Monday, October 11, 2021

The Energy Market with Unreliables

 The energy market is going to be something that will be on people's minds for a long time because right now there is very poor policy and ideological views driving us to a crisis. There has been a nice little bull run going on over the last few months, and this may not be the crisis. It's something that may immerge here, but it might be 5-10 years from now.

For the longest time I've been a passive index investor, and I still am for a nice chunk of my portfolio, but over the last 18 months I've decided that I'm going to apply my own judgment to the market place and invest accordingly. Over this time I've accumulated a pretty sizeable portfolio of LNG (Liquified Natural Gas) companies, in particular upstream and midstream companies.

Renewable Energy or Green Energy are Unreliables

There is a political push for green energy. It's driven by the moral ideas that green energy is this universally good energy and all the other reliable energies we use like fossil fuels and even nuclear are inherently bad, dangerous and destructive.

As an electrical engineer as trade, I thought I'd shed some realities on the differences between these energy forms as they apply to electricity.

1. A 1 Gigawatt (GW) Coal Power Plant is not equal to a 1GW Solar or Wind Farm

I would like to think that this is an obvious point, even to those that are completely unaware of the scientific basics, but some people don't know much beyond green is good. When we speak of a 1GW of any energy, we're speaking of a designed output value based on an optimal input value - also known as the rated value. 

With a wind farm, we're talking about the expected output with optimal speed of wind. When the wind is too high, wind turbines are typically disabled. In wind speeds that are slower, there is just less output. It's also important to note that the less output is not a linear function necessarily. A 50% reduction in wind isn't necessarily a 50% reduction in output. With friction, and inertia, we'd expect a great reduction in output. Also there is a minimum speed required to get things moving. That's not to say that you need a consistent 50km/h of wind all the time to get rated output. Wind gusts and slows, but in general keeping the blades spinning at an optimal speed is what is desired.

For a solar production, much of the same ideas are in play. Too much good sun isn't bad, there is just the rated value output. Less than good sun is less than the rated output. And ofcourse, there is zero output during the night.

Contrast this with a coal power plant. A coal plant will product 1GW of electricity provided it has the rated input value of coal. Coal is cheap, readably available, easy to transport and store. In effect, a coal plant will produce 1GW of power 24 hours a day, 7 days a week. Solar productions can have variable outputs that fluctuate greatly within time frames of 15 minutes. Wind isn't quite as variable as solar output, but wind hour to hour can be quite different.

From this you should be able to see that a 1GW coal power plant is a completely different product than 1GW of solar or wind. Even 4GW of solar or wind is still totally different and would create systematic problems with the grid that a reliable 1GW coal power plant would not.

The source of the figures is Alex Epstein's Moral Case for Fossil Fuel. It's important to see visually how the output changes and varies, even over periods of 15 minutes. And at the end of the day these are all AVERAGES for a period of time - not a consistent output - which is what other sources of energy produce such as coal, nuclear and even hydro is pretty consistent.

2. Power isn't just Dumped Onto the Grid

It's important for the average layperson to understand that the grid is a delicate balance between demand load and supply of power. The load on the grid fluctuates throughout the day. It typically follows a regular pattern, but it is variable. Plus, when there is some sort of irregular day (such as a cold snap or a heat wave) you experience a massive uptick in load.

The suppliers of power have to follow this load as it is always changing. You can't just dump all the power you're currently producing on the grid - it has to match the load. The best way to think about it is that the grid is a transportation network, not a storage space for excess energy that can be used at a later time.

When it comes to wind and solar, you just get what you get. You can't increase or decreases output. You cannot follow demand. Power sources like coal, nuclear, hydro, etc have the characteristic of ramping up and down production. A fuel source like natural gas (NG) has the capacity of ramping up and down output at very fast rates.

3. Power Quality Matters

When speaking of power quality, I'm speaking of the characteristics of the power produced and how close it aligns to the targets for the grid. For most places and most parts of the world, it's a nice clean AC sinusoidal wave, 60hz in NA. In some special applications with very high voltages, you may find DC.

It's important to understand that the more variable an output, the less optimal it is to produce a smooth sinusoidal wave. The less smooth the wave is, the more transients are introduced into the grid. The best way to think of these are ripples on an otherwise ordinary wave. In the case of harmonics, which is a load based ripple effect, these ripples can overlap at specific higher frequencies (like 3rd, 5th, 7th harmonics) where there is a very high current flowing.

With a steady output form of power, there is an understanding of the quality produced and mitigation methods rated for the output.

One last note is that poorer quality electricity that ends up on the grid must be compensated for in a few ways. One of which is power electronics on the grid to fix it (expensive infrastructure) or (when possible) another generating part of the grid produces an output that can balance things out. 

The Big Energy Picture

With the aggressive push to be green and force the inadequacies onto the grid, there is just unavoidable realities that need to be resolved. This is why I invested in LNG for the simple reality that there needs to be a ramp up, ramp down energy source that is reliable and can be depended on.

Today, most countries are shutting down and decommissioning coal plants for electricity. Even countries that are pro-nuclear and shutting down those plants - and today it's such an over regulated burden to even create a nuclear power plant that no one is building them.

When it comes to the current market landscape, there is a desperate need for NG. The issue that NG faces is that the infrastructure to supply the world isn't there and it's a product that most of the world is using to heat their homes and businesses.

Unless the world is planning to abandon the suicidal hatred of reliable hydrocarbon (fossil fuels) sources, a product like NG is going to be a hot commodity.

Ideally, I'd like a free market where energy sources compete and there can be one or many winners in that market. It doesn't matter to me, as long as it's reliable, abundant and cheap. As an investor, I have to invest in the world as it is and that world will need NG because it's either that or die.

*I'll point out that I didn't discuss other green sources such as biomass or whatever the seems to be the next hot new thing because they're worse than junk as a source of energy.

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The Energy Market with Unreliables

 The energy market is going to be something that will be on people's minds for a long time because right now there is very poor policy a...