“Where the Sun Don’t Shine’ is a great article,” writes Derek S, “and sheds some light (pardon the pun) on what we in the power industry call ‘Capacity Factor’.”
Fair warning, we’ve been turning over some of the content for the week to Mark Rossano and company because we’re under deadline to finish a book. More details on the book later.
“‘Capacity factor,’” Derek continues, “is one of the chief metrics of reliability. Nuclear and coal-fired generation have high capacity factors. Nuclear is often above 90%. Whereas solar, even in the sunny Southwest, is generally around 22%. In New York, or New England, it is about 12%.”
We’ve been advocating nuclear, even since we watched the Fukushima tsunami on the television from a hotel lobby in Bogata, Columbia.
“The other part of the renewal boondoggle,” Derek says, is that “most folks outside the industry have no idea. Megawatts from coal, gas, nuclear and thermal generation can be used to provide all sorts of valuable ‘ancillary services’ in the industry. Not so with non-firm renewables like solar or wind, but I guess that’s a topic for another day…”
Derek followed up with a kind word: “Keep up the great work! All the Best –Derek.”
Below is an attempt to expeditiously list the things Mark Rosanno and I talked about in our Wiggin Sessions’ chat:Why turtlenecks don’t solve the energy crises. What his big three investment ideas are at the moment and why, why, why we endure poor central bank policy.
Welcome, Mark Rossano, from our stellar Wiggin Session: Crazy Rich Saudis, OPEC+ & the Global Energy Crisis. Below is sneak peak into our conversation.
When we started our C6 Capital Holdings fund in 2019, we looked at the market and we saw a lot of opportunity in the private sector, not so much the public sector. We saw a global shortage of energy infrastructure, even before the pandemic.
We want to “bucket” it in three locations.
One is hydroelectric. The second is fertilizer production. The third is renewable diesel refining. We saw a shortage of energy emerging, and we wanted to find a way that we could capitalize on the green movement while providing “base load” that is going to be there 24/7.
Then we turned and we said there was a global food shortage. Fertilizer itself is massively energy intensive.
We wanted to find a solution to increase fertilizer production while keeping safe on waste products.
And then on the diesel front, in terms of refining.
Amoco refinery at Whiting, Indiana (Source: UIC Library Digital Collections)
Good luck trying to get a crude refinery built. But we found this one company that creates renewable diesel using wood waste as well as agricultural waste.
Now the beauty of renewable diesel is one, you’re not taking food to make fuel, and it’s molecularly the same as petrol diesel or crude diesel.
We wanted to find a way to address these problems with the view of GHG and ESG in mind.
But one thing I learned long ago, taking enough ethanol facilities into and out of bankruptcy, is that government subsidies should pad the returns, not drive the returns.
Why? Because a stroke of a pen can instantly change your profitability.
We wanted to find companies and assets that stand on their own two feet, and we wanted to show, “Look, you can have an environmental mindset while still making money and delivering value without saying, ‘Oh, well…'”
I don’t know if you saw Japan just told everyone they have to buy turtlenecks. Because if you wear turtlenecks, you will keep yourself warm and you’ll reduce your consumption of energy.
That’s ridiculous. Ridiculous.
And not a solution. Maybe if you’re farming sheep in New Zealand, it is. And if that’s the case, maybe we should get into the wool trade!
You and I are both watching the absurdity of this.
It’s like, so you’re forcing discounts and sales of turtlenecks to keep people warm, where we can actually look at this and look at the shortages.
But there’s a way to build more liquid natural gas (LNG) capacity to make more LNG available.
Can we increase LNG availability? Can we develop and capture flare gas, to take that flare gas that was a pollutant and is now powering your home and your heat?
There are ways to look at this with an environmental mindset while still delivering value and capturing something that is going to have longevity behind it.
Central banks created an artificially low hurdle rate where suddenly money was free. Everybody was buying in on the green movement. A ton of subsidies that were being thrown out.
So instead of looking at things and understanding the math of supply-demand economics, looking at the grid, dispatchable power, it was just, “How can I get the best subsidy the fastest and capitalize on the fact that I can borrow money at one and a half percent?”
Seattle from above. (Source: Wonderlane)
That’s something then after borrowing money at one and a half percent, I can then go to the government and then essentially get 2% back and I can – whether this product or project works – I’m going to make money.
And what happened? Grift and an insane inflationary world start to emerge where it wasn’t about math and economics. Or producing energy.
The mindset became and has been ingrained: “Well, the economics work because the government’s paying me to make it work.”
And that’s why when we saw all of these adjustments. Now you’re left with these policies and these projects that don’t deliver the value that they were supposed to. And the incentives remain misaligned.
You also have stranded assets, which the taxpayer spent billions on. In some cases, trillions. And no one is getting what they were promised.
Anybody who understands physics and chemistry and the way the electron moves and the way the world works, just rudimentary math, will understand that the green transition is just not going to be enough.
What are we trying to replace here?
Between insane low rates and the amount of liquidity pumped into the market, an artificial floor was created and people who work in the energy market began to believe rates were going to be low forever.
Now, the UN has come out and said that raising rates is the worst policy decision that we’ve ever had.
Well, what about the policy for the last 10 years?
How is that not the worst policy decision that we’ve ever had?
Are we just going to keep rates low forever?
No, we have to be diligent about liquidity, about saving this for a bad time or a COVID lockdowns.
But now, after the Fed and Treasury have dumped all this money into the market, and – even as we head into a recession similar to the 70s – they have no choice but to take the liquidity out because everyone was so greedy for so long.
And that’s going to create broad shortfalls.
In my opinion, this comes back to the FTX bankruptcy, and all of this grift getting pulled out of the market… without free money, people have to look at returns again.
They have to say, “Well, I can’t just dump money into an Uber. I’ve given you billions of dollars and you’ve delivered no actual value in terms of cash appreciation.”
So, my hurdle rates go up, my cost of capital goes up. When are you turning a cash flow? When are you returning cash? When are you cash flow positive? How quickly will that happen?
All the best,
Mark Rossano
Editor, The Neo Report
Special to The Wiggin Sessions
