The Emperor’s New Clothes

An alternative analysis of the current energy transition

In Hans Christian Anderson’s fairy tale “The Emperor’s New Clothes”, a vainglorious Emperor is conned by a pair of villainous tailors into parting with sacks of money in exchange for magical clothes. According to the conmen, the emperor’s magic suit can only be seen by clever people and will be invisible to anyone stupid or anyone who can’t do their job properly.

Of course, the clothes are truly invisible, they don’t exist, but fearing the 19th century version of cancel culture, the people as well as the Emperor, are too afraid to go against the general opinion that the magic suit is magnificent, concerned about revealing themselves to be stupid or incompetent, until a small child watching the Emperors procession shouts out: “The Emperor’s got no clothes on”.

Well, I need to warn you that I am that small child when it comes to the energy transition.

The current energy transition is in my opinion the most important issue in the global economy, and therefore for investors. Why are we doing it? The need for this energy transition is based on a scientific theory that has no null hypothesis and is conveniently ignorant of the long history of dramatic climate change that pre-dates the industrial revolution and therefore man-made CO2 emissions (see Fig 1 and Fig 2).

Fig.1 | Geological Timescale: Concentration of CO₂ & Temperature Fluctuations¹

Source: Scotese 2002, Nahle, 2009. Pagani et al, 2005 http://www.scotese.com/climate.htm; https://archive.ph/AtfgQ; https://www.science.org/doi/10.1126/science.1110063

It has been embraced as an apocalyptic religion by polite society; and forcibly imposed on all citizens without due democratic process. We were previously told that the energy transition would add rather than subtract from economic growth.

Fig.2 | Pre-Industrial Roman and Medieval Warm Periods²

Source: https://www.sciencedirect.com/science/article/abs/pii/S0012821X08000289

We are also reliably informed, as if it could be accurately predicted, that the upside from the energy transition is limiting the average global temperature rise to 1.5 degrees, instead of perhaps 3 degrees by 2050, but only if Net Zero is adopted globally, which we know the rest of the world isn’t going to do.

To put this into perspective, by the time I finish speaking today the temperature outside will have risen by this same 1.5-degree net benefit. So, my first observation is that the upside from the energy transition is at best uncertain. But more likely when the decarbonisation of the West fails to produce a measurable change to global climate, the solution, like that of the medieval doctor with his bag of leeches, will inevitably be to administer more medicine — whose efficacy can never be measured — locking us into a green policy doom-loop.

But far from saving the world from an environmental existential crisis in a cost-free manner, the truth is that this energy transition will undermine our standards of living, our geopolitical power and ultimately the capitalist system, with no benefit to the environment. Of course, like Ed Miliband, Greta Thunberg, Al Gore and Jeremy Grantham, I am no climate scientist. Unlike them, however, and since this is an investment conference, I will keep my remaining comments to observations around the economic impact of this energy transition and its lessons for investors.

I want to talk about 5 things:

1. What does a successful energy transition look like?
2. How is this energy transition different?
3. Is the intermittent electron cheap or useful?
4. What are the investment opportunities?
5. How should an ethical investor approach the energy transition?

It is often said that a contrarian mindset is essential to successful investing. Jesse Livermore, who briefly became the world’s richest man during the 1929 Wall St. Crash, trading only his own self-made capital, observed:

“People want the safety of human company. They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of contrary opinion.”³

I invite you to join me on this wolf-patrolled prairie of contrary opinion today.

1. What does a successful energy transition look like?

The Dark Ages

We need to start by understanding what life without fossil fuels looked like and what constitutes a successful energy transition.

Before fossil fuels, life in pre-industrial Britain had changed little for the better since the Romans had left 1200 years previously. Life expectancy, standard of living and stature, were no higher than in the days of Julius Caesar. Energy was provided by what today we call “renewables”: wood, charcoal, straw and dried dung; and weather dependent mechanical power in the form of wind and water mills. Most work was done by humans, horses and oxen. Travel was by sail, horse or foot.

