Too Green To Fail
Government bailouts are like potato chips: You can't stop with just one. - Thomas Sowell
In late Summer 2008, six months after the U.S. Federal Reserve bankrolled JP Morgan Chase’s $30 billion buyout of the failing Bear Stearns, Treasury Secretary Hank Paulson chose not to save Lehman Brothers. After Lehman’s bankruptcy filing on September 15th and the ensuing stock market reactions, Paulson and policymakers quickly pivoted toward market stabilization via bailouts, injecting more than $700 billion into failing corporate giants. They saved AIG and funded Bank of America’s buyouts of Countrywide Financial and Merrill Lynch. By June of 2009, General Motors was effectively nationalized, with a bailout package that left the U.S. government and Canadian governments with majority ownership.
In the aftermath of the 2008 financial crisis, U.S. policymakers, the Treasury and the Fed codified a new paradigm: companies could actually be deemed too “systemically” important, or too big to fail, thus requiring “saving” with taxpayer funds and printed fiat money, despite having made outlandishly risky bets and run their businesses badly. This set the stage for virtually any enterprise to be saved in the future if it were “systemically” important enough. Until now, bailouts were mostly limited to the largest global investment banks and lenders, whose failures were deemed a threat to the entire global financial system.
Today, we stand at the precipice of western governments who bet the farm on “alternative energy” applying that paradigm to wind, solar and electric vehicle (EV) companies. Any attempts to bail out wind, solar and EV companies will be even more absurd than the 2008 financial crisis because the loss of any - or all - of the companies represents no threat to the world’s financial, power generation or any other systems, even if they all went bust at once.
Wind and solar energy bubbles are bursting across western nations despite trillions in taxpayer subsidies. Even the “electric” growth in EV sales is running out of juice.
The overdue reckoning with physics and economics conjures an eerily familiar question from the 2008 financial crisis, but in a new and different context: are western governments so invested in “alternative energy” they will declare State-preferred wind, solar, and EV enterprises “too green to fail”? And which companies are most likely to be the first test cases? The situation on the ground is changing rapidly, but we can draw some reasonable conclusions from recent events.
In our October posts Winds of Fortune and Sunburned we detailed the troubles facing the wind and solar industries, including the rapidly declining fortunes of two of the biggest wind energy players, Orsted and Siemens Energy. In the weeks since publication, the situation for both companies deteriorated rapidly.
As we reported, in late August Orsted CEO Mads Nippers announced $2.3 billion in impairments in the firm’s U.S. offshore wind business and commented a week later that Orsted was “upholding a real option to walk away” from the projects. Then, less than four weeks after we published Winds of Fortune, on October 31st, Orsted announced it was abandoning the Ocean Wind 1 and 2 projects off the New Jersey coast. The next day, the company warned of massive expected losses for fiscal 2023. It was an embarrassing blow to New Jersey governor Phil Murphy, whose state had passed a bill this summer enabling Orsted to keep upwards of $100 million in federal “clean energy” tax credits originally intended to be returned to electricity customers. Orsted had just posted a $100 million performance security with state regulators to lock in the federal tax credits on October 4th. The governor was outraged, noting the State “would be reviewing all legal rights” to recover financial guarantees made. Murphy stated:
“Today’s decision by Orsted to abandon its commitments to New Jersey is outrageous and calls into question the company’s credibility and competence. As recently as several weeks ago, the company made public statements regarding the viability and progress of the Ocean Wind 1 project.”
In September, the UK government received exactly zero bidders in an offshore wind power auction with a cap at €44/Megawatt hour (Mwh). In late October Tom Glover, CEO of UK and European power generation firm RWE said no new wind farms will be built off UK shores until the government budges on price. Glover’s target strike price of €55 - €75/Mwh is a 25-70% increase over last year’s. Wall Street Journal writer Giulia Petroni recently noted that “Orsted, BP and Equinor have collectively written off $4.8 billion against U.S. offshore wind projects in recent days.
Siemens Energy, under tremendous pressure since disclosing a high percentage of failures in its offshore turbines this summer, has even deeper issues, writing down ~$4.3 billion for warranty and defect costs in its just closed (October 31) fiscal year. Losses from its Siemens Gamesa Renewable Energy (wind) division are expected to be about 2.5 times the combined profits from the company’s other three divisions for the year. The company releases its annual earnings on Wednesday of this week.
In July, after the company disclosed its wind turbine failure issues, Standard & Poor’s downgraded Siemens Energy’s long-term credit rating to BBB-, one notch above junk status. In late October, the company announced it was in discussions with the German government for €15 billion in loan guarantees for project and warranty bonds necessary to support its €100 million+ wind turbine order book. Siemens AG, which spun out Siemens Energy and still owns 25%, signaled it was unwilling to sacrifice its balance sheet for loan guarantees to keep Siemens Energy afloat. The news sent the stock plummeting by 40%.
