Net Zero's New Threat // VW: Energy Crisis Makes Battery Factories "Unviable" // ERCOT: Texas Vulnerable to Blackouts

Net Zero's New Threat

Net zero emissions goals face a new challenge: government spending cuts.

"Political pressure to cut spending is rising. The UK is planning tax hikes and budget cuts to stabilize its public finances," reports Bloomberg. "In the US, a narrow Republican majority in the House of Representatives portends a showdown over spending. Even Brazil, which just elected the relatively climate-friendly Lula, is keen to signal fiscal rectitude."

Notoriously subsidy dependent, wind and solar might appear like a safe part of the budget to cut, as they demand high upfront costs from governments to get going. 

“With some developed markets struggling to balance their government budgets, fiscal woes could add to tighter monetary policy as funding costs rise, slowing down much required green investments,” strategists at Bank of America Securities led by Francisco Blanch wrote.

Supply chain snags, tariffs against slave-labor built panels from China, skyrocketing input material prices, and various other delays have already beset the wind and solar industries. If government subsidies go, too, they'll be in dire straits. 

VW: Energy Crisis Makes Battery Factories "Unviable"

Unless Europe can get a handle on its energy crisis, further investment in industrial facilities like battery factories will be a non-starter according to a Volkswagen exec.

“Unless we manage to reduce energy prices in Germany and Europe quickly and reliably, investments in energy-intensive production or new battery cell factories in Germany and the EU will be practically unviable,” VW Brand Chief Executive Officer Thomas Schaefer wrote. “The value creation in this area will take place elsewhere.”

The question of prices isn't so much about prices themselves, but about supply. Demand for hydrocarbons is generally inelastic--you can sometimes switch between natural gas and coal for industrial production, but not away from fossil fuels themselves--and supplies are tight overall. Price controls might lower prices, but that demand will eat through those thin supplies and thus leave Europe and Germany in a worse place later on.

Unfortunately for Europe, which has a ban on fracking, there's no clear way out. It has exchanged its dependence on Russian pipeline gas for American LNG. But America's oil and gas sector is struggling to increase production after losing billions over the last decade. Not to mention, the governing party continues to threaten to "end" the fossil fuel industry. Thus, no one wants to invest in further expansion. Moreover, OPEC+ has neither the appetite nor the ability to scale up its production. 

This painful position has fueled European resentment against its new energy guarantor, America, because Biden's Inflation Reduction Act has created incentives for European manufacturing to shift stateside. America's reliably cheaper energy costs only sweeten the deal.

ERCOT: Texas Vulnerable to Blackouts

The Texas grid remains vulnerable to blackouts in extreme weather conditions since Ice Storm Uri froze the state's gas pipelines and stilled its wind fleet.

"[The Electricity Reliability Council of Texas’s] Seasonal Assessment of Resource Adequacy, or SARA, shows forecasted peak demand of 67,398 MW this winter with about 87,300 MW of resources available. But in extreme situations with higher demand, unexpected generator outages and low wind output, the grid could be short by 9,000 MW or more," reports Utility Dive.

However, regulators and the Electricity Reliability Council of Texas say that the grid is stable going into this winter. But there are still larger problems fragilizing the grid. 

“Year to year we are developing more generation resources. The majority of those resources being added to the ERCOT grid tend to be renewable resources, like solar and wind,” Pablo Vegas said, president and CEO of ERCOT. He went on to explain that most of the Lone Star state's capacity additions have been wind and solar, which are intermittent, undispatchable, and do not perform well in the winter. Thermal generator additions, Vegas continued, have remained flat as the state's population has climbed.  

"Texas is adding a city the size of Corpus Christi every single year in population, and the associated economic growth that comes with that is driving increased usage on the grid," said Vegas.

While batteries have been added to the state's resource assessment for the first time and some work has been done to improve critical infrastructure like gas pipelines, it seems likely that another Uri-style event could still do serious damage.

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Conversation Starters

1. Germany's largest state, which is home to 20 of country's 50 largest companies, has declared an emergency situation. "North Rhine-Westphalia, the biggest state in Germany in terms of economy and population, has declared an emergency situation amid the energy crisis in order to be allowed to take on more debt," reports Oilprice.com. "NRW has decided to borrow another $5.2 billion (5 billion euros) to cope with the energy crisis after declaring the emergency situation that allows the state to take on more loans. The state’s government is redrafting the 2023 budget and has planned to allocate $3.6 billion (3.5 billion euros) to energy relief measures from loans previously taken for Covid relief that haven’t been used."

2. Biden wants to build 16 offshore wind farms. "To meet the administration’s larger decarbonization goals, the White House wants to help raise 30 gigawatts of offshore wind power by 2030 — a pledge that will require pushing 16 individual wind farms through the regulatory gauntlet by the end of Biden’s first term," reports E&E News. "So far, the Bureau of Ocean Energy Management has only approved two of those farms."

3. Last summer, more ethanol was blended into American gasoline than ever before. "Last summer, when the price of fuel ethanol was lower than the petroleum component of gasoline, record amounts of ethanol were blended into the gasoline sold in the United States (blend rates). The summer 2022 fuel ethanol blend rate from June through August reached 10.5%, the highest blend rate calculated, based on our data going back to 2007," reports the Energy Information Administration. "Most of the gasoline now sold in the United States contains some ethanol. Ethanol blending in the United States helps meet the requirements for reformulated gasoline (RFG) in the 1990 Clean Air Act and the Renewable Fuel Standard set forth in the Energy Independence and Security Act of 2007."

Crom's Blessing