Energy Musings - January 25, 2024

The World Economic Forum at Davos had a couple of speakers who told the truth to the elites gathered to determine what policies you and I must follow. We wonder how these speakers got invited?

Green Energy Player Says The Truth Out Loud

Liberal elites go to Davos to get their marching orders about major social and economic issues.  This year’s World Economic Forum surprisingly had some speakers with discouraging words.  The most prominent voice speaking reality to WEF attendees was Javier Milei, President of Argentina.  His message was simple but disarming.

“Today I’m here to tell you that the Western world is in danger.  And it is in danger because those who are supposed to have to defend the values of the West are co-opted by a vision of the world that inexorably leads to socialism and thereby to poverty.” 

After documenting the successes of capitalism and global trade in lifting millions of people and countries out of poverty, Milei concluded by admonishing the businessmen in attendance and those watching online.  

“Do not be intimidated by the political caste or by parasites who live off the state.  Do not surrender to a political class that only wants to stay in power and retain its privileges.  You are social benefactors.  You are heroes.  You are the creators of the most extraordinary period of prosperity we’ve ever seen.” 

We understand that Klaus Schwab, the founder of the WEF, walked out of the Milei’s talk.  Not surprising as the message was 180 degrees from the WEF’s long-standing messages and direction.  One of those messages is about climate change.  The WEF espouses climate alarmism and therefore a need for dramatic action.  That means state-dictated policies and mandates to restructure the world’s energy system within a couple of decades.  A system that has taken more than a century to construct and which makes the entire world operate will not easily be restructured and certainly not on that timetable. 

To understand how upsetting it was to WEF followers to allow Milei to speak, we saw a note that New York Times climate correspondent David Gelles posted on LinkedIn imploring leaders at Davos to begin considering radical political and economic climate interventions.  Like they are not already urging such steps.  Gelles later deleted the post.  Wonder why? 

Another unwelcomed reality talk at Davos that received little public attention was delivered by an unlikely presenter – Joe Kaeser, chairman of Germany’s Siemens Energy, a 150-year-old company involved in electrification and energy, and which operates worldwide and is a key player in the green energy industry. 

Kaeser attacked the “fairytale” thinking fostered by the WEF about how world economies are going to get to net zero carbon emissions.  Kaeser’s company is one of the leading manufacturers of wind turbines which supplies the generating capacity for one of the favored renewable energy sources.  Because of the pitfalls Kaeser discusses, his company has suffered financially during the past couple of years.  Its most recent financial results reflected a smaller loss but also included news of the elimination of 6,000 jobs.  Green energy is supposed to be not only cheap and clean but also a huge job creator.  Something is not working out properly. 

London’s The Telegraph newspaper interviewed Kaeser.  He told them: “Every transformation comes at a cost and every transformation is painful.  And that’s something which the energy industry and the public sector - governments - don’t really want to hear.” 

We are told that transitioning to renewables will bring cheaper power while also cutting our carbon emissions.  However, those pushing the transition aren’t telling you that your power bills have to go up first before they can go down. The U.S. offshore wind regulator has stated that turbines will not impact climate change and reduce carbon emissions. 

We remember John Kerry, the special envoy for climate change, saying something similar during his presidential campaign, “I actually did vote for the $87 billion before I voted against it.”  That didn’t play well in the campaign. 

Krause’s message is electricity bills must go up before they can go down.  Does this fit with the other “fairytale” thinking?  We are sure the public is going to buy it. 

“I believe that for a while [customers] need to accept higher pricing,” Kaeser warned.  What?  He is saying that the green industry needs to make more money for the transition to continue.  Who is going to provide that money – the customers or the government?  Without it, the transition will stall. 

Once the industry becomes profitable Kaeser said, “…then there might be innovation – about the weight of the blades, other efficiency methods, technology – so the cost can then go down again.  But the point is, if there is no profit pool in an industry, why should that industry innovate?”  Pay me now and pay me later? 

The problem is that once expensive 15-30-year power contracts are negotiated, the high cost of electricity doesn’t decline.  For prices to fall, all subsequent power contracts would need to be priced near zero to average down the high price.  We doubt such a scenario will happen. 

So far, Kaeser’s analysis is on the mark.  After offshore wind projects were canceled last year in the U.K. and no one bid in an offshore wind solicitation because the price was too low, the government raised power prices for future auctions.  More subsidies will likely bring more renewable energy bidders, but those subsidies are financed from tax revenues paid by citizens and businesses.  Get ready, the bill will be coming. 

We laughed when we read an academic paper published in the U.K. that claimed the Contract for Difference payment scheme to reward renewable energy producers is not a subsidy but a “risk management tool.”  Assuring developers of a steady stream of income is supposedly going to minimize energy price fluctuations – risk management.  The problem is that governments providing a steady stream of income to induce an outcome is the very definition of a subsidy. 

In the U.S., offshore wind projects have been canceled and their values written down by developers who are not able to secure higher power prices.  New England electricity utility Eversource is taking a $1.4-$1-6 billion write-down of the value of the company’s interest in three joint venture offshore wind farms.  Eversource is attempting to sell these interests, so the carrying value on its financial statements needs to reflect the prospective sale price.  The economics of offshore wind, in particular, have been slammed by inflation, supply chain issues, and high-interest rates, with the last issue being the most impactful due to the capital-intensive nature of renewable energy projects, especially offshore wind. 

The latest offshore wind farm contracts approved were for two projects with a combined capacity of 3,742 megawatts.  When these projects are up and running in 2031, NY electricity customers will get hit with a 7% increase in their monthly bills. 

Kaeser also enumerated problems that have been self-generated by the offshore wind industry.  He pointed out how the industry recognized that larger wind turbines would increase their capacity factor – the amount of wind power that can be produced by a turbine.  However, rushing to embrace larger and larger turbines without having the prior models technically validated has led to design and engineering problems.  Those challenges have made it hard for manufacturers to plan their future output as they are constantly dealing with solving past problems. 

While Kaeser identified the qualities customers want from their electricity systems, his analysis of the challenges is only partially correct.  He said that “energy supplies are governed by a triangle of ‘reliability, affordability and sustainability,’ but ‘sustainability and affordability may conflict.’”  In other words, clean energy is not necessarily cheap.  That is a counter-message to the one coming from the green energy movement.  But what Kaeser misses is that green energy upsets reliability, meaning too much wind and solar when they do not deliver can mean blackouts.  No one wants blackouts, and they can potentially damage the power grid creating long-lasting blackouts and huge damages. 

What Kaeser gets right is another disarming message: “If you want to have cheap energy, you need to be gas-fired.  That’s the cheapest way, the most secure way if you calculate the whole thing, from the beginning to the end.” 

I am guessing that Klaus Schwab rues his invitation to Mr. Kaeser because his speaking the truth about the energy transition was not a message the WEF wanted to hear.  The facts are disturbing for governments, and the public is catching on that they are the sheep getting sheared and they are not happy.  Green energy is not cheap, it is less dependable and, in the case of offshore wind, does nothing for climate change.  Let’s get serious about nuclear, the only clean energy technology that we have in our toolbox.