Turning Winds (part 1)
Turning Winds (part 1)
The Crisis of the Wind Industry And Potential Opportunities
Economic Clouds On Renewables
In the last few months, the wind power industry, and renewables in general, have suffered greatly.
This started with a Warning by Siemens Energy that their largest wind turbines were wearing off MUCH quicker than expected. This led to a $5B loss, but worry not, the German government and the German banks came up with a $12B bailout check to make sure renewables’ unprofitability is paid by the society at large instead of the company responsible for it.
Another bloodbath happened to the other large European wind power company, Orsted (ORSTED.CO), with the stock crashing by 78% since its highest point in early 2021.
Wind is not the only sector suffering in renewables. Solar stocks have (even if to a lesser extent) crashed as well.
Invesco Solar ETF (TAN) is now much below where it was in 2011 or 2021 and has essentially brought no returns to its owners.
I know many of my readers might experience more than a little schadenfreude with these news. I know I do.
However, you also know that I am getting interested whenever there are panicked headlines like:
“What's Going On With Solar Stocks?“ (Nasdaq.com)
or
“Shares in China’s Longi, world’s largest maker of solar equipment, fall after firm reports more than 40% drop in quarterly profit. The stock has also declined 80 percent from a peak in February 2021” (South China Morning Post)
So what happened, and is there a possible play to profit from it?
A Perfect Storm
To begin with, there is a fundamental issue with the actual profitability of renewables.
Return On Energy Invested (ROEI)
This is much more pronounced with wind than with solar. Production of both are extremely energy-consuming process. This stems from the high demand for metal:
Copper for dynamo and connection
Silver in solar panels
Rare earth permanent magnet in wind turbine
Steel for structural strength
Concrete for wind turbine bases.
“Never forget, renewables like wind roughly, roughly, need 10 times the material [compared to] what conventional technologies need,”
Siemens Energy CEO
The difference is that solar might be ultimately recyclable (although this is debatable). Wind turbine blades on the other hand are mostly nonrecyclable (even if Orsted claims the latest might be, at which energy cost is yet to be seen) and the massive reinforced concrete bases will stay in the ground almost forever.
This also does not discuss the other rather amusing high energy need to operate wind power.
Like how wind turbine gears need A LOT of oil-derived grease for lubrication.
Or spraying hot diesel with helicopters to melt ice on the blades in winter:
Combined with a much shorter lifespan than expected, it becomes dubious if wind turbines even create enough energy to pay the bill for their own creation. Even less support an industrial civilization.
Intermittency
Because the wind might not blow for weeks, or the sun does not shine at night, or barely at all in winter (at least in Nordic latitudes), you need either enough backup with gas to cover the whole grid need, or gigantic battery parks.
This compounds the ROEI issue, as these batteries are equally resource and energy-intensive to produce, short-lived, and poorly recycled.
And if you need enough gas powerplants to cover the whole grid needs, but use them only half the time, their capex becomes twice as costly.
When renewables were 2% of the grid, you could pretend it would never be a cost.
At 10-20% of the grid, it becomes impossible to push it under the rug.
Rising rates
Speaking of capex, rising rates cause the cost of capital to rise.
For a loooooong time, renewables have been carried by the declining cost of capital. So the project next year would cost less, partly due to technological progress, but also partly because capital was increasingly accessible for free.
ESG bonds, governmental push for capital to flow in the sector, and subsidies also help build at close to 0% capital cost of these projects.
Energy Prices
Low energy prices during most of the 2010s, up to 2021, have helped China become the center of renewable manufacturing. Declining solar panel costs have been driven by low coal prices in China.
For the same reason, solar panels made out of China cannot be competitive, as they are trying an energy-intensive manufacturing process without cheap (fossil fuel) energy. Lighter environmental rules help too.
The same can be said for rare earth purification.
Low coal and fuel prices also helped globally produce cheap steel, cheap transportation, and cheap excavation, lifts, and overall construction costs.
Now that energy is not so cheap, the costs of renewables have stopped declining.
Inflation
While related to rising energy prices and rates, this is also an effect with a life of its own. Labor costs for installation and maintenance have gone up.
A decade of underinvestment is pushing higher not only oil prices but every metal price as well.
Add damaged supply chains by the lockdowns, and you have the last straw that broke the camel’s back.
Inflation is the number one reason Orsted blamed for canceling billions worth of projects in the US, UK, and Denmark.
Opportunities?
Avoiding wind
While by far the largest crash in the renewable sector, wind seems un-investable to me. This is because the concept is inherently flawed from an economic perspective.
It was only propped up by a mix of idiotic subsidies, excessive capital flow, low rates, and optimistic assumptions about the lifespan of the turbine.
Western countries are increasingly overindebted and running out of money. What’s left is more likely to be spent on military gear than wind turbines.
Solar
The solar sector is another story.
There are some areas where solar’s economics can make sense. Two different ones in fact.
The first one is in the tropical/sub-tropical area, where sun intensity is high enough to maximize production a lot more efficiently. Accidentally, this is also the high-consumption period for these countries, with air conditioning, especially during the daytime, running at max. And air conditioning is among the very first thing people buy when they finally can afford it.
The second one, somewhat paradoxically, will likely be very Nordic, very cold climes. Like Estonia where I live. For now, this is not really working well, because the preferred method is pretending that they will produce in winter, which between snow and 4h daylight is … optimistic.
But I think solar power can work there for 2 reasons. Summer will have a massive surplus, thanks to 16-20h/daytime. AND that surplus could be stored for the winter.
How? Did I not repeatedly say that energy storage for more than 24 hours is prohibitively expensive?
Yes, if you store electricity. Because storing electricity requires lithium, copper, nickel, etc…
If you store heat, however, you can do it with extremely basic materials.
Rather ingenious Finns at Polar Night Energy have made what is essentially a big silo (like for grain), filled it up with sand, and added isolation to it.
The sand is then warmed up to 400C. Because sand has rather low thermal conductivity AND high thermal mass, it can store a LOT of energy.
The whole thing is made of run-of-the-mill pipes, air pumps, electric resistance, steel silos, and sand. Nothing fancy, and all this equipment will last decades and require almost no maintenance. Even the sand can be the crudest, less valuable type of sand.
Of course, what you need to do is never convert back this heat into power, or the losses would be horrendous. But it just happens that Scandinavia, Germany, Eastern Europe, and Russia have tons of so-called district heating systems, where one big central heating system keeps warm thousands of flats in winter all at once.
With such storage and heating systems able to soak up any “surplus” of sun in summer, I can see solar working, especially with a lot of these regions being sparsely populated, providing ample space for solar farms.
I suspect also some form of concentrated solar power, directly producing heat instead of power, could be even more economically viable than photovoltaics for this.
What Stocks?
Polar Night Energy is a privately listed company, so not much to invest in there, even though I love the idea.
Now remember that China dominates the solar industry. And what used to be cheap coal will in the long run be replaced by cheap nuclear and cheap Russian gas. So I do not see this cost advantage going anywhere.
The EU and the USA could try to put a tariff on Chinese panels, but then they would pour so many subsidies into their own industry which would terminally destroy the economic viability of solar power. At least, not as long as they have not fixed their energy systems (so probably nothing good happening in the next 10 years).
I haven’t dug too deep into each of the companies below, so this is just an idea list, definitely not investment advice or even the equivalent of one of my reports.
I will ignore here the “China” risk, as any massive collapse of China-West relations would make the idea of a solar bet irrelevant.