Charts of the Month - October '23
Hybrids > EVs and The Beginning of the End of the Renewable Industrial Complex
Let the Engineers Figure it Out.
“We’d be better off if we decided the desired outcome, and then let the engineers figure out how to solve it.”
This is a concept that Jeff Currie (ex-Global Head of Commodities Research at Goldman Sachs) discussed in a panel discussion a few weeks back when having the ‘climate discussion’ at the Simplify Enter the Fall discussion series.
My (unsolicited) interpretation of what he meant is this: instead of having governments define the problem (climate change), the stated outcome (decarbonization), and the path function to solving the problem (renewables and EVs through incentive schemes like the IRA), we should instead let the engineers (the smart people in the room) decide how best to go about solving the problem, not Congress.
Notable in the above sequence is the 'stated' outcome and the path function to solving the problem not being aligned. The current path function is more aligned with an 'electrify everything' approach which is not at all the same as 'decarbonization'. 'Net Zero 2050' is a decarbonization goal, which, if we were led by engineers, achieving such a goal would likely take a significantly different path function than the one we're currently on. More on that path below.
Note: I’m not acknowledging or denying that we actually have a problem (climate change) or that we have a shot in hell at decarbonizing – that is a different conversation - this is simply the playing field we’re using to make a point in this section.
Hybrid cars are similar to nuclear reactors in that they’re technologies that’ve been around for a long time (the first nuclear reactor was installed nearly 80 years ago, and Toyota began mass producing the Prius in the early 90s), and both are, still today, far superior to the alternative path functions we’ve been instructed to follow. Namely, wind and solar instead of nuclear and EVs instead of Hybrids.
The Ford F-150, one of the best-selling vehicles of all time in the U.S., provides a nice case study.
In 2024, Ford will release its first F-150 Hybrid (gasoline and battery). They’ve already released the F-150 Lightning (full EV).
The F-150 Hybrid is the latest version of a truck that has had a remarkable run of consistently increasing fuel efficiency, to the tune of almost 130% increase in the last 40 years. Thanks to the engineers, with guidance from above.
This progress can be attributed to the rules of the game put in place with the Corporate Average Fuel Economy (CAFE) standards set in 1975 by Congress, which was largely a response to the 1973 oil embargo. CAFE standards set the minimum average new vehicle fuel economy. In 2007, The Department of Transportation, through the CAFE Act, increased the standards for light trucks to 22.2 miles per gallon (mpg), and scheduled further increases. Through the Energy Independence Act of 2007, fuel economy standards were raised even further, requiring a company’s fleet to meet a minimum of 35 mpg by 2020.
This is a case of
- 1) Defined problem – energy embargo causes oil crisis, so we need to reduce oil use,
- 2) A desired outcome – minimum mpg for vehicles,
- 3) Then let smart people solve it.
It was a winning formula. But today, we seem to have lost the script...
Unfortunately, EVs have been preordained as the technology of the future to solve ‘the’ problem that they’ve defined.
The smartest guys in this industry (i.e. Toyota) aren’t too sure, and that’s why they still have not committed to a full EV lineup.
And it’s not that hard to see why.
By now, everyone knows (or should know) that EV batteries are a human rights nightmare (mining for minerals using child slave labor in the bowels of Africa), their toxic chemical remnants are not easily disposed of, the actual mining operations are whatever the opposite of 'green' is, and many of the still in the ground elemental components as well as the manufacturing supply chains are both tied up in geographies fraught with geopolitical risks (namely China).
Sure, at face value, one might say that hybrids still carry a higher emissions profile, but in reality not only are hybrid batteries significantly smaller (meaning they use fewer materials to build and therefore fewer children to pull the materials out of the ground), but because they’re not needed for long distances or large loads (the ICE takes care of that), they can more often than not take advantage of Lithium-Iron-Phosphate (LFP) battery technology as opposed to their far more expensive, supply chain challenged, and human rights ladened cousins, the Nickel-Cobalt-Manganese batteries (cobalt being the primary culprit of human rights issues in the DRC), which are mostly used in pure EVs. We need to look at the full supply chain for a true apples-to-apples comparison.
