>>See Part I
OK, so Europe blew it by matching fiscal irresponsibility, in the form of feed-in tariffs and massive subsidies to the wind industry, with accepting junk science that promised efficiencies only hypothetically possible and only then in the controlled environment of a laboratory. How about the land of P.T. Barnum and corn-ethanol subsidies?
To answer that question, let’s take a look at the two states to the left of me. I most recently lived in Hawaii and California before moving to the Nevada side of Lake Tahoe. In Hawaii, which the tourist brochures claim are always blessed by gently-blowing trade winds (not!), at the southernmost point on the Big Island lies the rusting remnants of the Kamaoa Wind Farm. Kamaoa’s fate is important to us because, with European wind developers losing the EU's huge wind subsidies, closing factories there, and laying off thousands of workers, they are looking for new governments to fund their claims of “free energy forever.”
But there is no such thing as a free lunch, energy or otherwise. There is no such thing as free, efficient, energy; only energy at a price people are willing to pay for. I believe we will only pay if it is dependable and priced to compete with other sources -- after all production costs, repairs, and preventive maintenance is performed, and ex- all subsidies that spread the cost over other taxpayers, whether they have access to the energy or not. (By the way, I am adamant that any and all subsidies be done away with so we can assess the true cost and the true value of fossil and renewable resources for energy production -- that means no subsidies for oil, gas or coal, either.)
Kamaoa suffered from one of the above Achilles’ heels – a dearth of maintenance. Nine years after it was built, the original owners sold it to Apollo Energy. By cannibalizing parts from some turbines it shut down, Apollo kept Kamaoa limping along with old equipment. Since the project could not stand on its own economic two feet, there was no money to buy newer versions (wind turbine companies always have a newer version that will solve all the problems of the ones they told you would solve all the problems of preceding ones.) Now if you’ve ever been down to the southernmost point in the 50 United States, you know that the wind blows so steadily there that the trees grow sideways. Still, maintenance is an issue that must be addressed. By 2004, the on-going maintenance was so expensive that Kamaoa was abandoned. In 2006, transmission was cut off by Hawaii Electric and the turbines left to rust. Kamaoa is but one of six such sites that I know about in Hawaii.
But, as often happens, no other state can touch California for gullibility and bureaucratic bungling. (“We’re number one! We’re number one!”) I live near the California-Nevada border, in Nevada, at Lake Tahoe. I recently had some business in San Francisco and decided to drive directly from there to see my family in Lancaster, then proceed on for a little vacation time in Palm Springs. Doing so allowed me to pass by three of the – if you believe the ballyhoo of the wind vendors at the time – Wonders of the Alternative Energy World.
Leaving San Francisco, the fastest way to make this trip is to take Interstate 580 out through the Altamont Pass, one of the “Big Three” wind farms in California which, between them, have 14,000 separate wind turbines. On the turnoff to Lancaster from Interstate 5, I passed through the town of Tehachapi, where my family once lived and where the wind is so steady I learned to soar (as a glider pilot) there. Yet another giant farm in one of the steadiest windiest places in America. Finally, after heading on to Palm Springs, I went through the extensive San Gorgonio wind farm, where the wild desert wind is tunneled between the San Bernardino and the San Jacinto Mountains.
Having seen every one of the Big Three, why am I not writing rapturously about the joys of cheap, steady wind power? Because – every single one of these wind projects was shut down. That’s right; 14,000 turbines at a cost to California taxpayers of many billions of dollars are now shuttered! In some of the most steady wind spots on earth, over 14,000 turbines have been abandoned. They function now only as bird-kill zones.
Palm Springs has passed an ordinance requiring removal of the San Gorgonio turbines. Altamont’s may function during the eight months that migrating birds aren’t migrating. ( A 2008 study by the Alameda County Community Development Agency noted some 10,000 annual bird deaths from Altamont Pass wind turbines.) But Tehachapi remains, a monument to decisions made on the claims of vendors, not good science, good technology, or common sense.
Tehachapi's dead turbines
(image via webecoist, sky#walker; Center for Land Use Interpretation; Terminal Tower)
Today all three of the biggest wind farms in California lie fallow (at least part of the year in the case of Altamont Pass), dangerous skeletons because the wind didn't blow consistently, the migratory bird kill was unacceptable, they leaked oil or they were just too expensive to maintain to stand on their own.
