Part 1: Energy Insecurity is the Long Term Threat

Blain’s Morning Porridge April 1^st 2022: Part 1: Energy Insecurity is the Long Term Threat

“Confidence is silent. Insecurity is Loud!”

This Morning: Energy Insecurity is the major factor underlying market angst. I’ve been warning about it for years; initially because of mis-investment due to the ESG/climate change bandwagon, and then bad government policy ignoring security of supply. Look where we are now…

This morning let me present 2 morning porridge offerings: 1) Why Energy Insecurity remains the Long Term Threat, and 2) The potential of Hydrogen/Ammonia to solve it. This includes a guest post from Brett Morris on what the Australians are looking at.

Dear readers,

Traditionally on April 1^st I’ve try write an amusing note designed to fool you all with something sounding just plausible enough to be likely. Sadly, this year I haven’t had the time or the imagination, and frankly there isn’t much to smile about.

Instead, this morning let me offer you a two-part Morning Porridge for the weekend; first my own thoughts on energy insecurity, then an excellent and informed note from a young Australian chum, Brett Morris, on the potential for Hydrogen and Ammonia as an energy solution our future global economy. 

 Energy Insecurity – the long-term threat and hurdle

The uncertainty swilling round financial asset markets today is largely due to the sudden emergence of Energy Insecurity as the No-See-Um about to swamp European economies.

It’s taken the global economy years of self-delusion to get to this point – where the economies of Western Europe are suffering a sudden, tremendous and destabilising Energy Shock. The coming pain reflects bad decisions based on daft assumptions. It has created a distorted and confused energy transition market. The first mistake was an ignorant market assuming we could switch from bad fossil fuels to good renewables almost overnight, and investing with little consideration of long-term transition effects. The second were European governments being unaware while putting their faith in a rigged markets to which Russia ultimately held the keys.

Ukraine provided the wake-up shock. Until March this year, it was just too easy to forget it was power and energy that drove industrial revolutions and propelled Europe into the modern age. Without energy security, most of us would remain subsistence peasant farmers living to the ripe old age of 36 before dying in excruciating agony from something like dirty water. 

 Suddenly we are waking up to the reality of multiple energy threats:  

• The Germans are talking about gas rationing. 
• The Americans are releasing strategic oil reserves to bring down prices – a political move because Biden knows the price of “gas” (petrol as its properly called) will be another factor likely to slaughter him at the mid-terms in November. 
• Supranational agencies are bleating about climate change acceleration as nations light up coal power stations again. 
• The crisis in energy costs is driving inflation, crushing consumers, and creating all manner of negative consequences…
• We still don’t have effective energy transition and security strategies in place. 

 For all the hot air at COP26, the dearth of transition strategies – about how we actually move from bad coal to clean renewables and a decarbonised future – is massive political failure. The UK Government still hasn’t really got the message. Next week, or maybe next month – who knows – they will release a mind-numbing new energy supply strategy which will be long on solar power, offshore windfarms, but less keen on on-shore because the Sir Bufton Tuftons of the Tory Shires don’t want their view spoilt.

In contrast, the investment market very quickly cottoned-on to the decarbonisation message, and set out to arbitrage it. Smart investors realised how making lots of showy noise about how green they are would attract clients’ environmentally-concerned money. Big money clambered on board the ESG band-wagon and bought every solar and wind farm they could find, while holding back “evil” funding for gas, oil or coal.

The result has been energy supply distortion and a very suboptimal renewable strategy. Wind and Solar are massively over invested, (because they are proven, easy to understand and sell internally, seen to work, and the glossy financial models look great in investor or investment committee meetings). Meanwhile, other more promising and more reliable technologies – especially tide and hydro – have been dismissed because they look more “difficult” and expensive.. (Any new tech is expensive in its early phase!)

Although gas is massively less polluting and cleaner than coal, and has to be a critical part of any sensible, considered long-term transition strategy for decarbonisation, no ESG woke aware investor will fund gas.. it will not earn green points. The result is we are underinvested in the right energies. We are discovering the brutal reality is well presented excel financial models of wind farm returns have dramatically underestimated their reliability and off-time, and the reality of maintenance, the weather and repairability – especially at sea. Solar farms are degrading faster than expected.

The second issue has been the failure of Western Governments to anticipate an Energy Shock – like the Economic War with Russia has delivered. It was a lesson we learnt back in 1973 – the Oil Shock. We got complacent and forgot – which is hardly unusual over the span of Human History. Over the past few years Germany made the critical mistakes of closing nuclear and assuming Russian gas supplies would be steady and non-political. The UK didn’t bother maintaining a strategic gas reserve – making the flawed assumption perfect markets would ensure supply.