None of this even touches on the fact that it’s becoming clear that most drivers, at least in the U.S., don’t really want to drive EVs as much as the ivory tower believed they would. GM is massively cutting EV production as they’re coming nowhere near their initial sales targets, Tesla can’t cut prices fast enough (6 times this year alone), and Ford appears to be toeing the Toyota line of “should we or shouldn’t we go all in on EVs?”. Both Ford and Toyota have recently cut their EV sales forecasts as they see drivers gravitating more toward their hybrid models…
Let’s just let the smart guys solve this, OK?
The Beginning of the End.
It’s November 2nd, 2023, and we’re putting our stake in the ground - the inevitable decline of the Renewable Industrial Complex has arrived.
The industry that’s been propped up by government incentives, politicians around the world, the United Nations, the World Economic Forum, activists and lobbyists, media pundits, and the entirety of the ESG+Woke Brigade, has been slowly cracking, but now, seems to be falling apart all at once.
Here’s a few anecdotal stories from just the last few months:
- Siemens Energy (one of the largest wind turbine manufacturers in the world) is looking like it’s going to be nationalized by the German government (as it’s currently flirting with bankruptcy).
- GE is guiding towards at least a $1 billion loss on their wind division in 2023 and again in 2024.
- NextEra Energy (the largest renewable energy utility in the U.S.) has taken a 30% haircut to its stock price this year as it cut its dividend in half on declining cash flows.
- Offshore wind projects in the UK received zero bids in the latest contract auction (first time ever).
- Orsted, one of Europe’s leading offshore wind developers, just took a $4 billion write-down - note that their entire market cap is $20 billion.
- Connecticut-based energy services company Avangrid, just PAID $64 million to terminate wind power purchase agreements to "avoid billions of dollars in write-offs. The company said the projects were "unfinancable" in their current states."
- Pretty much the entirety of the solar landscape is guiding towards a slowdown in demand from the U.S. and the EU in addition to continued and ongoing supply chain issues raising their cost of goods, which they are unable to pass on to consumers because if they did, demand would slow further.
Understandably, the performance of the renewable industry, even with the unimaginably strong tailwinds they’ve received over the last decade+ from the aforementioned list of myopic proponents, has nosedived. When you juxtapose their returns with traditional energy, an industry that’s been given the opposite treatment (Biden literally saying to the world he’s going to ‘shut them down’), it becomes evident that we’re beginning to see reality finally beat ideology.
High interest rates are absolutely a huge contributing factor. Remember, renewables are heavy industry, and as such, require a lot of debt to initially finance operations and capital projects. But no matter how much preferential treatment you get from the powers that be, debt math is still debt math, and debt service matters.
Keep in mind that these debt service ratios are BEFORE refinancing kicks in at higher rates over the coming months and years (more on that in next month's Research piece).
These stretched fundamentals coupled with the cracking of the narrative, make, in my opinion, renewables uninvestable for the foreseeable future, if not forever.
A silver lining? The commodities required to build energy infrastructure (green or otherwise) should maybe pique your interest…
^ The rebar (steel) foundation of one onshore wind turbine. Each turbine requires 120-180 tons of steel per megawatt. The average onshore wind turbine produces 2-3 megawatts.
As a reminder, steal requires a lot of the C word… carbon.
“Steelmaking is one of the most energy- and carbon-intensive industries, accounting for around 7% of global carbon dioxide emissions in 2020.
About two-thirds of the world’s steel is produced by a coal-based and carbon-intensive process where iron ore is heated and reduced by a coke (made by heating coal) to produce iron in a blast furnace (BF). The iron is then converted into steel with a basic oxygen furnace (BOF).” – EIA
Again, can we just let the smart people figure this out, instead of the lawyers, lobbyists, and poli-sci majors?
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