Blain’s Morning Porridge – 15 Jan 2021: A Different Green Future?

New York Times: 2020 was the joint-hottest year on record (with 2016). Stark headlines remind us of the urgent need to address climate change.

Blain’s Morning Porridge – 15thJanuary 2021: A Different Green Future? 

“Never mind that our numbers don’t work in your model, we will lobby our way to commerciality” 

This morning I read in the New York Times that 2020 was the joint-hottest year on record (with 2016). Stark headlines remind us of the urgent need to address climate change. Coincidently, plans have been announced to double the size of the already massive Rampion offshore wind farm off Brighton (the UK’s Southcoast) – which already stretches across the horizon. The developer says it will create renewable power for one million homes and reduce carbon emissions by 1.8 million tonnes per year. 

Back in the early 1980s I chose to study environmental economics as a component of my honours degree. What I learnt then about green science has stuck. I’m a firm believer in environmental fragility. I accept the Anthropocene – the age of man – is changing the planet, and not to our advantage. I admire Greta Thunberg for her passion and galvanising her generation on the issue.  

I have a personal stake in preventing global warming: our back door is only a couple of meters above the tide line – I really don’t want a dispossessed polar bear taking up residence on the deck with the intention of some easy paddle-board delivered free-lunches.

I accept the science that higher carbon concentrations are driving global warming. Having made my position clear, I know many people don’t accept the science – despite it being repeatedly demonstrated. They know better – because they’ve read it on the internet. Let everyone believe what they want to believe. 

I believe in the science and I also believe in the numbers that proper analysis provides on the economics of climate change. It’s not as simple or obvious as many people think.

Earlier this week I was reading a green-driven economic doom and gloom tale: a high profile Hydro Scheme in British Columbia (actually… I think this is first time I’ve mentioned Canada this decade… “dead or…” springs to mind), that has gone spectacularly wrong. The dam will cost over C$12 bln but is beset with crisis – “the whole project is uneconomic as an energy source, and fails it’s green and clean promise, which is to reduce carbon emissions,” say economists who have analysed the project.

The Net Present Value of electricity produced is $2 bln vs a build cost of $10.7 bln – which is a significant loss. One suggestion is to pull the plug and stop spending – writing off $6 bln of massively carbon polluting concrete that’s already been poured. For the plant to work at any kind of economic level would require a complete rebuild of the whole of Canada’s electric grid – adding further costs and raising pollution! 

Sadly… the Canadian Dam will not be the only green disappointment.

To address climate change some pretty tough choices face us, but I am beginning to doubt the manner in which these will likely be addressed by those in authority. I fear the Green agenda has fallen into a dangerous trap; caught in Political Opportunism, Bureaucratic Boondoggellery, and Woke-based Groupthink. Solutions are leapt upon without any real understanding the implications or having done meaningful due diligence. 

Sadly, the market tends to get carried away in the waves of enthusiasm that follows climate change, getting caught up in the “possibilities and promises” of exciting new green technologies – leading to bursting bubbles which ultimately diminish the funding available for the dull, boring, predictable carbon clean tech that actually does work. 

There are host of issues to consider when it comes to the economics of climate change. Green power sources and decarbonisation are certainly possible – but they have many substantial costs attached. There will be consequences. 

First, we have to acknowledge that any attempt to decarbonise comes with a serious “free rider” problem. While some nations are honestly committed to do their utmost to achieve carbon neutrality – that will matter not a jot unless every country does it. It creates moral and ethical issues. Everyone is suspicious of China because it is the biggest emitter of CO2, but a recent Oxford University note on African demand for electricity predicts it will double by 2040. The bulk will come from new gas, oil and coal fired plants. Solar and other renewables will provide 15% or less. 

What right does the West have to hold back Africa’s growth, stem the alleviation of poverty or improve prosperity? If we don’t, then our efforts to decarbonise potentially go for naught. 

In November, the World’s great and the good and Boris Johnson will be gathering in Glasgow for COP21 – the UN’s latest make or break moment for climate change. It’s such an important conference the UK’s Minister of somethingorother Alok Sharma (one of the government’s inexhaustible supply of cloned professional politicians with a smidge of experience doing something else before becoming, to quote: “a leading force behind the UK’s climate diplomacy”) has been given the role of President. He’s said… “The biggest challenge of our time is climate change and we need to work together to deliver a cleaner, greener world and build back better for present and future generations..” 

Yeah? So…  what you going to do about it Alok? 

Follow the science? Or tell us all about the wonderful strides the UK is making to decarbonise? Boast about how we aren’t burning coal because it’s so windy? 

As I wrote recentlyin a Porridge about the real cost of windpower, the UK’s government public statements about our apparently unlimited and bountiful free wind is hopeless wish-myth-thinking. It’s frankly dishonest. 

Big Wind looks attractive on paper, but in practice it’s been shown to be very expensive because its prone to breaking down, loses efficiency while rising O&M costs are not being factored in. The UK’s vote-grabbing wind policies are likely to prove massively expensive. 

I would suggest to Alok he does something truly unique and inspirational… look at the economics, and understand the brutal, frightening reality: Renewables (on their own) stand about as much chance of solving climate change as bringing a penknife to a tank fight. 