 Ukraine has become a critical moment for the global economy because it’s exposed all the weaknesses in Energy policy and finance. Whatever the West thinks about how Russia is being beaten, or how much damage the economic damage sanctions are inflicting, the brutal reality is Putin holds a very strong hand. He has energy leverage. He is betting Europe’s economies will be forced to concede his Ukraine land-grab because it won’t be able to withstand years of energy crisis and shortages wrecking their economies.  

 The impact is being felt already. A European recession is now a distinct possibility. It will take 2 years to build the LNG terminals to distribute the gas Germany intends to import from Qatar. There is only so much the USA will be able to do to prop up European energy needs in the medium term. The oil shock of 1973 gave immediate power to the Gulf States and empowered OPEC to become the West’s nemesis as it set the energy price agenda. Ultimately the West had no alternative but to adapt to higher oil prices and accept OPEC. We can’t give Russia similar control.  

 A second critical point is Energy insecurities can be rectified – given time. If Europe can last 2 years of energy crisis, then Russia will be the ultimate loser. During the coming battle, the immediate shock of discovering how beholden we are to energy suppliers will become attritional. You soon learn who your friends are when gas prices go through the roof. It will change the way we perceive other power blocks, and how globalisation evolves. When Russia loses, good luck to the Gulf and India trying to regain favour.  

 In contrast, Climate change will prove a much slower tectonic shift moving through the global economy – but it will change the foundations of economies far more fundamentally long-term. Decarbonisation – even during an energy crisis – remains critical.  

 Last week I wrote a despairing article about Energy insecurity and climate change – concluding the West needs to invest in relaunching Nuclear power. I suggested extending and new build current design nuclear plants, new hybrid nuclear power alternatives like mini nukes, and a collective monumental effort to innovate fusion as the paradigm shift into long-term energy security to transform our future.  

 I concluded the problem is largely policy (or lack of) driven. We need grown-up policy on energy transition and security. Thus far the UK government is long on statements but has consistently failed to deliver a plan. I am, however, heartened to read the UK has just appointed a senior BP executive to advise and assist on the “UK’s transition to a low carbon economy, while prioritising efforts to increase the UK’s clean energy independence by increasing home-grown energy and renewables.”

The press release then goes to on to blag about: “While the UK’s reliance on fossil fuels continues to fall, there will be an ongoing need for oil and gas over the coming decades while we ramp up renewable energy capacity, as recognised by the independent Climate Change Committee. The UK government is clear that we cannot have a cliff-edge where North Sea oil and gas are abandoned overnight. Turning off the taps would put energy security, British jobs and new industries like hydrogen and Carbon Capture and Storage at risk – and we would be even more dependent on foreign imports.” 

 For all that, it feels like there is a bureaucratic fug hanging over UK policy – where easy solutions get approval, but better, more reliable but more difficult alternative renewable energies like Tidal Power (predictable as clockword) have been largely ignored. “Too difficult” is an easy way to dismiss solutions.  

 There also seems to be an assumption that battery technology is somehow going to solve everything as a renewable solution. No. It will not. Batteries only store energy. They do not create it. Any car battery is filled with energy that is at least 60% generated from carbon sources. If you weight the carbon costs and energy transformational inefficiencies of current lithium batteries, and the environmental damage done by mining and eventually recycling them, then the actual contribution of lithium batteries to decarbonisation is questionable.  

 (Don’t be surprised – the tech underlying a Tesla battery is basically 50 years old.) Regular readers will know I am not a fan of Lithium EVs. This is the year the bubble will burst when the spiraling costs of lithium causes an EV cost crisis. But we do need to think about how to decarbonise transport.  

 Following my comments on Nuclear power last week I received considerable “correspondence” from readers. Many questioned the wisdom of putting too much reliance on a single technology – arguing we’d be better to diversify energy sources. I agree – lets have more wind, solar, tide, geothermal and nuclear.  

 Others asked about Hydrogen.  

 Hydrogen is not new. My wife’s grandfather worked on hydrogen cars over 50 years ago. The Tech is evolving. I like the idea of green-hydrogen fuel cells far more than lithium batteries, but the practical problems of building hydrogen infrastructure and distribution, and then containing hydrogen as fuel – the element is so tiny it literally seeps through any containment vessel or piping – makes it all sound terribly difficult. From my perspective, it could be years before we develop effective tech to allow Hydrogen powered cars.  

 In contrast, this morning’s guest contributor in Part 2, Brett Morris writing from Oz, points out scientists are pretty bullish on Hydrogen prospects. He’s got a pretty good starting point – a background in science, and exploiting his home state of Western Oz’ deserts and wind to generate green hydrogen, and how Ammonia will be part of a diversified Energy Security solution.  

Let me hand over to Brett for Part 2 of this morning’s Porridge…  

 No Morning Porridge Next Week – taking a week off to go down the Nile!  

 Bill Blain 

Strategist – Shard Capital