People were tied to the land. There wasn’t enough surplus energy for large scale urbanisation or to sustain more than 4 million people in England. It was called the Dark Ages for a reason. There wasn’t a lot of cheap and reliable energy, which meant it was dark.

Coal

Then in response to dwindling forest resources, Elizabethan England switched to burning coal marking the first significant energy transition.

Coal’s energy density or bang for buck heat generation was much higher than wood. It could also be more easily transported. It quickly became the fuel of choice for domestic heating as well as in energy intensive industries like salt production, brewing beer and iron manufacturing, which could now be done on a bigger scale.

Britain became Great by embracing fossil fuels. Coal went from 15% of the UK’s primary energy in 1600 to 50% by 1650; 77% by 1800 and by the 1850’s 91% (see Fig 3).

Fig.3 | Coal Share of Primary UK Energy Consumption⁴

Source: Argonaut, Warde “Energy Consumption in England & Wales” 1560-2000.

Human and Animal labour was over 50% of energy consumption in 1600, but only 7% by 1850. Coal energy freed up time and resources for other economic activities (see Fig 4).

Fig.4 | UK Primary Energy Consumption⁵

Source: Argonaut, Warde “Energy Consumption in England & Wales” 1560-2000.

By 1750 the UK population was 6 million and by 1850 it was 18 million (4.5x the population in 1600) (see Fig 5).

Fig.5 | UK Population During the Industrial Revolution⁶

Source: Argonaut, Ourworldindata.

Yet unlike pre-industrial times, real incomes rose, from just over £1,000 in 1600 to just under £3,000 by 1850 (see Fig 6).

Fig.6 | UK Real GDP per Capita⁷

Source: Argonaut, Ourworldindata.

At the beginning of the 19th century Britain’s industrial revolution accelerated with the invention of the steam engine, which converted coal’s compact chemical energy into reliable mechanical energy, transforming manufacturing through the belt drive, and the construction industry through mechanical pile drivers and excavators.

By 1865 the economist William Jevons proclaimed that “with coal almost any feat is possible or easy; without it we are thrown back into the laborious poverty of early times.”⁸

The steam engine revolutionised travel through the building of the first national railway network in the 1840’s and then with steamships replacing sail: Britain’s Royal Navy ruled the waves, which facilitated the globalisation of trade, and the abolition of slavery.

Oil

But energy transitions and geopolitical power are inextricably linked. Coal, the Steam Engine and the British hegemony of the 18th and 19th century was to be supplanted in the 20th century by America through the discovery and commercialisation of a superior fossil fuel, Oil.

The American search for oil was initially motivated by the growing scarcity of whale oil – for use in lighting and soap. If coal saved the British forest, Oil saved the whale. Capitalism saved rather than destroyed the environment.

The US oil boom began in Pennsylvania in 1859. By 1918, the US produced 70% of the world’s crude oil (see Fig 7).

By the 1880s the first internal combustion engines - using refined oil products: gasoline, diesel, and kerosene, which had even higher energy density than coal, and were cleaner to burn, and easier to move and store – replaced steam engines, first in shipping and then trains.

Crude oil has been an incredibly flexible source of energy. Its different properties could be isolated by refining and used for a variety of different purposes: lubricants, asphalt, synthetic fibres, paints, coatings, detergents, pesticides, resins, adhesives.

Fig.7 | US Share of Global Oil Production⁹

Source: Argonaut, Ourworldindata.

Electricity

Near the end of the 19th century more powerful and efficient coal fired steam engines began to produce a more reliable, clean and efficient, silent and adjustable form of power: electricity. The first of many world changing uses of electricity was the lightbulb in 1879 (100x brighter than candles). It is often forgotten that Gasoline cars accounted for only 22% of cars built in 1900 compared to coal “steamer” cars at 40% and electric cars at 38%. None of these could match the power to weight ratio of the internal combustion engine powered by gasoline or diesel, their economy, range or ease of manufacture. Cars powered by refined oil proved were superior then, and for the same reasons still are.

