You might be wondering why I’m back in such short order with another finance story.
A couple of weeks ago, I wrote about Cathie Wood, the CEO of Ark Invest and her search for disruptive innovation, whatever that means? If you missed it, she was an early investor into Tesla. She believes the next big money spinner will be autonomous taxis and the biggest life changer of all, DNA sequencing for you and me.
Merryn Talks Money, a friend’s recommend, has now found traction on my Spotify account. I couldn’t resist another episode last week, Hedge Fund Boss’s Moral Case for Fossil Fuel Investing.
My own bias typically keeps me in the dark about people like Barry Norris and Argonaut Capital.
My financial advisor is under strict instructions to steer well clear of fossil fuels and other industries like airlines, where growth seems such a poor outcome for future generations.
Putting any bias of mine to one side for a moment, I expect future carbon taxes will eventually become de-rigueur, adopted by the majority of governments, because what other choice will they have?
Mountains of debt will need to be funded, public opinion will be behind popular save the planet initiatives, removing any remaining stubborn political tin ear and THE fire, yes that one, still needs to be extinguished.
If you’re a fan of long term buy and holds, carbon dependent companies will best be avoided as they quickly trend in the wrong direction, unable to right their wrongs quickly enough. Their future, gone to the same graveyards as the ice breaking companies after refrigeration arrived.
It’s also good to listen to a contrarian fund manager, who sees the world very differently to me. His logic makes complete sense, provided your focus is short term and entirely profit-based, making alpha, if you really want to sound like a silly city billy.
Norris’ Absolute return fund is actively managed and frequently shorts (sells) stocks as well as buys them, (the more traditional approach). Other funds claim to do the same, the only difference being that his has made returns in excess of 10%, every year for the last 5 years, despite global markets being flat at best and many funds reporting negative returns.
His investment style, can best be described as traditional. He’s interested in companies that are earning money, looks for value, which could mean out of favour and under-priced, doesn’t like unprofitable companies on high multiples to sale, potentially burning through cash and/or a heavy dependency on government subsidy.
This is the sort of investor who gets more excited about buying banks and other traditional sectors like mining, house building, transport and oil. The only way he would touch Tesla, is when he’s selling it, which he did.
One of his most successful strategies has been to short sell renewable energy companies, especially the wind power operators and turbine companies.
He sees an opportunity because alternate energy is a complex subject as are electricity grids. Government intervention has also created a market distortion which he’s been keen to exploit.
He uses a simple analogy to explain the issue. Imagine the electricity grid is a factory. Like all factories, it needs reliable workers, who turn up for work on time as agreed. The workers in this case are gas, coal, hydroelectric, nuclear, even biomass. The unreliable workers are solar and wind because of their dependency on the weather.
It doesn’t matter if only 1 in 10 workers is unreliable, but that’s not been the case for some time. In March, wind power generation reached 14 gigawatts (GW). It means that 37% of the UK’s electricity was wind-based, operating at 70% of total capacity. And this figure is set to grow significantly with 50 GW eventually being wind generated by 2035.
Despite all this renewable energy, electricity prices continue to rise for the consumer? This is because the factory owner still needs to contract those reliable workers, otherwise the electricity grid wouldn’t work.
4 trillion dollars has been invested globally in renewables but the fossil fuel contribution has only fallen from 82-81%. (I suspect the percentage is global, because the UK is 40.8%, 2022). Governments and consumers still have to pay for the back-up, which is never factored into the cheaper numbers for solar and wind. If the renewables industry had to pay for intermittency, no more wind or solar farms would be built because costs would be prohibitive.
He argues that battery storage, conversion of excess electricity to green hydrogen or exporting our glut of cheap wind energy somewhere else is all nonsense.
At Trafford Park in Manchester the biggest lithium ion battery in the world is being built at a cost of £750m. When operational it will be able to hold 1 GW of electricity, enough to power the entire UK grid for 3 minutes and 17 seconds.
If the country shifted to a 100% renewable network, we would need to build thousands of these battery parks, which would be a lot more than 100% of our gross domestic product GDP, which would effectively bankrupt the UK. They’d also have to renew every 8-10 years, because that’s the lifetime of a battery, bankrupting us again and again.
