September 8, 2023

We’ve said it here before here at Streetlight Confidential…

The only results the government has ever been able to deliver regularly, reliably and without fail… are unintended consequences.

Except maybe one…

In 1961 JFK told Congress the US “should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth.”

And indeed on July 20, 1969 Neil Armstrong stepped off the ladder of the lunar module Eagle and set foot on the moon. 

I’ll give them that one. 

But most of the rest of the big plans devised by any (our) government end up causing some degree of less-than-desirable outcome. 

The reason these things happen is because governments make plans based on how they think things should be. And they let academics in ivory towers map paths toward those ends. Without any regard to the warning signals that may pop up along the way.

Joe Biden’s plan to end fossil fuels in the US is one of those. We’ve warned before, this plan presents a very real danger to our economy. And to date, there have been some serious warnings on the path to carbon free.

Here are three major warnings they’ve chosen to ignore so far…

The Wind Farms Fiasco

It’s free. It’s renewable. It’s the wind!

Wind farms have long been one-half of the dynamic duo of green energy. Proponents envision banks of turbines, their long blades turning leisurely in the breeze, generating gigawatts of clean, carbon-free energy to everyone connected to their grids.  

That’s a nice thought. But there are some serious realities that are conveniently ignored when it comes to getting there. Namely that “free” energy isn’t really free. 

The US currently has only one “functional” offshore wind farm. It’s called the Block Island Wind Farm and is situated off the coast of Rhode Island. It’s made up of five turbine structures and has a capacity of 30 megawatts of power. It went into production in 2016.

An analysis from the Manhattan Institute noted:

The project took two years to build and cost about $300 million. The 22-mile-long Sea2Shore transmission line that brings the electricity from Block Island to the mainland cost another $114 million. Thus, the overall project cost was over $400 million—over $13 million per MW. (By comparison, a new gas-fired combined-cycle generator has a capital cost of about $1 million per MW, and new offshore wind projects have an estimated capital cost of about $5.5 million per MW.)

The project has been plagued by setbacks and shutdowns over the years — most notably a cable re-bury project in 2021. (The developer had been given an exemption by Rhode Island’s Coastal Resources Management Council (CRMC) and was allowed to bury the cable at a depth of four feet. Within months, parts of the cable had become exposed near the shore! The owner of the power line expected their end of the bill to be $30 million. A charge they expected to recover via an undetermined surcharge to ratepayers.)

So what’s up and running is still being tweaked — and customers are footing the bill.

You might say the bright side would be that they’re learning from their mistakes (we can’t be sure they are).

Meanwhile, the Wall Street Journal just reported this week…

According to a report late last month by the New York State Energy Research and Development Authority (Nyserda), large offshore wind developers are asking for an average 48% price adjustment in their contracts to cover rising costs. 

Then there was this…

The Alliance for Clean Energy NY is also requesting an average 64% price increase on 86 solar and wind projects.

EnergyNow piled on the reporting bandwagon…

Orsted A/S said it’s prepared to walk away from US projects unless the White House guarantees more support, highlighting the myriad challenges facing wind-energy developers in the country.

There have been similar hold ups for Commonwealth Wind, Massachusetts’ biggest offshore wind project. WBUR out of Boston…

Months after its developer, Avangrid, signed power contracts with three major utilities, the company is trying to get the state’s Department of Public Utilities to allow it to renegotiate those agreements.  …  Late Monday night [December 2022], the offshore wind developer reiterated that its 1,200 megawatt project will only be financially viable if the company is allowed to charge more for the electricity it produces.

The (admittedly mis-named) Inflation Reduction Act allows for federal tax credits that can offset as much as 50% of a wind project’s costs. But the main complaint from developers is still…

…that their costs are increasing faster than inflation and that the projects will “not be economically viable and would be unable to proceed to construction and operation under their existing pricing.”

Costs rising faster than inflation?

This has to make you wonder about the economic viability of these projects at all.

It would appear that even the roughly $370 billion giveaway promised in the IRA won’t be enough to make a financially and economically non-viable project viable. We’re off to a rocky start here.

(No response from the government yet.)

The Electric Vehicle Boom (and Pending Bust)

The news on the EV front would seem to be more positive. The Wall Street Journal reported at the beginning of this year…

Global sales of fully electric vehicles totaled around 7.8 million units, an increase of as much as 68% from the previous year, according to preliminary research from LMC Automotive and EV-Volumes.com, research groups that track automotive sales.