Summary

The industrial revolution – of which Britain was the earliest pioneer – substituted renewable energy with fossil fuels, replaced animal and human labour with electricity and internal combustion engines. Within just a few generations, it created an entirely new world, which was also indisputably a better world.

Fig.8 | UK Per Capita Energy Consumption¹⁰

Source: Argonaut, Warde “Energy Consumption in England & Wales” 1560-2000.

We use 20 times more energy per capita than in 1650 (see Fig 8). The real costs of energy have fallen by 90% over the same period. This is the main cause of our living standards – defined by GDP per capita – rising by 30 times (see Fig 9).

Fig.9 | UK Real GDP per Capita¹¹

Source: Argonaut, Ourworldindata.

Preindustrial economies had 80% of the population employed in agriculture. By 1861 England had 21%. It is 1% today.

With our utilisation of mechanised farming equipment, and fertilisers and pesticides derived from fossil fuels, since 1800 the human labour needed to produce a kilogram of wheat was reduced from 10 minutes to less than two seconds. This has freed up over 95% of the population who seem to have forgotten what fossil fuels have done for them.

In terms of physical labour, our embrace of fossil fuels means that the average person in the UK has the equivalent of 250 people working for them non-stop day and night without complaint.

Today, fossil fuels still represent over 85% of our primary energy consumption (see Fig 10) and are essential in the production of plastics, steel, cement, nitrogen fertiliser and silicon, the material basis for our civilisation.

Fig.10 | UK Primary Energy Consumption¹²

Source: Argonaut, BP Statistical Review

Without the cheap and reliable energy brought by fossil fuels we would have to reembrace agrarian living – like Tom and Barbara on the 1970s sitcom “The Good Life” - and we would struggle to produce enough food for Britain’s extra 62 million people. Who really wants to go back to living like that?

2. How is this energy transition different?

Previous energy transitions have seen market forces support the triumph of an economically superior product: during the Industrial Revolution, coal replaced wood, dried dung, and wind as the dominant fuels; in the twentieth century, oil replaced coal and in the 1990’s, North Sea gas replaced coal as the main source of UK electricity generation.

A more natural evolution might see nuclear — which has more “bang for buck” energy density, if not yet lower cost or ease of use — eventually replace fossil fuels.

Instead, for the first time in the history of human civilisation we are seeking to replace a superior economic source of energy, with inferior products, which have been discarded by previous generations.

The prime motivation for this energy transition is unique in history.

It is not economic but instead ideological, or more accurately quasi-religious, the demonisation of CO2, a clear and odourless gas which makes up 4bps of the earth’s atmosphere and which is essential for plant photosynthesis.¹³

Since the free market would never embrace an economically inferior product, this transition requires constant government subsidy and coercion against fossil fuel alternatives to ensure the survival of the unfittest.

Government involvement in previous energy transitions was limited. Although the Elizabethan government passed various laws protecting the forest, the use of coal and steam engines in Britain developed without government support.

There was no 19th century American subsidy for the nascent oil industry. Whaling was not outlawed in the US until 1971. At the beginning of the 20th century, government didn’t try to pick winners between electrical, coal and gasoline or diesel-powered cars.

There are now 3 main energy transmission policy commitments in the UK: a renewable grid by 2030 (previously 2035): a European wide ban on non-electric new car sales by 2035: and for those who either still believe in fairies and unicorns or want to reembrace pre-industrial standards of living, “Net Zero” by 2050, now enshrined in law since 2019, via a parliamentary debate which lasted just 17 minutes.¹⁴

It is worth remembering that the electricity grid currently still only powers less than 20 per cent of total UK final energy consumption, 80 per cent of which is still reliant on fossil fuels.

“Net Zero” therefore must involve attempting to electrify all economic activity: manufacturing, agriculture, transportation, home heating; forcing consumers to change their behaviour; relying on products that haven’t yet been invented, and probably won’t be unless the laws of physics and chemistry change.

