Meredith Angwin, expert on the US power grid and author of Shorting the Grid, explains in less than 90 seconds how renewables are destabilizing the national grid:
The Big Picture: War, Energy, Bonds and Gold
Two inter-connected themes likely to dominate the next few decades are War and Energy.
War may take the form of a geopolitical struggle between opposing ideologies, with conventional wars limited to proxies in most cases and nuclear exchanges avoided because the costs are prohibitive. But it is likely to involve fierce competition for energy and resources in an attempt to undermine opposing economies. The impact is likely to be felt throughout the global economy and across all asset classes, including bonds, stocks and precious metals.
War
War can take many forms: conventional war, nuclear war, proxy war, cold war, economic war, or some combination of the above.
Nuclear war can hopefully be avoided, with sane leaders skirting mutually assured destruction (MAD). For that reason, even conventional war between great powers is unlikely — but there is a risk of it being triggered by escalation in a war between proxies.
Cold war, with limited trade between opposing powers — as in the days of Churchill’s Iron Curtain — is also unlikely. Global economic interdependence is far higher than sixty years ago.
Greg Hayes, chief executive of Raytheon, said the company had “several thousand suppliers in China and decoupling . . . is impossible”. “We can de-risk but not decouple,” Hayes told the Financial Times in an interview, adding that he believed this to be the case “for everybody”.
“Think about the $500bn of trade that goes from China to the US every year. More than 95 per cent of rare earth materials or metals come from, or are processed in, China. There is no alternative,” said Hayes. “If we had to pull out of China, it would take us many, many years to re-establish that capability either domestically or in other friendly countries.”
What is likely is a struggle for geopolitical advantage between opposing alliances, with economic war, proxy wars, and attempts to build spheres of influence. This includes enticing (or coercing) non-aligned nations such as India to join one of the sides.
Such a geopolitical arm-wrestle is likely to have ramifications in many different spheres, but most of all energy.
Energy
You can’t fight a war without energy. A key element of the geopolitical tussle will be to secure adequate supplies of energy — and to deprive the opposing side of the same.
The situation is further complicated by the attempted transition from fossil fuels to low-carbon energy sources.
Since the Industrial revolution, development of the global economy has been fueled by energy from fossil fuels, with GDP and fossil fuel consumption growing exponentially. Gradual transition to alternative energy sources would be a big ask. To attempt a rapid transition while in the midst of geopolitical conflict could end in disaster.
The challenge is further complicated by attempts to replace fossil fuels with wind and solar which generate intermittent power. Base-load power — generated from fossil fuels or nuclear — is essential for many industries. Microsoft are investigating the use of nuclear to power data centers. The US Department of Defense (DoD) has commissioned Oklo Inc. to design and build a nuclear micro-reactor to power Eielson Air Force Base in Alaska. Renewables are a poor option for critical applications.
Russia’s 2022 invasion of Ukraine highlighted Germany’s energy vulnerability despite billions of Euros invested in renewables over recent decades. You cannot run a modern industrialized economy without reliable energy sources.
Low investment in fossil fuel resources — which fail to meet ESG standards — has further increased global vulnerability to energy shortages during the transition.
Inflation
War and pandemics cause high inflation. Governments run large deficits during times of crisis, funded by central bank purchases in the absence of other investors. This causes rapid expansion of the money supply, leading to high inflation.
Geopolitical conflict and the attempt to rapidly transition to carbon-free fuels — while neglecting existing resources — are both likely to cause a steep rise in energy costs.
Bond Market
The bond market has the final say. The recent steep rise in long-term Treasury yields is the bond market’s assessment of fiscal management in the US. The deeply divided House of Representatives has effectively been awarded an “F” on its economic report card.
Failure of a divided government to address fiscal debt at precarious levels and rein in ballooning deficits raises a question mark over future stability, with the bond market demanding a premium on long-term issues.
The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions. (Fitch Ratings)
CBO projections show federal debt held by the public rising from 98% of GDP today to 181% in thirty years time.