The story of how this German industrial juggernaut’s energy business was brought to its knees is a cautionary tale. When mega corporations follow green political winds, chase subsidies, and abandon the physics and economics discipline that built legendary industrial businesses, they risk becoming beggars and rent-seeking dependents of the State.
In the mid-1800s, Ernst Werner von Siemens’ company was one of the world’s leaders in telegraphs and electrical engineering. In 1895 the firm (then known as Siemens & Halske), built South Africa’s first electric power plant, using generators that were among the largest in the world at the time. In 1929, it completed the Ardnacrusha hydroelectric power plant, helping to electrify the Irish Free State.
In the early 1970’s Siemens built the Stade nuclear power plant, its first, in the German town of Bassenfleth. Over nearly a century, electric power, combustion turbine and nuclear engineering were core to Siemens’ growth, profitability and deserved reputation as outstanding engineers and innovators.
Siemens designs were used in all 17 of Germany’s nuclear power plants. But when the German government made the fateful decision to close all its nuclear power plants in the wake of the 2011 Fukushima accident, Siemens announced it would exit the nuclear business.
During a period of restructurings between 1997 and 2017, Siemens acquired Danish wind concern Bonus Energy (2004), opened its first wind turbine blade manufacturing facility in the U.S. (2007 in Iowa) and shed its remaining 35% stake (2009) in nuclear power provider Areva (which it had formed by combining its nuclear operations with French company Framatome in 2001).
In 2017, Siemens combined its wind energy business with Spanish wind turbine manufacturer Gamesa. In 2019, after more than a century as a global power generation industry leader, Siemens decided to exit the business. Its combustion and wind power businesses were spun out as Siemens Energy.
Ironically, a similar story played out with Danish wind energy company Orsted. The former Danish state oil company, Danske Olie og Naturgas A/S (Danish Oil and Natural Gas aka DONG), sold off the last of its oil and gas interests in 2017. As we noted last month in Winds of Fortune:
Announcing its successful transition to renewable energy was complete, DONG changed its name to Orsted, after Danish scientist Hans Christian Orsted (first to discover the connection between electricity and magnetism).
In under four years, Orsted rode the subsidy-fueled “alternative energy” Green Grift wave from a market capitalization of under $25 billion to almost $100 billion. After January 2021, the wheels started to come off.
Siemens Energy, Orsted and many other wind, solar and car companies hitched their futures to rich subsidies from western nations chasing “alternative energy transitions”. The fate of many (most?) may now rely on rescues like the one sought by Siemens Energy from the German government.
Too Green to Fail™ will not end with the national governments of countries like Germany and Denmark. Other western nations with “net zero by (fill in the blank)” commitments, their taxpayers and electricity ratepayers will all be dragged into, requested, or forced to participate.
In the case of the great “alternative energy transition”, bailouts may take some forms similar to the financial crisis of 2008 (e.g. loans, cash injections in return for preferred stock/warrants, etc.), but some of the new forms will be even more insidious. The fact that all this will occur after trillions of dollars in taxpayer subsidies were heaped on the wind and solar sectors this century is nothing short of absurd.
Because U.S., European, Canadian, and Australian climate and energy policies all rely heavily on wind and solar, we predict that citizens from across these nations will be asked in one form or another to contribute to prevent failures of companies outside their borders. Before you dismiss that as preposterous conspiracy theory, consider the recent comments noted above by RWE’s Tom Wagner, as well as Orsted’s recent actions.
In August, Orsted was one of a number of offshore wind project developers who petitioned the New York Public Service Commission (NYPSC) for an average ex post facto 48% increase in their existing contract prices. A concurrent petition from the Alliance for Clean Energy New York requested an average 71% increase in onshore wind prices and average 63% increase in solar prices. Fortunately, from our perspective, last month NYSPSC rejected the petitions.
Consider who would be paying for these increases in the form of higher electricity rates had they been granted. Residents and businesses in New York state would effectively be forced to bail out Orsted, Eversource, BP, Equinor and other foreign energy companies, project developers and wind turbine manufacturers. Citizens will eventually wake up to this. Sleights of hand categorizing the nature of the government support and market distortion necessary for the industry’s survival will not be able to obscure reality forever.