And naturally the government is doing everything it can to push that end. (Whether the market wants it or not.) Last April we outlined one of the Biden gang’s regulatory strategies for greasing the path to an all EV fleet:

Under the updated regulations, carmakers will be required to raise the average fuel efficiency of their fleets by 8% annually for the 2024 and 2025 model years, and 10% for 2026. By the 2026 model year, the average will have to be 49 mpg under the agency’s testing regime, though actual results for motorists will likely be closer to 39 or 40 mpg.

The good news for car makers was they get to average mileage across all their model lines. So if they can show several models of EVs that claim the equivalent of 100 mpg, it’s not such a big problem. 

The bad news is that, faced with these regulations — not to mention the rose-colored headlines and forecasts about EV demand like the one above  — every manufacturer is diving headlong into the EV sector. Increased production has begun to outpace the demand in the US. 

“Sales have been rising and are clearly going up with all the new entrants in the marketplace. But sales are not going up to the same extent that inventory is going up. As we approach the end of the second quarter of this year, average inventory for electric vehicles tops more than 92,000 units on the ground at dealer lots as we look at inventory versus this time 2022. That’s a whopping 342% year over year increase.” Jeremy Robb, senior director of economic and industry insight at Cox Automotive, told reporters at a briefing.

And there’s no end in sight…

According to Cox Automobile’s estimates, no less than 33 new EVs will be launched in 2023 alone, and more than 50 additional new or updated EVs will be launched in 2024.

And this meddling with the market has created yet another problem for the industry — overall disappointing results…

As we first noted last week, Ford is slated to lose $4.5 billion from its EV segment this year, a $1.5 billion larger loss than the company had expected.

So far this year, the division has lost $1.8 billion and this year’s $4.5 billion loss figure blows away last year’s $2.1 billion loss. Ford also announced that its electric F-150 pickup trucks will undergo a price cut.

DETROIT, Nov 17 (Reuters) – General Motors Co (GM.N) expects its electric vehicles will make money in 2025, with recently enacted federal subsidies plugging the profitability gap between EVs and GM’s combustion fleet, Chief Executive Mary Barra said Thursday.

Federal subsidies could add $3,500 to $5,500 a vehicle to pre-tax profits for GM electric vehicles, CFO Paul Jacobson said during a call ahead of a presentation to investors in New York.

It’s become obvious that the government-pushed shift to EVs won’t be profitable without the government throwing money at them.

So what’s the administration’s answer?

The Biden administration is offering $12 billion in grants and loans to automakers and suppliers to retrofit their plants to manufacture electric vehicles and other advanced vehicles, Energy Secretary and former governor of car-manufacturing state Michigan, Jennifer Granholm, has announced.

In the meantime, back in the real car world, things are getting complicated for car makers as well… 

Automakers are currently in contract negotiations with the UAW. 

The union is threatening GM (as well as Ford and Stellantis) with a wave of strikes if their contract demands aren’t met by September 14. What are they asking for? Just a 46% wage increase, reinstatement of traditional pensions, and a 32 hour workweek (cut from 40).

Needless to say, the UAW was all in favor of the administration’s $12 billion spending plan…

UAW President Shawn Fain has applauded the announcement, saying the grants and loans “makes clear to employers that the EV transition must include strong union partnerships with the high pay and safety standards that generations of UAW members have fought for and won.”

The big three are facing a wall of financial pressures exacerbated by the government’s green mandates. It would seem the green sector is getting more dysfunctional by the day.

On the other hand, if we eventually all have to plug our EVs into those wind powered grids… This whole conversation might be moot. 

And at the same time there’s little interest in providing any relief.

Oil Prices are Back on the Rise

I’ll just refer you to our last weekly update for the full discussion of The Other Elephant Still in the Room. 

It’s worth keeping an eye on the price of oil. Should West Texas Intermediate (WTI — the US benchmark) breakout above the $85 level, significantly higher prices would be likely. And if energy prices start to spike, the only thing holding inflation in check will be out of the box, and headline prices will be soaring once again.

West Texas intermediate has taken out the $85 per barrel high and is currently teasing the $88 level. 

The Saudis and OPEC+ have continued to thumb their noses at the market extending their 1.3 million barrel cut through the rest of the year. 

And that’s led to further bad news…

The administration’s response to this turn of events? 

Crickets.

Pouring billions into struggling, unprofitable industries to create an outcome which is far from guaranteed is NOT the way to bolster an economy. 

Yeah, we’re fond of saying the government can only deliver unintended consequences here at Streetlight Confidential. 

But when you step back and look at the bigger picture of what they’re doing, the consequences may not look so unintentional after all…

Humbly yours,

Tim Collins
Editor, Streetlight Confidential