Rising long-term yields also add to deficits as servicing costs on existing debt increase over time. The actual curve is likely to be even steeper. CBO projections assume an average interest rate of 2.5%, while current rates are close to 5.0%.
Continuing large fiscal deficits in the next few decades appear unavoidable. The result is likely to be massive central bank purchases of fiscal debt — as in previous wars/pandemics — with negative real interest rates (red circles below) driving higher inflation (blue) and rising inequality.
Political instability
Interest rate suppression effectively subsidizes borrowers at the expense of savers. Only the wealthy are able to leverage their large balance sheets, buying real assets while borrowing at negative real interest rates. Those less fortunate have limited access to credit and suffer the worst consequences of inflation, further accentuating the division in society and fostering political instability as populism soars.
Commodities
Resources are likely to be in short supply, from under-investment during the pandemic, geopolitical competition, and the attempted rapid transition to new energy sources. Prices are still likely to fall if global demand shrinks during a recession. But growing demand, shrinking supply (from past under-investment) and inflation pushing up production costs are expected to lead to a long-term secular up-trend.
Gold
High inflation, negative real interest rates and geopolitical competition are likely to weaken the Dollar, strengthening demand for Gold as a safe haven and inflation hedge. Breakout above $2000 per ounce would offer a long-term target of $3000.
Conclusion
We expect large government deficits and shortages of energy and critical materials — such as Lithium and Copper — the result of a geopolitical struggle and attempt to transition to low-carbon energy sources over several decades.
Rising government debt will necessitate central bank purchases as the bond market drives up yields in the absence of foreign buyers. The likely result will be high inflation and interest rate suppression as central banks and government attempt to manage soaring debt levels and servicing costs.
Our strategy is to be overweight commodities, especially critical materials required for the transition to low-carbon fuel sources; short-term bonds and term deposits; and defensive (value) stocks.
We are also overweight energy, including: heavy electrical; nuclear technology; uranium; and oil & gas resources.
Gold is more complicated. Rising long-term interest rates will weaken demand for Gold, while geopolitical turmoil will strengthen demand, causing a see-sawing market with high volatility. If long-term yields fall — due to central bank purchases of US Treasuries — expect high inflation. That would be a signal to load up on Gold.
We are underweight growth stocks and real estate. Rising long-term interest rates are expected to lower earnings multiples, causing falling prices. Collapsing long-term yields due to central bank purchases of USTs, however, would cause negative real interest rates. A signal to overweight real assets such as growth stocks and real estate.
Long-term bonds are plunging in value as long-term yields rise, with iShares 20+ Year Treasury ETF (TLT) having lost almost 50% since early 2020.
The trend is expected to reverse when Treasury yields peak but timing the reversal is going to be difficult.
Acknowledgements
- Mish Shedlock: Bond Bulls are Getting Crushed in a Relentless Selloff, It’s Not China
- Luke Gromen: FFTT – October 12, 2023
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Nuclear or renewables?
Fossil fuels were the source of 83.7% of energy produced in the USA for the first half of 2023, compared to 7.8% for nuclear and 8.4% for renewables.
Take a closer look at renewables and 5.0% of the total comes from biomass — wood and biofuels like ethanol. Solar contributes 0.9% and wind 1.5%, for a total of only 2.4%.
The scale required to achieve a tenfold increase in wind and solar is hard to imagine. France, on the other hand, has already demonstrated what can be achieved with nuclear.
Uranium
Uranium prices are soaring, with the Sprott Physical Uranium Trust (SRUUF) climbing to a new high since its formation in 2021.
As John Quakes explained, on the social media site formerly known as Twitter, the shortage is caused by Rosatom buying uranium in Western markets due to sanctions restricting shipping insurance in Russia:
Conclusion
Nuclear is the only viable option to replace fossil fuels for electricity generation. Renewables such as wind and solar may contribute but nuclear is the only option that can be implemented on such a scale.
Uranium prices are soaring and are likely to remain high for as long as Russia occupies part of Ukraine.