And as we will see, all this powered by a dysfunctional grid, that only works when the wind blows, requiring a blank cheque of taxpayer or consumer subsidy.

Even if full electrification could be achieved, a mere doubling of planned electricity generation would appear to imply that per capita primary energy consumption would need to fall by at least 60% to reach “Net Zero”, presumably with a commensurate fall in standards of living.

Under such an economic scenario not only will stock market returns be disastrous but it is unlikely that the capitalist system, including private property, will continue to exist.

UK electricity consumption has already declined by 20% since 2005, owing to high prices and deindustrialisation, and our total energy consumption is down 30%, now at levels last seen in the 1950’s (see Fig 11 and Fig 12).

Fig.11 | UK Power Generation since 1985 (TWH)¹⁵

Source: Argonaut, BP Statistical Review

Fig.12 | UK Industrial Production¹⁶

Source: Argonaut, Bloomberg

Is it any wonder that UK GDP per capita continues to decline whilst those countries which still embrace cheap and reliable energy such as the US, China and India power ahead?

Although politicians of all creeds in the UK have generally demonstrated little understanding of how a power grid works, leading to breathtaking ignorance about the cost and feasibility of the “energy transition”, new Energy Minister Ed Miliband, combines an unusual degree of economic illiteracy with the zeal of a man who has just found his calling through membership of an apocalyptic cult.

Only government intervention could result in so much of the nation’s resources being reallocated so unproductively. As former US President Ronald Reagan once put it “the nine most terrifying words in the English language are: “I’m from the Government and I’m here to help.”¹⁷

3. Is the intermittent electron cheap or useful?

Cost

Let’s examine how UK wind producers are incentivised.

There are almost no offshore wind projects in the UK currently operating in the free market - without subsidy (ROC), guaranteed prices (CFD) for their output, or above market private agreements (PPA).

Over the last decade, the UK government has allocated new wind production capacity to the wind industry via its CFD auction, which set a guaranteed price for wind farm output. The CFD auction process misleads the public, since headline prices are quoted at 2012 levels and prices are automatically adjusted higher each year by inflation and grid costs for the 15 years of the contract (see Fig 13).

Fig.13 | UK Offshore Wind CFD Strike Price Development¹⁸

Source: Argonaut

This means, for instance, the CFD awarded in 2014 at £140 MW/h is currently actually now worth 40% more at £196 MW/h. This is four times the current cost of gas-powered electricity generation at £45-50 MW/h before carbon taxes.

As we shall see the guaranteed price insures wind operators against the fatal defect of intermittency whilst the upwards only annual price revisions protect against inflation. The wind industry and UK politicians previously made silly claims about wind power’s cost competitiveness relative to gas based on the decline in headline CFD auction prices (from £140 MW/h in 2014 to £37 MW/h in 2022).
Last year, in an embarrassing backtrack from previous claims that offshore wind was the “cheapest form of energy,” wind developers refused to bid for new projects unless they were awarded higher guaranteed prices. In a shabby backroom bailout, the UK government agreed to adjust some of the previously agreed contracts and raise the 2024 guaranteed CFD price to a headline £75 MW/h, which adjusted for inflation is already worth £100 MW/h today (twice the cost of gas generation).

The wind industry is now strangely silent about wind being cheap. Once again, our politicians have been duped by green grifters, with the bill settled by UK consumers. But this is what happens when governments rather than the free market are allowed to pick winners and allocate capital.

Whilst some will argue that a premium for carbon free power is a price worth paying, there is no defence when the debate turns to the usefulness of intermittent power. There is no price worth paying for something which is economically useless. And I say more wind power is useless.

Useless

My research has broken down wind market share and spot system power price since 2019 examining over 100,000 ½ hour discrete time periods.

We see how UK wind market share has regularly oscillated between 0% and 60% in 30 minutes depending on weather (see Fig 14).

