We recently published a Q&A discussion with Smith & Howard Wealth Managements’ Chief Investment Officer, Brad Swinsburg, in which he provided his thoughts on a range of topics related to the energy industry. The impetus for the dialogue was the February power outage in Texas, but Brad also provided some thoughts and perspective on the overall energy industry and its transition toward renewables and clean energy. Considering the scrutiny the industry has recently been receiving and the hot-button nature of the topic politically, we were not surprised to receive a number of follow-up questions and comments as a result of the piece. It would be difficult to attempt to address them all, but there were a few consistent themes that we asked Brad to comment on.
Q: Any last or different takeaways from the Texas situation now that more time has passed and more data is available?
A: No, not really. If anything, I think our overall points about the root causes of the power outage are now more fully supported. As you’ll recall, our view was that the issues stemmed from the lack of “winterization” of the equipment and the closed-loop nature of the Texas grid. There was a lot said during the crisis and in the immediate aftermath about whether or not the failures of renewable sources like wind and solar were the main culprit, but the bigger, more unexpected issues were actually related to natural gas. In fact, the Electric Reliability Council of Texas (ERCOT), which operates the electric grid for most of the state, reported that the outage was primarily the result of natural gas supply issues.
To be fair, there were failures across a variety of energy sources – coal, the nuclear, gas, wind, and solar. The reason ERCOT cited natural gas issues as the primary cause is that it was an unplanned or unexpected failure. When ERCOT looked at what happened and compared it to their worst-case risk assessment analysis (prepared in 2020), the drops in power from coal, nuclear and wind were in line with the 2020 assessment. However, the natural gas sources that were offline, were far greater than anticipated. I don’t want to pick on gas because the real issue comes back to the lack of winterization of the equipment. All these energy sources would work just fine in cold temperatures when winterized properly, which should be the main takeaway.
Q: We obviously hear a lot about the benefits of transitioning to renewable or cleaner energy sources, but are there aspects of renewable energy or the transition that are being overlooked?
A: That’s a great question and one I don’t think gets asked enough. Anytime there is such excitement around an idea or theme, we often overlook some of the challenges or issues it may present. We talked last time about some of the technological limitations that still need to be overcome, but there are also some more practical limitations as well.
The most pressing one is simply that of transmission. We need massive transmission upgrades if we’re going to advance decarbonization plans. We’re already seeing this issue today and it’s more of a NIMBY (not in my backyard) issue than a technology problem. NIMBY concerns are obviously a very different type of hurdle with less of a clear path forward. It won’t do us much good to build renewable generation sources if we can’t get the power created to the places it’s needed.
The other issue, which we, fortunately, have more time to solve, is making sure we can safely dispose of or recycle some of the component parts in renewable energy sources like wind turbines, solar panels, and electric car batteries. For example, wind turbines are built to withstand the elements and last for decades. This indestructibility becomes an issue, however, when the time comes to retire and dispose of the turbines. Additionally, solar panels and electric car batteries both contain hazardous materials that will present different disposal challenges and dangers. I’m certainly not saying that renewable energy sources have net negative effects on the environment, but we can’t ignore the fact that they will present their own set of challenges.
Q: Since your piece about the energy industry, we’ve heard a lot about the energy usage and impact of cryptocurrencies. Could you touch on some of the headlines and provide some thoughts?
A: This is probably one of the more fascinating, and until recently, under the radar storylines related to the explosion in interest and prices of cryptocurrencies. There are some debatable aspects to the discussion, which I’ll come back to, but the fact is that the mining of Bitcoin and other cryptocurrencies uses an astounding amount of energy. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining uses more energy than entire countries such as Sweden and Malaysia.
The reason cryptocurrencies like Bitcoin are so energy-intensive is due to the underlying technology, blockchain. The use of blockchain means that new coins can only be “minted” when miners solve complex math puzzles on purpose-built computers. The complexity or computational effort it takes to do this mining has been increasing rapidly in the last few years and there is a definite feedback loop issue. As the price of Bitcoin and other cryptocurrencies (of which there are more than 4,000!) increases, there becomes more interest and incentive to “mine” the cryptocurrency which only serves to further increase the computational difficulty and energy required to mine new coins.
As mentioned, the surge in energy demands created by the bull market in cryptocurrencies has started to garner more headlines and even action. More recently we’ve seen crackdowns on mining operations in China and Iran and perhaps most notably, a tweet from cryptocurrency fan Elon Musk that Tesla would stop accepting payment for new vehicles in Bitcoin due to the energy usage concern and the environmental impact.
There is some debate about the ultimate environmental impact or the carbon footprint from cryptocurrency mining. The argument that the environmental impact is being overstated generally revolves around the idea that cryptocurrency energy needs will drive greater renewable energy innovation and perhaps protocol modifications that will lessen the overall energy consumed. Personally, it’s hard for me to feel great about something that might happen in a best-case scenario and will take years to come to fruition to help alleviate an issue that already exists.
Q: Do you have any last thoughts on things for people to consider as they read more or hear more about the changing energy landscape in the months to come?
A: Yes, question everything. I say that somewhat tongue in cheek, but it’s also true and not necessarily specific to this topic. There is a lot of misinformation out there and a lot of what I call “presentations with an agenda” which, if taken at face value, can be extremely dangerous, especially if it informs an investment decision. There was a lot of misinformation stemming from the Texas outage, and as time has passed, many of the things claimed or even stated as factual were proven incorrect. Admittedly, I think it’s just good practice and something we built into our investment process, to question things, do some research, and even search out opposing viewpoints in order to make an informed decision.
If you have any questions on the energy industry and the discussion above, please contact Brad Swinsburg.
Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold, or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.