Acknowledgements
Putin’s war
“The economy of imaginary wealth is being inevitably replaced by the economy of real and hard assets”.
Vladimir Putin gave some insight, last week, into his strategy to force Europe to withdraw its support for Ukraine. It involves two steps:
- Use energy shortages to drive up inflation;
- Use inflation to undermine confidence in the Euro and Dollar.
Will Putin succeed?
There are plenty of signs that Europe is experiencing economic distress.
When asked whether he expected a wave of bankruptcies at the end of winter, Robert Habeck, the German Federal Minister for Economic Affairs and Climate Action, replied:
Belgian PM Alexander De Croo also did not pull his punches:
“A few weeks like this and the European economy will just go into a full stop. The risk of that is de-industrialization and severe risk of fundamental social unrest.” (Twitter)
Steel plants are shutting down blast furnaces as rising energy prices make the cost of steel prohibitive. This is likely to have a domino effect on heavy industry and auto-manufacturers.
Aluminium smelters face similar challenges from rising energy costs.
How is the West responding?
Europe is reverting to coal to generate base-load power.
And increasing shipments of LNG. Germany is building regasification plants and has leased floating LNG terminals but there are still bottlenecks as the network is not designed around receiving gas from Russia in the East, not ports in the West.
Also, extending the life of nuclear power plants which were scheduled to be mothballed.
The new British prime minister, Liz Truss, is going further by lifting the ban on fracking. But new gas fields and related infrastructure will take years to build.
The President of the EC, Ursula von der Leyen’s announcement of increased investment in renewables will also be of little help. It takes about 7 years to build an offshore wind farm and the infrastructure to connect it to the grid.
Energy subsidies announced are likely to maintain current demand for energy instead of reducing it. A form of government stimulus, subsidies are also expected to increase inflation.
Price cap
The G7 has also responded by announcing a price cap on Russian oil. The hope is that the Russians will be forced to keep pumping but at a reduced price, avoiding the shortages likely under a full embargo.
Vladimir Putin, however, will try to create an energy crisis in an attempt to break Western resolve.
Putin responded to the price cap at the Asian Economic Forum, on Wednesday, in Vladivostok:
“Russia is coping with the economic, financial and technological aggression of the West. I’m talking about aggression. There’s no other word for it…….
We will not supply anything at all if it is contrary to our interests, in this case economic. No gas, no oil, no coal, no fuel oil, nothing.”
Ed Morse at Citi has expressed concerns about the price cap, calling it “a poor judgement call as to timing.” His concerns focus on the political implications of Winter hardship in Europe, especially with upcoming elections in Italy, the potential effect of lower flows out of Russia, and the impact increased demand for US oil would have on domestic prices.
The Dollar
Attempts to undermine the Dollar have so far failed, with the Dollar Index climbing steadily as the Fed hikes interest rates.
While Gold has fallen.
Conclusion
The West is engaged in an economic war with Russia, while China and India sit on the sidelines. War typically results in massive fiscal deficits and soaring government debt, followed by high inflation and suppression of bond yields.
We expect high inflation caused by (1) energy shortages; and (2) government actions to alleviate hardships which threaten political upheaval.
The Fed and ECB are hiking interest rates to protect their currencies but that is likely to aggravate economic hardship and increase the need for government spending to alleviate political blow-back.
We maintain our bullish long-term view on Gold. Apart from its status as a safe haven — especially when the Dollar and Euro are under attack — we expect negative real interest rates to boost demand for Gold as a hedge against inflation. In the short-term, breach of support at $1700 per ounce would be bearish, while recovery above the descending trendline (above) would signal that a base is forming. Follow-through above $1800 would signal another test of resistance at $2000.
Acknowledgements
Brookings Institution: Discussion on the Price Cap
FT Energy Source: How Putin held Europe hostage over energy
Alfonso Peccatiello: Putin vs Europe – The Long War
Andreas Steno Larsen: What on earth is going on in European electricity markets?