Fig.14 | Wind Power Market Share UK¹⁹

Source: Argonaut, Elexon BMRS generation reports

As with all commodities, the market price is set by the marginal cost of switching on supply to meet demand, so that when the wind doesn’t blow the grid must bid up supply from producers of reliable, dispatchable power (gas, nuclear, hydro, coal, biomass) to match supply with demand to avoid blackouts.

Conversely, when there is too much supply of wind power that cannot be used (or stored) the grid makes low or even negative bids to discourage this production.

This means that as the UK increases its wind generation, wind market share will become even more volatile, leading to more volatile power prices, which increases grid costs as dispatchable power must ramp up and down to compensate for wind volatility.

Excluding the immediate aftermath of the Russian invasion of Ukraine when the gas price temporarily spiked, wind market share or rather the weather in these 100,000 discrete 30 min periods is now the biggest determinant of the price of UK power (see Fig 15).

Fig.15 | UK System Power Price 2019-2024²⁰

Source: Argonaut, Elexon BMRS generation reports

Since when the wind is blowing in the North Sea it is usually blowing in the Irish Sea, this fundamental problem cannot be overcome by installing more wind turbines.

On windy days, Britain already has a glut of electricity, which cannot be consumed, stored (since large scale batteries remain cripplingly uneconomic) or exported (since the rest of Europe also experiences simultaneous windy day gluts).

The “Saudi Arabia of Wind” is perhaps one of the dumbest business models of all time.

If when the wind blows its market share is already 60%, if we install 3- or 4-times current capacity (see Fig 16), we will just have even more frequent periods of very low or even negative power prices reflecting wasteful economic activity.

Fig.16 | UK Offshore Wind Installed Capacity²¹

Source: Argonaut, Digest of UK Energy Statistics July 2023

The companies building these monstrous offshore wind farms, nowadays often the size of Greater London, don’t care that their product is largely useless, since the government has guaranteed them a price for their output, funded by higher electricity bills for UK consumers. This is crony capitalism, shielded behind the cloak of sanctimonious ESG.

This monumental misallocation of capital would not happen in the free market but only occurs because the UK government guarantees a price for wind power, irrespective of whether there is an economic use for the power produced.

TotalEnergies CEO whose company has invested billions in wind projects, recently stated that in isolation (in my view at anything other than low market shares): "Green intermittent electrons have little or no value".²²

Let me explain this through an analogy:

The power grid is like a factory which always needs to be manned. In this analogy, nuclear power is an expensive worker who never clocks off; gas power is the flexible worker who can be relied upon to turn up when needed; whilst wind is the unreliable worker who calls in sick more often than they turn up.

New factory owner Ed Miliband now proposes to ditch all gas power by 2030, sacking all the flexible (gas) workers, replacing them with either more expensive inflexible (nuclear) workers or those additional (wind) workers who now guarantee to only turn up when they are not needed.

Without the reliable flexible (gas) worker, the factory owner is unable to respond to either volatility of demand or supply (of unreliable wind workers).

It ends up needing either to over-invest in the expensive inflexible workers (nuclear) or in general employ far more workers overall than needed, with no guarantee of being consistently adequately resourced. The cost of this duplication of resource in building a “renewable grid” is passed on to British consumers through higher electricity bills.

The UK grid will attempt to compensate for the loss of gas by burning more wood, which has an even higher negative environmental impact than coal. It is also unrealistic to expect large scale deployment of new nuclear by 2029, even new generation small modular reactors.

Replacing Coal as the reliable worker, cleaner Gas turbine generation increased from just 5% of the UK electricity grid in 1990 to 40% in 2021.

With gas, the UK could have both decarbonisation (emissions fell 44% over the same period, see Fig 17) and economic growth (which rose 76%).

Fig.17 | UK CO₂ Emissions²³

Source: Argonaut, BP Energy Review

The tragedy and stupidity of enshrining “Net Zero” into statute is that it effectively outlaws Gas, which remains the only viable energy choice facilitating both decarbonisation and growth.