Even those who most ardently argue that wind (with enough subsidies) can replace the current grid must accept the fact that the intermittent nature of wind energy actually destabilizes existing power grids by forcing extra expense for engineers to stand by and adds expense in order to keep another, more dependable, fossil fuel constantly burning at a lower rate in order to quickly add supply every time the wind drops off or consumer demand rises.
Don’t read into my words that I am anti-alternative energies. I would love to see wind power replace fossil fuels. I’d love to see some magical fairy dust taken out of the air we breathe to power our energy needs, too, but I see both fantasies as bearing equal weight. I started Part I admitting to being a realist. If you are, as well, I predict you will be far more successful in the market, no matter how fervently you “want” to believe that fair dust exists.
We need to warm ourselves in the winter and we want to cool ourselves in the summer. There’s a reason why Canada uses more energy per capita than the US. It isn’t because they are fossil fuel gluttons who don’t care about the environment – it’s because its colder there for more of the year. On balance, as an investor, I can find no reasoned argument to demonize the batteries that fossil fuels represent when we do not – yet—have any other steady, dependable, and still abundant alternative.
For that reason, rather than buy some stock in a wind company selling at hope x good intentions x subsidy2 I will buy the fossil fuels that, instead, sell for tangible results x private capital at risk x earnings today and tomorrow.
This means I will buy, at the right price, the quality bigs like Exxon (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), Statoil (NYSE:STO), Conoco Phillips (NYSE:COP), and others. I’ll buy, again at the right price, the next layer of quality firms like EnCana (NYSE:ECA), Imperial Oil (NYSEMKT:IMO) and Marathon (NYSE:MRO), as well as the best drillers, especially deep-water drillers like Diamond Offshore (NYSE:DO) and MLPs – lots of MLPs -- that store and distribute natural gas from one place to another. It also means coal; the bargains I see there are in outfits Cloud Peak (NYSE:CLD) and, even better for my clients and me, superb acreage-holders who lease to coal operators like Natural Resource Partners (NYSE:NRP) and Penn Virginia Resources (PVR.)
For those who despise coal, you are probably doing so from a house air-conditioned by coal right now and may continue to despise it as it warms you this winter or at least controls your electric thermostat. The inconvenient truth is that nearly half of America’s electricity is generated from coal. Natural gas and nuclear energy add about 20 percent each. That’s nearly 90%. Most of the rest is provided by hydroelectric energy at 6 percent. Non-hydro renewables like wind, solar energy and biomass all together total only 3 percent! For those adamantly in favor of “punishing” coal, oil and gas companies for selling you something you specifically asked them to produce, are you so in thrall to your dreams of pixie dust that you are willing to survive on just 3% of the energy you now use every year?
The Heritage Foundation's Center for Data Analysis has found that the “renewable electricity” standards currently wandering through the Congressional offices of states with lots of sun or wind would raise electricity prices by 36% for households and 60% for industry (making your investments in utilities a much more dicey investment); reduce GDP by $5.2 trillion between 2012 and 2035; and add more than 1,000,000 people to the unemployed rolls. If they are only half right, it’s still too much by half.
I promised I would try to find an investment for those who are True Believers that, despite all the evidence, wind can somehow replace a huge amount of fossil fuel usage. In good conscience, the only beneficiaries I can even imagine are the companies that build electrical transmission lines. Since urban areas are unlikely to suddenly see wind turbines sprout outside the office buildings (although the canyons of Wall Street are particularly windy!) there will always be a Not In My Back Yard element to wind power. So someone will have to bring the power created by the turbines beneath all those spinning blades to market. Since I consider this a remote investment possibility (at least based on the “wind”fall of wind power,) I leave it to you to research the most attractive companies here within this identified sector. My own portfolio is already quite full with the companies and sectors I can truly believe in.
Author's Disclosure: We and those clients for whom it is appropriate own Exxon (XOM), Royal Dutch Shell (NYSE:RDS.B), Statoil (STO), Diamond Offshore (DO), a number of MLPs, and Natural Resource Partners (NRP) and Penn Virginia Resources (PVR.) On what I expect will be a pretty good pullback, I’ll be a buyer of the other companies mentioned above.
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