Control Panel: Energy transition

Investment Analysis Clubs Macro Economic Trends and Risks
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The Control Panel is a short-term METAR (weather forecast) so headlining it with a long-term trend change probably isn’t appropriate. But this long article, packed with information about the shift from fossil fuels to renewable energy, was published today and I want to share it.

The Clean Energy Future Is Arriving Faster Than You Think

The United States is pivoting away from fossil fuels and toward wind, solar and other renewable energy, even in areas dominated by the oil and gas industries.
by David Gelles; Brad Plumer and Jim Tankersley; and Jack Ewing, The New York Times, 8/13/2023

…
Wind and solar power are breaking records, and renewables are now expected to overtake coal by 2025 as the world’s largest source of electricity…

The cost of generating electricity from the sun and wind is falling fast and in many areas is now cheaper than gas, oil or coal. Private investment is flooding into companies that are jockeying for advantage in emerging green industries…

More than $1.7 trillion worldwide is expected to be invested in technologies such as wind, solar power, electric vehicles and batteries globally this year, according to the I.E.A., compared with just over $1 trillion in fossil fuels. That is by far the most ever spent on clean energy in a year…

Clean energy became cheap far faster than anyone expected. Since 2009, the cost of solar power has plunged by 83 percent, while the cost of producing wind power has fallen by more than half. The price of lithium-ion battery cells fell 97 percent over the past three decades…

The scale of change required to remake the systems that power the United States — all the infrastructure that needs to be removed, re-engineered and replaced — is mind-boggling. There are major challenges involved in adding large amounts of renewable energy to antiquated electric grids and mining enough minerals for clean technologies. … [end quote]

The U.S. economy is holding up well, especially considering the Fed’s campaign to increase the cost of borrowing.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in July on a seasonally adjusted basis, the same increase as in June, the U.S. Bureau of Labor Statistics reported last week. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment. The index for all items less food and energy rose 0.2 percent in July, as it did in June. The all items less food and energy index rose 4.7
percent over the last 12 months. This is the “core” CPI-U which is closely watched by the Fed. Inflation is still higher than the Fed’s target of 2%.

The index for shelter was by far the largest contributor to the monthly all items increase, accounting for over 90 percent of the increase. Despite an increase in the mortgage rate, the Median Sales Price of Existing Homes is rising. Rental prices are also rising. That directly impacts the CPI-U since the BEA uses “owner’s equivalent rent” for the price of housing to exclude the capital gain from the increase in the price of a house.

Although the current 30 year mortgage rate is higher than the more recent ultra-low rate due to Fed suppression of yields, it is in the range of mortgage rates before the 2008 financial crisis. It isn’t really super-high, especially considering inflation.

With the stock market in a strong upward trend in 2023, the main question is whether the Fed’s campaign will cause a recession or a soft landing.

At least two indicators point to recession, despite the good performance of real GDP growth.

What Top Executives Are Saying About a Soft Landing

Talk of a recession has cooled and restaurants and banks are bullish; advertisers, others say they have been mired in a slump

By Inti Pacheco, The Wall Street Journal, Aug. 13, 2023

…
Big companies are split on whether the Federal Reserve will be able to tame inflation without tipping the U.S. economy into a full-blown recession. …

Talk of a recession has been tempered on recent earnings calls by signs that the Fed is succeeding. A string of interest-rate increases have pushed up borrowing costs to levels that typically lead companies to slash jobs and consumers to sharply curtail spending. While employers have slowed their hiring, many are making a priority of holding on to workers, who in turn are continuing to spend.

U.S. economic growth accelerated in the second quarter and inflation has cooled. Consumer prices ticked up in July, the Labor Department reported on Thursday, but the data showed underlying price pressures remained modest… [end quote]

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 4.1 percent. That is a startlingly strong growth forecast and far above the economic consensus.
https://www.atlantafed.org/cqer/research/gdpnow

Stocks cooled off their rise last week. This may or may not be noise. The CAPE is still at bubble levels.

The Treasury yield curve flattened as yields rose along the entire duration except the fed funds rate.

The Fear & Greed Index was in Greed. The market is mildly risk-on.

The METAR for next week is partly sunny. I don’t see anything that will disrupt the upward trend in stocks although there might be some noise like last week.

Wendy

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Hi Wendy,
Replying from my Tor kludge as I suspect my browser security settings are not allowing the Fool login screen to display correctly. Anyhow, enough about my problems.

I feel we are, in the US, approaching some interesting points - and while it is not my intention to be political, politics will influence the economic fabric of our country. There are powerful commercial entities (supported by powerful politicians who depend on their largess to continue to be re-elected) who are dependent on fossil fuels for their income and who can influence their company’s’ large work forces to support their pet politicians. The governmental subsidies backing the deployment of renewable resources may become challenged by changes in government (and taxpayer subsidies of fossil fuel deployment may take its place).