Now I personally like the idea of tidal power – it sort-of makes sense on the basis the tides are utterly reliable and predictable. But they are the very devil to maintain (the moment you stick anything in salt-water bad things start to happen) and the power is variable making it hard for the grid to process, transfer and store. All renewable power suffers the same general issue: they are high entrophy – converting power from one form into another and then delivering it. It’s expensive – and not particularly efficient. Like it or lump it, but fossil fuels remain better and more efficient stores of energy. 

However, as most people now accept Climate Change is very real, then we do need to find solutions. As renewable are clean (let’s not quibble about the carbon loads from building them), then they are “obviously” the kinds of technologies we should be supporting. Obvious… but incorrect. 

The reality is there are lots of new technologies that could replace carbon power and allow us to get to the goal of carbon zero – yet they are generally very expensive, unproven, will require subsidy and, ultimately, may not deliver. Some things we do know: nuclear power is horrendously expensive and has “disposal” issues – but it works and is reliable (and would be considered safe if not for Fukishima, Chernobyl, Three-Mile Island, Windscale… oh…) 

Everyone is now massively enthusiastic about the possibilities of Green Hydrogen (ie using renewable derived energy to make hydrogen for fuel cells and fuel) – but it will require enormous investment in terms of infrastructure, government support and subsidy, proving safe new technologies, solving storage issues, even before the technology can be commercialised. There are more than a few analysts who thing the emerging new hydrogen tech sector is already a bubble. 

Electric vehicles (EVs) are seen as another solution to Carbon Zero, but they are also expensive and require infrastructure. Over the past few years one major driver of the acceptance of EVs has been the fall in the cost of batteries, but now half the lithium and rare earths on the planet are used in car batteries – yet EV companies are barely profitable, and more and more are competing in the market. If they want to extract margin from their product, and the price of the battery components is rising, then EVs are going to get progressively more expensive. (Any regular porridge reader will know I think Tesla is perhaps the most obvious market bubble.) 

With the best will in the world, the UK is unlikely to get to carbon neutrality through renewables like wind, or a hydrogen economy, unless we are prepared to pay through the nose for it. We will have to find other ways forward – and be prepared for massive costs.

One of the research firms I follow closely is Thunder Said Energy. Chief analyst Rob West is one of the smartest chaps I know (and I’ve a couple of billionaire hedge fund clients!) He’s done the numbers on climate change:

· If we do nothing, the costs of climate change will exceed $1.5 trillion per annum by 2050. The most economically devasting storm in history was Hurricane Katrine – $165 bln. Imagine something similar hitting the global economy every month and getting more and frequent as CO2 levels continue to rise, pushing up temperatures.

· Perversely, to get to zero-carbon usage the global economy we will need to spend around $3 trillion per annum to transition energy from fossil fuels to new decarbonised sources – even as energy use will rise by some 65% in the West. 

· Net Zero won’t repair the damage already done. It may limit the predicted damage by 50% – still devasting. Sea levels will still rise inundating many large cities. Labour productivity will fall, flooding and extreme weather will continue. 

Let me stress: Rob does not argue we should do nothing – he supports fixing the planet. He just wants everyone to understand the economic reality and why its creating market bubbles and unwise expectations. 

Rob has calculated we can decarbonise, but the most effective ways to offset carbon won’t be the popular “sexy” solutions the market wants to invest in like hydrogen cars, green H2, Biomass, floating wind-farms or even new Nuclear Tech – these will all cost more than $200 per tonne of carbon abatement. Even electric cars are marginal when it comes to carbon neutrality. 

Improvements will come through much cheaper solutions under $75 per tonne – dull boring stuff; like restoring the uptake of carbon in soil, reforestation, working from home, supercapacitors and grid improvement, and repurposing fossil fuels in forms like decarbonised coal and cleaner gas tech. I’m going to invest in charities which plant trees as my own effort to decarbonise. 

A big issue is where we will find all the electricity we need to power electric “green” cars and fuel growth? As demand for energy will continue to increase, it won’t be met by renewables. We may not be able to cut our reliance on fossil fuels – but we can make them better: clean oil and gas are technologies that are likely to provide better and more carbon efficient solutions than the billions sunk in offshore wind farms and other “grandstanding” projects. I’d suggest the path to success to a decarbonised future likely lies in gas, better battery tech, more forests and better soil. Renewables have a place, but are not likely to be provide a whole solution in themselves. 

If we are going to solve carbon it will require a massive effort in terms of clean energy generation, carbon capture and a true price for carbon rights and pollution, but also a more practical approach to what is possible, what is real and what makes economic sense. 

Every time I write about decarbonisation and renewables, I get responses about Nuclear power being the key. Its important, but its either frighteningly expensive, still in development like molten thulium salt, or it’s an always-tomorrow project like Fusion. But if Fusion ever happens it will be a genuine game changer and create obsolescence across any money we pour into clean gas…  but it will take years to roll out…

Decarbonisation can be done. But governments have to be honest, look at the numbers, listen to the science and economics, and direct investment into solutions accordingly. 

For institutional investors: if you’d like me to put you in touch with Rob West of Thunder Said Energy, or John Constable, whose research informed my comments on Wind Power, I will be very happy to make the introductions. I can also ask permission from Rob to share some of his recent research if you are intrigued. 

Have a great weekend..

Bill Blain

Shard Capital