On Dr. Chris Keefer’s outstanding Decouple podcast recently, energy commentator Mark Nelson made a highly relevant comment about the price increases being requested of New Jersey, New York, and other coastal Northeastern and Mid-Atlantic states by wind developers (emphasis added):
“It looks like they were looking for $140, $150, $160, $170, $180/Mwh…. At that point, you’re getting up there with some of the most expensive and overbudget completed nuclear plant projects that we’ve ever seen. The cost for (Southern Company’s new plant) Vogtle is probably going to be about there with what these wind turbine projects were asking for from state governments and state legislatures.”
Except that Vogtle and new Gigawatt-scale nuclear power plants run consistently at 90% or more of capacity. Wind’s capacity at the best Tier 1 locations reaches ~40%, while solar capacity maxes out at ~35% in ideal locations. For the same billions spent, which would you rather rely on? A electricity generation source running at 90% or more of rated capacity over an annual period? Or one running - at best and in very few locations - at 35%-40% of its rated capacity?
Before you answer, consider two more key facts:
1) You’ll need to rebuild the wind and solar facilities in 20-25 years. The new nuclear plants will operate for 50-80 years.
2) MIT (and others) anticipate the future cost of Gw-scale nuclear to drop by ~70%. After rapidly falling costs over the last two decades, further reductions in the cost of wind and solar of 70% are unlikely.
The wreckage on the alternative energy racetrack is not limited to wind and solar. EVs have spun out and piled up in turn two.
Ford lost $3.1 billion on EVs in the first three quarters this year, and its loss of $32,000 per unit sold in the second quarter increased to $36,000 in the third quarter. Ford anticipates a $4.5 billion loss for the full-year in its EV division.
On its third quarter earnings call last month GM ditched its EV production goals noting flagging demand, only days after delaying production at a Michigan electric pickup truck factory. Days later Honda shelved plans to jointly develop EVs with GM.
Mercedes’ CFO commented last month:
“EVs are a pretty brutal space. I can hardly imagine the current status quo is fully sustainable for everybody.”
(We would have chosen “anybody” instead of “everybody”.)
Tesla may be the “healthiest” horse in the glue factory. Citing the state of the global economy on its third quarter earnings call last month, Elon Musk implied flagging demand for cars and announced the company was delaying plans for a vehicle factory in Mexico.
Perhaps no company provides a more glaring example of EV reality than the ironically named “Lucid”. The company lost $433,000 per unit in its third quarter (which was an improvement over the $544,000 per unit loss in the prior quarter!)
With virtually every EV manufacturer hemorrhaging money, can their begging for more government support be far behind?
We close by noting that circumstances on the ground are changing so fast they affected the title for this post. Originally posed as a rhetorical question, before we could finish it had been answered, requiring us to remove the question mark in the title.
Last Thursday (November 9th), Reuters announced in an exclusive that Siemens Energy, the German government, Siemens AG, and “other parties” had “agreed a deal in principal” to secure the “project-related guarantees” (read: bailout) to save its wind energy business. After settling our formerly rhetorical question, Reuters choice of words should cause readers to consider the implications of this precedent (emphasis added):
“Siemens Energy makes gas and wind turbines as well as large converter stations, vital energy equipment for the country's efforts to gradually phase out fossil fuels, prompting Berlin to seek backing for what it considers a systemically relevant company.”
Too Green to Fail? Asked and answered.
The West would be wise to cut the head off this green snake before it multiplies.
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Wonderful post. I actually worked at one of the firms mentioned in the introductory portion. Those rescues/ bailouts were executed based on the belief that financial contagion can spread like wildfire. Massive leverage combined with “get my money out” psychology is indeed a precarious situation. Investopedia indicates national debt was $10 trillion at the time.
Fifteen years later we’re staring at a $33 trillion hole and the most recent fiscal year just ended with a $1.7 trillion deficit. Outstanding debt which is now maturing, much of it at extremely low rates, is obviously being refinanced at approximately 5%. This problem is only getting worse. Is there a harsh tipping point? I don’t know.
But, of course, saving the world from the extinction of all species, including humans, is a scare tactic that works really well if repeated enough. I assume there will be calls for financial bailouts if things that you’ve just described keep going. Think of the absurdity of the following - A government that is essentially broke given my previous paragraph, is still willing to give a couple who has $300,000 in adjusted gross income a $7500 tax credit to buy an $80,000 Tesla (per the company’s website). Comically stupid.
Another one outta the park, folks! Thanks for shining the harsh light of reality on all of this green lunacy. I'm hoping that voters worldwide will start to wake up to these realities, and vote the clowns who brought this upon us to the curb.
My fear is, that this who AGW thing has reached the point of cult-status among the minds of the sheeple among us, and that there are enough of the Gaia-faithful out there to sabotage it all.
An animal is at its most dangerous when cornered, as so will be the green fanatics....