books by increasing depreciation. As CEO Scherr put it, “The MSRP declines in EVs over the course of 2023, driven primarily by Tesla, have driven the fair-market value of our EVs lower as compared to last year, such that a salvage creates a larger loss and, therefore, greater burden.”
Rental car companies sell lots of vehicles in the used car market. Therefore, depreciation is a major consideration when deciding which vehicles to have in their fleets. Hertz outlined how this strategy change will impact future operations and financial results.
"The Company expects this action to better balance supply against expected demand of EVs."
"This will position the Company to eliminate a disproportionate number of lower margin rentals and reduce damage expense associated with EVs. The Company will continue to execute its strategy around EV mobility and offer customers a wide selection of vehicles."
"Going forward, the Company will continue to actively manage the total size of its EV fleet, as well as the allocation of EVs among customer segments, including leisure, corporate, government and rideshare."
The cost of this strategic change for Hertz is a $245 million loss due to the higher EV depreciation, an average of about $12,250 per vehicle. With some car market analysts expecting a further decline in used EV values this year, Hertz’s estimated loss might be greater.
This EV story is telling about the automobile landscape and represents another blow to the Biden administration’s Green New Deal. Tesla’s problems continued to mount with last week’s announcement that it was shuttering its German manufacturing plant due to a shortage of parts. The lack of parts is the direct result of Yemen Houthis attacking Red Sea shipping. Most shippers are diverting their Asia to Europe cargo away from the Suez Canal and around Africa. The route change adds several thousands of miles to the journey and a couple of weeks to arrival times. While the delayed delivery issue is currently impacting Tesla, it won’t be the last manufacturer to experience production disruptions. Consumers will also be impacted by delayed delivery times of goods they have already purchased that are coming from China and Southeast Asia.
We expect the Biden administration to continue to tout its Green New Deal, believing that the public is concerned about climate change. This may be a miscalculation. In the meantime, look for more news and stories about energy and climate change in 2024.