Energy transition has always been about a shift to a superior product. Wood was replaced by coal during the industrial revolution. Oil and gas, also energy dense products but available as a liquid, were perfect for new forms of transport.
Wind and solar are fundamentally low value products, which reduce in value further the higher the percentage of total renewables contributing to the grid. Boris Johnson’s comments about the UK becoming the Saudi Arabia of wind is probably one of the worst economic business models ever to have existed.
The production costs for a barrel of oil in Saudi Arabia is between $5-10 and it is currently sold for $90.
The problem with exporting wind power electricity when the UK has a glut is the price will tend towards zero because the wind has also been blowing in Denmark and Germany too. The wind farm operators don’t mind because they have their contract for difference CFD, set by the British government which has just announced that the next renewable auction will offer a strike price of £73 ($90.61) per megawatt hour.
His moral compass for continuing to buy fossil fuels is, the western world will last about 2 hours without them. The longer term outcome is economic power dwindles because China and other autocratic nations continue to burn fossil fuels regardless. Eventually, there is only one conclusion, we lose our democratic freedom. It’s therefore our duty to continue to burn fossil fuels.
Where to begin?
Intermittency maybe a hidden cost for renewable energy, but it’s chump change when you begin to consider the increased cost of devastation, inflicted by nature if we don’t stop burning oil and gas.
The world has already had a taste of what that looks like. Here’s a short list from 2023.
Hundreds of millions across the US, Europe, and Asia hit by severe heat.
Evacuations ordered after monsoon flooding in India.
Catastrophic flooding swamps Vermont.
Tropical Storm Mawar hits Japan, Guam, the Philippines, and Taiwan.
Wildfires blaze through Canada.
Cyclone Mocha devastates Myanmar.
Italy experiences torrential rainfall.
South Sudan sees its fourth year of consecutive flooding.
The cost of producing a barrel of oil has to pick up the cost for this damage and the turmoil and misery yet to come.
It doesn’t really matter whether renewable energy sources are inferior to fossil fuels or not. The damage being caused by them is incontrovertible and has to stop. Make it an economic argument if you prefer, but don’t forget to include a carbon tax which rightly factors in a climate contribution making oil a far less attractive product.
His in-depth knowledge of the technical issues associated with renewable energy and the national grid, conveniently ignores other developments which don’t support his case.
Northvolt, a Swedish industrial start-up, backed by Volkswagen, BlackRock and Goldman Sachs, recently announced the development of a sodium-ion battery. Significantly, it has no lithium, cobalt or nickel, critical elements dominated by Chinese supply chains.
The new battery is a cheaper and safer alternative to lithium because it works better at high and low temperatures. Importantly, they have reached the critical level of 160 watt hours per kilogram, an energy density close to the lithium ones used for energy storage currently.
Until July 2020, the UK government made it deliberately difficult to build storage units. They were trying to prevent inefficient monopolies developing between different parts of the market, network operators owning storage, for instance. Now the rules have been loosened, there’s been renewed interest. Local authorities and energy companies are planning to expand current storage 10-fold.
It’s the start of a rapidly changing grid, where smaller and distributed sources of power provide greater flexibility.
What about the huge potential of electric vehicles (EV) for battery storage on an intelligently connected grid?
Tesla earlier this year announced bi-directional charging being available in their cars in a couple of years time. It sounds like a similar story at GM and Volkswagen. Hyundai, Ford and Nissan are already offering vehicle to grid capability apparently,
It stacks up. Why invest in larger stationary battery systems, when the lowly car battery could provide up to 38 GW of storage space by 2050. It makes sense when hundreds of thousands of EVs are going to be plugged into a charger every evening when demand is traditionally at its highest.
As I said at the beginning, Norris is only concerned with the short term markets and the facts to support his decision making
There is a much bigger issue at stake here than making a few extra percentage points on a fund which is picking holes in a nascent industry.
Let’s at least hope common sense eventually prevails even for Norris and he’s forced to short sell oil and buy Northvolt before it’s too late.