Why Your Power Bills Will Remain High?
Inflation may be far lower but regardless your power bills will be almost certainly heading higher from here.
Why?
Because we are finding out the brutal realities and especially the brutal costs of our green energy transition and more simply producing the type of energy mix we now consider optimal.
This mix is technically possible which is wonderful, it is also more expensive than we realized, which is not.
This has profound implications both for the (important) battle with climate change and also for maintaining political support for that same cause.
Western politicians of a certain urban, educated stripe have been very keen to flaunt their green credentials. They have been a little less ardent of late and for good reason - the expensive bill for all their cheap talk is coming due.
We aren't sure where this will head but we think it does mean you should be very careful about getting too excited for "green" investments and especially green investment products that often hide higher fees and obscure structures behind virtue signaling and slick ad campaigns.
Away from the always slippery marketing habits of the financial industry the most important reality is just that the cost of renewable energy is proving far higher than we expected.
Here are two data points that resonate:
Ørsted, the Danish renewable developer, admitted in its recent earnings that it is fully exiting two US offshore wind projects and taking a $4 billion-with-a-B write down as a result.
Meanwhile, in its own filings, Siemens Gamesa Renewable Energy is also taking similar major write downs on onshore wind projects but, separately, it is also reporting major extra costs associated with maintenance and repair.
The latter is proving to be as much as 15-30% on some of the newest and largest projects.
The reasons are complex but scale is one simple answer. The newest wind turbines - onshore or offshore - are so large and so complex that, while wonderful for climate targets, they are proving to be perhaps a bit too ambitious from an engineering point of view.
The nasty conclusion is that building wind power projects is proving very disappointing for the companies best placed to do it.
Both Siemens' and Ørsted's stocks are down by more than 50% from their highs and while they may bounce some time soon the challenges of making profits in this sector will remain for the long term.
But the point isn't to dump on these two individual (European) renewables companies.
The point is to make clear how difficult it is for renewable energy companies to make money in this business period. This may not be a temporary development, in other words. The new high cost, high interest rate regime is hardly proving temporary.
Take Ørsted, for example: they are making more and more revenue but their profits and cash flow are staying flat. That is a bad sign for the viability of their business.
And here is the thing about successful companies in a functioning capitalist system: if a business line isn't profitable then they will generally get out of that business.
This isn't just an issue for renewable energy companies. It is plaguing the entire green transition economy. American car manufacturers getting out of small, cheap vehicles - EVs or combustion engine versions - is another timely example. The math simply doesn't work.
When it comes to offshore wind specifically, it is important to realize that the reason renewable energy companies are struggling to make money isn't purely a result of higher interest rates, supply chain snarls and pricier raw materials.
The biggest single factor is the fact that renewable energy companies bid to provide energy at a certain price and then nail down their costs later.
Where this gets very problematic is the fact that it can take years and years between the the bid and the completion because it can take that long to get permitting at every level of government. This is especially the case in the federal and highly litigious system in the US.
That works well when everything stays stable and predictable. It is obviously a disaster when that isn't the case.
This business approach was fine for a long time and obviously the likes of Siemens Gamesa or Ørsted modeled out the expectations and likely volatility in their cost basis. However, then Covid hit and the world went sideways at the exact same time that demand for renewable energy projects surged.
Overnight this changed everything and regrettably we have been unwilling to adapt to the new circumstances.
The problem is that, shocker, local states and governments have been extremely reluctant to renegotiate the power contracts signed in an earlier, less inflationary and costly era.
Democratically elected politicians know they will not stay elected very long if they willfully renegotiate power contracts that mean their voters have to pay far higher rates for their electricity.
The end result of all this, however, means: far fewer wind projects.
Ørsted isn't alone in abandoning the US. Iberdola, Equinor, BP and Shell etc. are also leaving offshore projects in the US.
As a direct result of this trend, of course, the country is unsurprisingly falling behind the wind energy goals assigned by the Biden administration. The target was 30 GW by 2030. That is now looking impossible and we are only getting started.
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