Until renewable power companies are made to pay for the cost of their own intermittency, they have no jeopardy to force them to make rational economic decisions that are in the wider economic interest, such as delaying building further production capacity until after breakthroughs in storage technology, if indeed major breakthroughs are feasible.

The “renewable grid” envisaged by the Labour government by 2030 will produce abundant electricity for a few days annually and prohibitively expensive, unreliable power the rest of the time, requiring a blank cheque of consumer subsidy, resulting in demand destruction, supply rationing and deindustrialisation.

Many of you may remember on the morning of the 1992 General Election the Sun newspaper front page famously warned its readers that “If Kinnock wins today will the last person to leave Britain, please turn out the lights (see Fig 18).”²⁴

Fig.18 | “The Sun” 1992

By the time we get round to the next election in 2029, unlike in 1992, we may not need to worry about turning out the lights (see Fig.19.).

Fig.19 | “The Sun” 2029?

4. Where are the investment opportunities?

Battery

Perhaps it would be easier to start with what to avoid.

Matt Ridley, eminent scientist, author, Member of the House of Lords, recently tweeted:

“Don’t expect industry to tell the truth about the impossibility of the transition. To paraphrase Gulliver’s Travels, if you ask business to make sunbeams from cucumbers, they would have a crack at it – and only tell you it was impossible after spending a billion of your money”²⁵

So, there are scams, facilitated by the victim’s ideological opposition to the sun, but need for sunbeams.

At higher shares of wind power, electricity will need to be stored over weeks and months, not days and hours. But current battery technology is unable to offer an industrial scale solution for longer than a few hours.

The building of “the world’s largest” lithium-ion industrial battery in Trafford, Manchester, recently hit the headlines: costing £750m, the battery would store 1 GW for 2 hours, (2 GW/h) enough to power Britain’s grid for 3 minutes and 17 seconds.

The business model for battery storage takes advantage of very short-term fluctuations in power prices, which will increase as the power price is made more volatile by the energy transition. It is yet another green grifter industry earning an economic rent from UK consumers

“Net-Zero” disciples continue to advocate that Britain plough on regardless and continue to over-build wind, in the hope that surplus energy generated on windy days can in future be efficiently exported or stored over useful time periods in a cost-effective, scalable manner.

So, we are fed a narrative of miraculous technological breakthroughs in storage. The reality is that human ingenuity can innovate but the rules of chemistry and physics don’t change.

Hydrogen is the latest unfeasible storage fad touted to justify wind overbuild. Expensive industrial electrolysers would have to operate at very low-capacity utilisation given the intermittency of renewable energy, which is why weather dependent hydrogen will never be cost competitive.

Hydrogen is extremely flammable and difficult to store, it must be chilled to -253 degrees Celsius to liquify and safely transport, with energy subject to high losses on conversion, meaning it is a complete waste of time.

This capacity of the storage battery to attract fraudsters was recognised at the birth of electricity. Thomas Edison wrote in 1883:

“The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies. The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers. Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying."²⁶

Wind

An alien investor just landed on earth, might think an industry such as wind generation - which is so heavily subsidised to the detriment of consumers, given regulatory support, including the coercion of competitors through carbon taxes and forcing on those competitors higher grid costs - must be a nirvana for shareholder profits.

But the fact is that there are some products that are so inherently inferior that even after the best efforts of governments, they fail to generate adequate profits for investors. If you cannot make a profit in the free market, then you are not “sustainable” in the true sense of the word. This is why the energy transition is failing and will fail.

The wind industry wouldn’t exist without government subsidy and may still fail despite it.

The miraculous drop in UK CFD prices from 2017 throws into doubt the economic viability of all offshore wind projects built in the UK since then on significantly lower CFD prices.

Wind turbine manufacturers claim their turbines last 15-20 years. We think that the average life of a wind turbine is half this, which makes a significant difference to the profitability of a wind project, particularly when it is typically loaded with debt.