Part of the challenge with gauging the future path of inflation has become distorted by post-COVID realizations that companies really don’t require thee real estate footprint they used to have in order to support the same sales/management footprint. Similarly, brick/mortar retail distribution is becoming increasingly expensive compared to web-based distribution and the challenges to chains like BB&B will continue to claim victims. Those who are able to skim off excess logistical costs will survive, but the department store model of previous generations is a vulnerable dinosaur.

With the diminished of center city commercially rented real estate, there is a demand for reasonably price residential real estate. Unfortunately the diminished of white collar jobs in the major cities, combined with higher taxes required to support a population becoming relatively poorer is beginning to set up a feedback loop in many of those cities which is creating demographic challenges with very obvious political urban/rural divides.

Add to that the substantial expenditures required to keep the Ukraine War from spilling over into the laps of our other allies is going to potentially shift our nation’s balance sheet (enough to, with the assistance of shenanigans in Congress over debt limits, etc) to permanently impact the value (and international functionality) of the USD.

We have at least another year or two of the Ukraine thing (assuming it doesn’t enter a permanent steady-state stalemate) and, while traditionally the presidential election year is good for the stock market, a recession is still not off the table and, if the future reflects the past, a single term incumbent is very unlikely to be reelected if there is a recession during the election year.

Make sure your crystal balls are well polished as predictions are very difficult to make - especially when they are about the future (Y. Berra)

Jeff

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Pardon me??? :slight_smile:

'38Packard
→ I don’t have any crystal balls!

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@OrmontUS

Voter turnout in the general elections is 55% when people run on supply side econ

When people run on demand side econ voter turnout in the general elections is 65%.

No one in the country these days runs on supply side econ. No one dares because it is a failure. You would have made more money with demand side economics when you sold your business.

You can take any ideas Friedman came up with and look at Samuelson studies of just how backward thinking those ideas are. Samuelson used metrics and saw failures in every single policy.

People want cheaper energy. A few workers in oil, coal and gas wont cut it. The public wants alternatives to save money.

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Interesting update from the EIA. The lion’s share of new energy generation capacity this year will be renewables, with a chunk of natural gas and a small slice of nuclear. But potentially it would have been a lot more.

In the first half of 2023, developers added 16.8 gigawatts (GW) of new utility-scale electric generating capacity to the U.S. power grid, according to our latest inventory of electric generators. Developers plan to bring an additional 35.2 GW of capacity online in the second half of the year.

Operating capacity: Solar power accounted for the largest share, 35% (5.9 GW) of the capacity that came online in the first half of 2023. That new capacity is 4.6 GW less than what developers and project planners reported expecting for the period at the beginning of the year. Supply chain constraints were the primary cause for this shortfall.

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@syke6 sounds like the 4.6 GW was added in larger part to the second half of this year.

That is exponentially faster than getting a nuclear plant.

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On the road at the moment, and have some insights to share on the EV thing. About two years ago, I visited Mesquite NV. To my knowledge, the only location in the town with EV chargers was one casino (Eureka) on the East side of town. Visited Casablanca Hotel/Resort (one exit prior - or middle of town) today, and they have installed 10-15 Tesla EV chargers in one parking lot – Besides the gambling, the casino can offer “the stuckees” (as in people who are stuck waiting :wink: ) an opportunity to golf. Casino own a golf course right next door! Also, the casino has dining, drinking and spa facilities. And, of course, if one tosses back a few alcoholic drinks, and needs a place to stay, … well, a hotel room :slight_smile:

Haven’t thoroughly scouted the Casablanca property, but the front side of the property doesn’t seem to be taking advantage of solar. It was 104 degrees earlier today. Maybe I will wander around the other side of the resort tomorrow

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The “supply side” narrative is alive and well in Michigan, when the state has Shiny (L&Ses) in charge. The previous Gov handed the “JCs” two fat tax cuts, paid for with increased taxes on retirees and working poor, and cuts to government services, like road maintenance and education. And the scheme to transfer wealth to the wealthy was dressed up as “job creation”.

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Steve,

I know people still subscribe to tax cuts.

No one is bragging that we need supply side econ in particular. That would be stupid. It always was.

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The Shinies are. As spelled out in that article, advocates drew a direct line from more handouts to the “JCs” to “jobs”.

Steve

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I hear boomers endlessly. The crying is that people do not respect them. That they do not respect others. etc etc etc…and cut my taxes…

But no one ever says cutting taxes will help the US economy or a state economy. The reason it never did help. No one lies about it any longer.

Seriously not one person in congress uses the term supply side econ.