ACCC bells the cat on electricity | Graham Young
While on the fringe of our normal investment sphere, this article by Graham Young on energy costs, published today in Online Opinion, poses some serious questions for the Australian economy.
In an inversion of the social hierarchy of Yes Minister, it would appear that Australia has at least one courageous public servant – ACCC Chair Rod Sims.
When it comes to energy generation Sims has shown remarkable fortitude and has belled the cat a number of times, including calling-out the price gouging of the Queensland government through their publicly-owned electricity utilities.
His latest act of heroism is the ACCC Electricity supply and prices inquiry final report which is a tacit acknowledgement that current strategies for CO2 abatement will not work at an affordable price.
It is the best analysis of the energy market that we have, and must lead to a rethink of the role of the AEMO, AER and AEMC. These bodies have comprehensively failed and pushed Australian power prices up to unsustainable levels.
The report also calls into question the NEG, proposing a role for the federal government to provide stability through the provision of stable baseload power generation.
The role of the Chief Scientist, Mr Finkel, must also be under review as it shows how ineffective his Review into the Future Security of the National Electricity Market was.
It also means that the states should wind-down their subsidy schemes for wind and solar and hand control of these matters to the Commonwealth government. With a national electricity network the decisions in one state impact on the prices paid by consumers in all states.
Many on the left, including the Opposition, are pointing to market failure as a problem, but what the ACCC reveals is the real problem is regulator failure.
In an ideal world the ACCC proposal for the federal government to underwrite the construction of new baseload power is suboptimal, but a regrettable necessity in the current situation. It is likely to be less costly than building Snowy 2.0 to deal with the vagaries of increased penetration of wind and solar.
Another implication of the report is that Australia, and the world, also needs to adopt a new approach to CO2 abatement: intermittent energy will not power the world, even with storage.
Not only has the current approach led to unsustainably high power prices, but CO2 world emissions are still growing, and after an approximate 10% decrease since 2005, so too are Australia’s.
It’s likely that any decrease in Australian emissions is due to higher power prices creating a degree of de-industrialisation. But as we consume at ever increasing levels, the amount of CO2 embedded in our economic production and consumption is probably higher than it was in 2005.
All that has happened is there has been a flight of production from Australia to countries with lower electricity prices, and higher CO2 emissions.
The world has been running a number of real world experiments on renewable energy over the last 13 years since the Kyoto Climate Agreement came into effect. Those experiments prove conclusively that with present technologies renewables are not viable, even if the politicians of Germany and California, to mention two, haven’t worked it out yet.
Everywhere that penetration of renewables has exceeded 25% or so, prices have increased. This is because, while the collection of energy is relatively cheap, with the raw materials of wind and sunlight being provided free by nature, the systems components are phenomenally expensive, requiring investment in networks, standby power generation and storage, at the same time pushing the price of baseload power higher.
The only form of renewables that provide reliable power at reasonable prices are hydro schemes, and some of them run out of water at times as well.
The definitive proof of this failure is that, if it were possible to power an economy using renewables only, and if they were, as Mark Butler claimed yesterday, cheaper than alternatives, then the Communist People’s Republic of China, a brownfields site for industrialisation, would take this opportunity to provide all future power through renewable energy.
Instead of that, our chief strategic rival is building nuclear reactors (17 under construction and a total of 100 operational by 2030), and coal-fired power stations (299 units under construction in China today, according to the Australian Parliamentary Library).
They are then using that power to manufacture and then dump photovoltaic cells on the Western World which we are then using to deindustrialise, giving them a further industrial and strategic advantage.
If Butler is right they wouldn’t waste their time building a “more expensive” system with baseload power generators which they will then have to decommission, and retrofit the system for “cheaper” renewables – it just wouldn’t make sense.
The ACCC report gives us a chance to take account of these realities and recalibrate our approach to the Paris Accord.
In the first place we need to get a real feel for the CO2 intensity of world economies, and that can’t be measured just on domestic emissions, when much of our consumption is imported. We need to measure the CO2 actually embedded in our consumption.
