How to produce emissions-free oil

Another week, another set of miserable headlines for the Grubble – what I call the green bubble.

Bloomberg’s headline piles on the misery before you can even get to the details: “A $1 Billion Solar Plant Was Obsolete Before It Ever Went Online”.

It’s such an embarrassment that “Almost no one associated with Crescent Dunes will talk about it anymore,” the article says. But the journalists did their job anyway.

The story goes a little something like this: innovation in solar power is at such a pace that investing in actual installations is a mug’s game. Which has interesting implications for investors.

Sure, solar power is lovely. But actually making money from it as an investor is tough given the severity of competition and rate of innovation. Even whopping government support like that detailed in the Bloomberg article couldn’t save SolarReserve’s Crescent Dunes. (Apparently snazzy names don’t save you either.)

This chart shows what does happen. While Crescent Dunes is producing power at $135 per megawatt-hour, a new Nevada photovoltaic solar farm is producing at $30 per MWh.

Crescent Dunes just lost its last customer and the government is on the hook for $737 million in loan guarantees. That’s more than the infamous Solyndra which embarrassed Barack Obama.

Wind energy got a kick in the guts too. This time the Financial Times had the headline: “Offshore forecast fears blow through European wind farms”. It turns out that assumptions used to calculate how efficient wind turbines are when placed near each other were likely wrong.

Since 2016, Orsted, the world’s largest offshore wind developer, has been using the radar system to collect 3D images of the wind as it blew through its Westermost Rough project, in waters eight kilometres from the shore.

The 3D data collected from Westermost Rough, along with observations from Orsted’s other schemes, aroused suspicions within the Danish company that previous assumptions about how wind interacts with large offshore turbines — and how it affects their production levels — were possibly too simplistic.

And by “simplistic” they mean “overblown”. The underlying issues are known as “wake” and “blockage”. I call them “constipation”.

In 2018, a different report highlighted a surprising problem. Not just with wind farms but with how they’re studied. It turns out that windmills in the front line also underperform when placed in a… what’s the collective noun for windmills? An eyesore of windmills? A thunberg of windmills? 

Instead of measuring the effects of clustering windmills, “It was assumed that a turbine could only affect other turbines located downstream. Any influence on turbines upstream or laterally was almost always ignored,” said James Bleeg, a principal researcher at DNV GL. He also said “This likely represents a material bias in energy prediction procedures used throughout the industry”.

Oops. Volkswagen’s diesel engineers were heard snickering across the border.

The effect of the Orsted revelation was felt harshly in financial markets:

Orsted went public with its findings on October 29 last year, describing the problems as “industry wide” and revising down offshore wind production forecasts made to the market a year earlier.

Shares in the company, previously known as Danish Oil and Natural Gas, fell 7 per cent on the day of the announcement as investors were caught off guard and wondered whether other developers would also follow suit.

Oops again.

One of the rising problems which green energy investors face is falling subsidies. As the Grubble inflates, it’ll become too expensive to subsidise.

My wedding photographer is a victim of this change. He’s complaining on social media about the drop in tariffs being paid to him for the power he generates from his roof. Apparently it’s government policy to pay him less.

Projecting the viability of energy investments based on government subsidies is dangerous for your financial health.

But my favourite Grubble stumble doesn’t even come from the green energy industry at all. It comes from one of the largest oil companies in the world, Statoil. Sorry, they’ve renamed it Equinor to sound more green and equitable.

Bloomberg is reporting that the largely state controlled oil giant has decided to go emissions free by 2050. Which is great news, if you’re a comedian. A $5.7 billion investment, which includes connecting offshore oil rigs to the electricity grid, will allow Statoil, sorry Equinor, to produce its oil without emitting carbon. Yes, produce oil without emitting carbon.

Bloomberg found the comedian I was looking for:

“These ambitions ignore the elephant in the room,” said Mark van Baal, the head of Dutch investor advocacy group Follow This. “An oil company with targets for its own emissions, and not for its products, is like a cigarette producer that promises that all employees will quit smoking, while increasing cigarette production.”

It’s not just oil companies making themselves look stupid. This headline is also a great laugh:

Source: Aerospace Digest

My point isn’t just to ridicule the Grubble. It’s very real. It’s just not sound or worth investing in. Not in a broad way.

Targeted bets on new technology will of course work in any environment. And green tech is a great source of innovation. Our editors regularly find game-changing companies like this one in the industry.

But I don’t think you should be out there buying green ETFs.

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Energy

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