Recently, my wife has become almost obsessed with the evening news. While she has always been mostly on top of the passing scene, the current news cycle has both fascinated and scared her significantly. I doubt she is alone in that regard.
Indeed, the headlines have been discouraging. So much so, it is very easy to ski the slippery slope to having that worst-case scenario rattling around in your brain.
To that end, Beth asked me, in all seriousness, whether I thought the Russians, Chinese, Iranians and North Koreans had orchestrated the recent unpleasantness to drain the US of material, money and will. I replied I doubted there was a well-coordinated plot at the onset, however I was sure these countries aren’t too displeased with the results.
Of course, I could be wrong.
While war, and threat of it, will always dominate headlines and imaginations, there are plenty of other depressing news stories. It seems like it is like Morton’s Salt everywhere: “when it rains, it pours.” Readers will just have to choose their depressants.
The Net-Zero Commitment
This one, for instance, got to me.
This morning, the Wall Street Journal Editorial Board (WSJ) wrote an opinion piece about how the ‘green electric power grid isn’t coming.’ It heavily cited a study from the International Energy Agency (IEA) headquartered in Paris. You can find the study here.
Let’s just say the WSJ isn’t terribly bullish on the potential of getting to net-zero emissions by 2040.
Why? The cost is going to be enormous. Still, that doesn’t stop the IEA from claiming a ‘lack of ambition and attention risks making the electricity grids the weak link in clean energy transitions.’ If only the world’s utility companies had some ambition. If only they cared, huh?
Money is never the issue.
As the IEA says in its report “For other jurisdictions, such as Europe, the United States, Chile and Japan, the strongest barriers relate to public acceptance of new projects and the need for regulatory reform.”
- Consider this: At the end of the 2nd quarter of 2023, Duke Energy Corp. reported total assets of $180.1 billion, and equity of $51.1 billion. Of those assets, $114.5 billion were in ‘net plant in service’ – essentially its power generation, distribution and transmission investments. For grins, it had around $377 million in cash and near cash items.
Should the transition to green energy require the company to eventually replace the existing capacity with newer and greener technologies, what would Duke Energy have to do? From an accounting standpoint that is? While I am not a CPA, it would seem the company would have to accelerate the depreciation of these assets, if not impair them altogether, if they aren’t using them.
If so, what would that do to the company’s equity? Particularly if it is require to shell out large amounts of money to update its grid? Further understanding, it currently has $377 million with which to pay for tens of billions of dollars, if not hundreds, in future investments.
Hmm. At best, the company is going to have a hard time financing the new investments. If I were the head of a utility, I would be screaming “first, you put my earnings in a collar and NOW you want me to come off the hip for how much exactly?”
So, from where does the money come to do all of this? It appears the only entity capable of funding such a massive endeavor would be, drum roll please, the U.S. Treasury. Well, in case you haven’t heard or read, we already have a little bit of a debt problem in Washington. I suppose the thought process is: what difference does a few more trillion make?
Now, I went to the trouble of reading a decent amount of the IEA report. It was earnest, brainy and well-written. However, it seems the authors believe a few regulatory tweaks, some workforce development and a little government intervention will produce the necessary results.
If it discussed financing an additional $600 billion per year (its own estimate to build out the necessary capacity) at 5-7%, I didn’t read it.
Here is the verbiage:
“In the APS, widespread electrification of end-use sectors, increased demand and rapid deployment of renewables all contribute to significantly higher average grid investment to 2030, with an average value in the period 2023-2030 of around USD 500 billion per year, exceeding USD 600 billion by 2030, almost double the level in recent years. If grid investment to 2030 stays at the current level, it will fall short of this decade’s required average by around 35% for the APS and by 42% for the NZE Scenario.
Beyond 2030, grid investment needs to ramp up even faster, reaching USD 775 billion/year under the APS in the decade 2031-2040 and USD 870 billion/year for 2041-2050. Grid investment under the NZE Scenario climbs even higher, surpassing the USD 1 trillion per year mark around 2035 onwards.”
We just need to ramp up investment, that’s all. There’s no mention whether this new investment will generate a rate of return for investors. You know, they tend to like that sort of thing. Shoot, even the Federal government likes to get its money back when it lends it out to the private sector.
Therein lies the problem.
It isn’t lack of ambition or attention. Organizations like the IEA are asking utilities (and governments) to double (and eventually triple) the investment in their power grids without a commensurate increase in either capacity or revenue, if any increase at all.
I have a hard time getting my brain around all of this. Perhaps that is the capitalist in me or the businessperson or what have you. From where is the money going to come? From where will we get the necessary inputs? What is the return on the investment? How will it impact our overall capacity? Will it increase revenue? Will it be better for our clients? Is it even feasible?
Whew.
There really isn’t any shortage of news stories to get your goat. Obviously, the news in the Middle East and Eastern Europe will get much of the attention, deservedly so.
However, you can mark my words, we will be hearing a lot more about how utilities and governments aren’t doing anywhere near enough to get their energy infrastructure up to net-zero standards.
Frankly, it won’t even be close, because it simply isn’t going to happen unless the government shells out literally trillions of dollars to the utility sector to build out the capacity. By shell out, I mean give not loan, because this massive proposed buildout is about swapping capacity. It isn’t about adding it or even increasing revenue.
That to me is scary, and I don’t think the Russians, Chinese, Iranians and North Koreans are behind it.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.