This will provide a better discipline and put an end to the Ponzi scheme where we shuffle our emissions off somewhere else without actually changing much more than place of production.
Then we need to accept the reality that Bronze Age technologies like wind, and novelties like solar, cannot provide reliable grid-scale power, and increase actual electricity costs and that the only technology that has a chance of solving the energy trilemma (cost, reliability and emissions) is nuclear. So if we are serious about emissions we need to be serious about nuclear.
Given the issues with nuclear a sensible use of the resources being poured into “clean” energy should be redirected to researching nuclear power and handling spent nuclear fuel.
Australia is already a leader in one of these areas, having developed Synrock for safe storage of spent nuclear fuel in 1978.
An alternative to storage is reprocessing. As a country which already mines uranium and turns it into yellow cake we have advantages there as well.
While developing a nuclear program we need holding and bridging strategies to limit emissions. Efficiency is probably the lowest cost strategy, and an increased use of gas, which emits half as much CO2 as coal, another.
Finally we need to understand that storage will never be suitable for a large scale grid without repealing the Second Law of Thermodynamics – that’s the one that put paid to perpetual motion machines.
Battery enthusiasts draw comparisons between computers and batteries and predict that, just as computers have dived in cost and soared in computing power, the same will happen to batteries and power output.
But computers have done this by miniaturising and using less power to do the same work. Batteries are all about producing energy, and only so much efficiency can be wrung out of this process.
A more realistic model for how much increased efficiency is available is the motor vehicle. While it is true to say that the modern car is a significant refinement on the Model T, that refinement is nothing like the one that occurred between a pioneering computer like ENIAC, and the laptop on which I am typing this article.
The only step change in energy production comparable to that in computing is contained in the equation e=mc2, where Einstein showed that changing a small amount of mass into energy released huge amounts of energy.
Which brings us back to nuclear.
While the ACCC report doesn’t mention nuclear, it does open up the conversation. Politicians need to grab the opportunity. Otherwise they face a grinding political death between the stones of increasing electricity costs and decreasing reliability, all while CO2 emissions continue to rise.
This article was first published in The Spectator. Republished under a Creative Commons License.
Graham Young is chief editor and the publisher of On Line Opinion. He is executive director of the Australian Institute for Progress, an Australian think tank based in Brisbane, and the publisher of On Line Opinion.
OPEC extends output cuts but “caught in a pincer”
From Stanley Reed at The Age:
The Organisation of the Petroleum Exporting Countries extended oil production cuts through March 2018, Khalid A. al-Falih, the Saudi energy minister, said in Vienna overnight. The move follows a decision this month by Saudi Arabia and Russia to do so.
The earlier announcement helped lift prices from a low of $US46. But on Thursday, prices shed more than 4 per cent with more than a billion barrels traded….
“Opec is being caught in a pincer movement of technology and policy that will, over time, erode oil use,” said Bill Farren-Price, chief executive of Petroleum Policy Intelligence, an advisory firm for hedge funds and other investors. “This meeting is more about forestalling an oil price collapse than driving prices higher.”
Read more at: OPEC agrees to extend output cuts through March 2018
Pro-nuclear greenies? Thinking outside the box with Pandora’s Promise
Ben Heard and Prof. Corey Bradshaw highlight the environmental and economic damage caused by pursuit of nuclear-free power.
Had Australia deployed a modest nuclear program starting in 1965, to build slowly to around 20% of electricity provided (as done in the USA), over 876 million tonnes of carbon dioxide equivalent (CO2-e) would have been avoided to this day.
…..In the OECD, three yes, only three countries have achieved success in all but eliminating fossil fuels from electricity supply. They are France, Sweden and Switzerland Finland will soon join them. All did it by embracing nuclear power generation. These nations deliver reliable, large-scale electricity supply with less than 1/10th the emissions of Australia. France in particular delivers the cheapest electricity in Western Europe, and is the second-highest net exporter of electricity in the world…..
Read more at Pro-nuclear greenies? Thinking outside the box with Pandora's Promise.