Yes the residue of people who were sold on it remains.

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That is what I have been predicting for the last 15 years on METAR. The nuclear and fossil guys/gals did not believe me and some still do not believe me.

The prices of residential electricity are high in California and Germany, but that is not because of renewable electricity. Texas has about the same amount of renewable electricity as California, but their residential electricity prices are much lower than those in California.

Residential electricity prices are not a good measure of comparing renewables to nuclear and fossil fuels as the source of generation. Wholesale electricity prices are the correct means of comparing the cost of generating electricity by fuel source.

That is why Texas and many other states/countries are now building more renewables and less nuclear/fossil.

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The same can be said for the other side. There are powerful companies and politicians who want to divest from fossil fuels for business reasons, climate changes dangers that are coming true, and voter sentiment for the survival of their lives and fortunes.

Government and taxpayer subsides of renewables deployment may be increased while subsidies of fossil fuel deployment may be reduced more than it is today.

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Renewable energy and the grid won a major victory in FERC’s new ruling:

The Federal Energy Regulatory Commission (FERC) has approved key transmission reforms aimed at clearing a staggering backlog of more than 10,000 generation and storage projects—more than 2,000 GW—stalled in interconnection queues across the country.

Order 2023, a final rule unanimously adopted by FERC’s four commissioners at a July 27 open meeting and posted in full late on July 28, reforms FERC’s standard generator interconnection procedures and agreements with the intent to improve cost and timing certainty, and prevent “undue discrimination” for new technologies.

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That quote above from the NY Times article, linking to the IEA, is a little misleading. From the Statistical Review of World Energy, below are the TWh produced by renewables, coal, and total electricity generation for 2022.

2022 World electricity generation
Renewables    4,204 TWh
Coal         10,317
All sources  29,165

Does anyone really think that renewables are going to more than double in two or three years? The trick is, they need to include hydroelectricity in the renewables category, in order to get close to the electricity produced from coal. If hydro is included, then about 29% of world electricity is currently produced from renewables, while 35% is from coal. As I have reported here in the past, the state of California does not allow large hydroelectric dams to be included in the definition of renewable energy. From my experience, many environmentalists hate hydroelectricity almost as much as they hate nuclear energy. They would prefer to see the dams torn down, so the salmon can swim freely, or something. But, if they need to include hydro in order to make their renewable energy numbers look better, then so be it.

Secondly, the article says “The cost of generating electricity from the sun and wind is falling fast and in many areas is now cheaper than gas, oil or coal”. That statement is misleading, because the unstated implication is that electricity from the sun and wind is just like, and just as good as, electricity from gas, oil or coal. As constantly needs to be repeated, the sun doesn’t always shine and the wind doesn’t always blow. With the capacity factors for solar and wind well below 50%, if a power company is going to add new capacity, they will also need to build reliable, dispatchable generators. Those dispatchable sources are often fossil fuels, usually natural gas here in the US. Therefore, comparing the costs of highly subsidized wind and solar to dispatchable fossil generators is somewhat deceptive.

Here is what the Energy Information Administration says about comparing different kinds of power plants with vastly different operating characteristics…
Because load must be continuously balanced, generating units that can vary output to follow demand (dispatchable technologies) generally have more value to a system than less flexible units that use intermittent resources to operate (resource-constrained technologies). We list the LCOE values for dispatchable and resource-constrained technologies separately because they are built to provide different services to the grid, and direct comparisons of cost between dispatchable and resource-constrained technologies may not be meaningful in most contexts.

Also:
The duty cycle for intermittent resources is not operator controlled, but rather, depends on the weather, which does not necessarily correspond to operator-dispatched duty cycles. As a result, LCOE values for wind and solar technologies are not directly comparable with the LCOE values for other technologies that may have a similar average annual capacity factor, and we show them separately as resource-constrained technologies.

The EIA states, in the sentences above, that it is improper to compare the costs of the intermittent renewables to the more reliable and dispatchable energy sources, but the NY Times writers do it anyway.

^ ^ ^ ^ ^ ^

I had several more items to discuss, but this post is probably already long enough…

  • Pete
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Your post has many errors.:

  1. Natural gas is highly subsidized just as much as wind and solar.

  2. Nuclear is a boondoggle in US:
    In a recent guest essay entitled “A Star Is Born, as Plant Vogtle Nuclear Expansion Enters Service,” Georgia Public Service Commissioner Tim Echols wrote glowingly about Plant Vogtle, the first new reactor to come online in the U.S. in 30 years. He even praised Southern Company for keeping the project going during COVID.

But what didn’t he mention? Ratepayers—you know, customers—the people who are paying the bills. He also failed to mention the length of time it took to build this plant or its costs.