Legacy ROC subsidies that allow older projects to operate at three times the market price have incentivised wind operators to maintain their aged fleet with high OpEx, but as less generously subsidised vintages become a higher proportion of the overall turbine fleet, we are witnessing turbine manufacturers incurring higher warranty and service costs for unreliable turbines; this problem is most acute in the harsher offshore environment; and that dealing with this hidden liability will be a nasty surprise for equity investors.

China, Europe and the US

Then there is the problem of cheaper Chinese competition.

China has become a conduit for Europe to move its CO2 emissions off balance sheet (see Fig 20). It can efficiently manufacture, powered by coal fired electricity, the polysilicon for solar cells and smelt the lithium for EV batteries.

Fig.20 | Global CO2 Emissions (m/tonnes)²⁷

Source: Argonaut, BP Energy Review

China will also through its mercantilist business model, which does not require its companies to make a profit only create employment and earn foreign exchange, dominate “energy transition” industries, putting its Western competitors out of business.

The European economy grew just 15% in dollar terms over the past 15 years, compared to 82% for the US. The average EU country is now poorer than every US state except Idaho and Mississippi.

At the time of the financial crisis in 2008, standards of living in the US, UK, France and Germany were roughly comparable. Since then whilst GDP per capita in the US has risen from $48k to $78k, it has seen zero advancement in Western Europe (see Fig 21).

Fig.21 | GDP per Capita since 2008²⁸

Source: Argonaut, World Bank

The only successful energy transition of recent times has been in America. The shale oil revolution which only began in 2008 is now responsible for 64% of all US crude production and 78% of natural gas production, reestablishing the US as the world’s top oil and gas producer (see Fig 22 and Fig 23).

Fig.22 | US Oil Production²⁹

Source: Argonaut, Argonaut, EIA

Fig.23 | US Gas Production³⁰

Source: Argonaut, EIA

Whereas through embracing shale, the US has an abundance of cheap and reliable energy, according to a recently published report by EU Super Technocrat Mario Draghi, the solution to EU economic stagnation is that Brussels bureaucrats be allocated €800bn a year to pick “winners” in green technology, doubling down on what doesn’t work. It simply beggars’ belief.

Europe’s climate change piety has resulted in it not only banning sales of new non-electric cars from 2035, but also from 2025 and then again in 2030, imposing increasingly penal fines on its car makers for the manufacture of non-electric cars.

The logical consequence of this is that the EU’s car industry – like the UK car industry before it - will cease to be mass market, resulting in the hollowing out of the European industrial base.

Artificial Intelligence (AI)

The AI revolution is something of a gamechanger for power markets, in that companies with balance sheets as big as government, are building AI datacentres that need more robust solutions than an unreliable public power grid, which cannot be powered 24/7 by intermittent energy PPA’s, so are privately making superior capital allocation decisions to government.

Unlike government, these private companies are recognising economic reality by paying a premium (not a discount) for reliable dispatchable power.

Microsoft recently announced it had done a deal with US utility Constellation to restart the Three Mile Island nuclear power plant to power its data centres, paying $110 MW/h, roughly double the average grid price.

To put the demand for power from AI datacentres into context, a 1GW data centre would consume about 3% of UK annual electricity supply. OpenAI is talking about building 5GW data centres. If all of Britain’s electricity were used to exclusively power 5GW datacentres, it could manage to power just 6 and a half. With the highest electricity prices in the world (see Fig 24, according to a recent report by the IEA some 80% above median developed world and 3x those in the US) the UK is unlikely to benefit from the AI revolution.

Fig.24 | UK Industrial Electricity Prices (incl. taxes)³¹

Source: Argonaut, DESNZ, IEA

Google has said it is looking at Small Modular Reactors (SMR). The problem with nuclear is that there is not much spare capacity to reallocate to datacentres and although SMR technology is proven in submarines, the estimates for cost of delivery are still uncertain and the first SMR’s will likely not see service until the early 2030’s. This is too long to wait in the AI arms race.

Gas

And as that most famous master of inference Sherlock Homes famously concluded: “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.”

And this is true when finding sound investment ideas from this energy transition.

Therefore, however improbable, the truth is that our economic future must involve reembracing GAS, our flexible grid worker, with half the CO2 emissions of wood and coal, which at least in the US, is found in abundance at by far the cheapest price per unit of any energy. Henry Hub trades at $2.7 per Gigajoule vs European TTF $10.5 and Crude Oil $14.

If you are looking for sound energy investments, I suggest focusing on gas turbine manufacturers, US gas pipeline companies able to directly connect datacentres to shale fields and shale gas operators and drillers.

Who knows this might even catch on in Europe, eventually.

5. How should an ethical investor approach the energy transition?

Through the Environmental, Social and Governance (ESG) movement, institutional fund managers have been coaxed and coerced into supporting a half-baked political agenda.

Beyond “Net Zero”, the ESG agenda - which has never and can never be properly defined - expands relentlessly to any and every other trendy political issue of the day.

It is also unclear who is defining this agenda and to whom they are accountable.

As the economist Milton Friedman pointed out, the responsibility of business is to make as much money as possible within the rules of society.

Those rules should be set by a democratic parliament, not an unaccountable nomenklatura, who like a youthful cadre of Maoist Red Guards, exercise their ESG tyranny across corporations and financial institutions.

The logical endgame of compulsory ESG is that all public capital is allocated – not primarily for profit – but according to the political values of organisations which are not democratically accountable. This sounds a lot like the way communist economies work, with so far zero examples of economic success.

There is no legal basis for an investment manager to prioritize moral or ethical considerations over financial performance on an ad hoc, subjective, and arbitrary basis.

Excluding stocks based solely on non-economic factors can never result in higher returns because a smaller investment universe will always lead to fewer opportunities. Indeed, this goes against an investment manager’s core fiduciary duty as the agent of the investors to act in their best economic interests.

As soon as profit is displaced by non-pecuniary factors, capital gets repurposed for non-economic projects, which become a drag on productivity and economic growth. Whilst capitalism rightly creates “winners” and “losers” through efficient allocation of resources, the alternative created by ESG investing is a stagnant command economy where no one wins.

Far from “creating wealth and doing good”, ESG will destroy societies through an absence of economic growth that will inevitably come with the neglect of the profit motive.

Government has recently shown a revived appetite to compete with companies and investors in allocating capital. Although the historic track record of state industrial policy in picking winners is patchy, the record of loser companies – requiring endless taxpayer support - picking government is exemplary.

Everywhere and always the “energy transition” seeks to replace an economically superior with an inferior product.

Consequently, it requires unsustainable exogeneous factors to sustain it: free capital from zero interest rates and ESG investing; government subsidies, which reallocate capital from the productive to the unproductive economy and is therefore not scalable; and command economy coercion, which bans everything that already exists which is more useful.

We have forgotten that profit has been the greatest motivation known to mankind to allocate finite resources productively; that capitalism is inherently meritocratic because its survival instincts require the best talent and optimal resources; and that no society can have sustainable economic growth without profit growth that increases the capital base of the economy for future productive reinvestment and ensures the Darwinian survival of the best ideas in an evolution of civilisation.

Profit must therefore be the central tenet of ethical investing. As the infamous fictional corporate raider Gordon Gekko succinctly put it in the 1987 movie “Wall St.”:

“The point is, ladies and gentlemen, greed – for lack of a better word - is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed in all its forms, greed for life, money, love, knowledge, has marked the upward surge of mankind.”

And, it is the pursuit of profit, not ESG or the “energy transition”, to paraphrase Gekko, that will save not only our stock market, but that other malfunctioning corporation called the UK.

Thank You.

Barry Norris
MoneyWeek Investment Conference
London, 8-Nov-24