But here’s the truth: At $35 billion, Plant Vogtle is the most expensive power plant ever built on earth. Vogtle’s electricity is estimated to cost $170–$180/MWh, which is astoundingly high. These high costs are why 49 other states decided against building nuclear plants, even with lavish federal subsidies. They pursued far more affordable clean-energy solutions: 2,200 MW of geothermal would have cost just $9 billion, and solar plus storage would have cost between $4 billion and $5 billion, less than a fourth the cost of Vogtle.

Georgia is one of only four states in the nation with no Consumer Utility Counsel (CUC), an agency designated by most states to act as an independent ratepayer advocate when utility commission decisions are made. The Georgia legislature defunded the CUC in 2008, the year before Plant Vogtle began construction. The loss of this agency cannot be overstated: with no consumer advocate at the commission, Plant Vogtle proceeded with no cost-cap, no consumer protections, and Public Service Commission (PSC) staff were prohibited from conducting analysis comparing the costs of nuclear to clean energy alternatives.

As a result of these missing protections and analysis, Plant Vogtle proceeded to rack up enormous cost overruns with all risk on customers. On August 31, one month after Unit 3 began commercial operation, $2.1 billion will be added to Georgia Power’s rate base.

But that amount is small compared with what’s to come. Once fuel is loaded into Unit 4, expected late summer, Georgia Power will request commission proceedings to recover these cost overruns, expected to be $10 billion. Another $5.68 billion has already been approved and will not be part of the hearing.

Note that the $9 billion to $10 billion in cost overruns is just for Georgia Power’s 45.7% share of the project. When the partners’ share is included, the cost overruns total more than $18 billion. These costs will be paid by the municipal and electric membership cooperative (EMC) utility customers of the partners MEAG and Oglethorpe Power.

Georgia Power executives and Georgia PSC commissioners are making claims that the benefit of Plant Vogtle is clean energy. Commissioner Echols repeated that claim in his essay. But let’s be clear: clean energy wasn’t why Plant Vogtle was built. Georgia has no climate mitigation plan or renewable energy goals it is trying to meet. In July 2022, the Georgia PSC, including Commissioner Echols, voted to authorize Georgia Power to add 2,300 MW of natural gas into its generation mix, even more energy than what Plant Vogtle will add.

It is an extraordinary claim that clean energy is the reason Plant Vogtle was built, given that history. Plant Vogtle was built because Georgia Power is incented to build capital projects. This business model dates to the mid-20th century when America’s grid needed rapid build-out, but it’s an obsolete, counterproductive incentive now. At least 14 states have recognized that and changed how their utilities earn profits by adopting PBR—performance-based ratemaking, which incentivizes performance on metrics such as expanding efficiency and increasing clean energy, rather than building capital projects.

A second reason Plant Vogtle was built is that the Georgia PSC celebrates what it calls a “constructive regulatory relationship” with Georgia Power. The PSC believes that a close relationship benefits all parties, which was easily seen in Commissioner Echols’ essay. But this type of relationship results in unfairly favorable decisions for the regulated utility to the detriment of customers who have no choice in their electricity provider. Being accommodative to a regulated monopoly utility is not the proper role of a regulator.

It doesn’t have to be this way. The beauty of the digital era is that it allows for new and better solutions. Data analytics, grid edge services, and fully funding demand-side management—in addition to cheap renewables like wind and solar coupled with storage, geothermal, virtual power plants, and other flexible load solutions is the grid of the future. Exciting things are still to come with distributed energy and vehicle-to-grid services that electric vehicle (EV) batteries may one day provide. Building large command and control generation sources far from populated areas is far too expensive and no longer appropriate.

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Here are other errors that needs to be corrected in the above quote:

  1. Renewables are increasing and coal is decreasing. Renewables will overtake coal by 2025.

  2. Hydroelectricity has always been considered to be a renewable source of energy by definition: Hydroelectricity uses the energy of running water, without reducing its quantity, to produce electricity. Therefore, all hydroelectric developments, of small or large size, whether run of the river or of accumulated storage, fit the concept of renewable energy.

https://www.usgs.gov/special-topics/water-science-school/science/hydroelectric-power-advantages-production-and-usage#:~:text=Hydroelectricity%20is%20a%20renewable%20energy,the%20concept%20of%20renewable%20energy.

  1. As the world’s electrical generation is skewed by China’s tremendous use of coal and gas for electricity. So lets look at USA electrical generation by fuel source:

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Jaak,

Does the US still need legislation to empower the executive or to set a budget for this and other needs? Does it really have to happen this year or early next year that we get legislation for a better grid?

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Usually not, but the problem is the US Supreme Court. They essentially are requiring every detail to be spelled out by Congress and not to an administration allowed to use best practices.

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