Thoughts on the Christmas Blackouts // Inflation Hammers American Mining // Biden's Offshore Wind Woes

Thoughts on the Christmas Blackouts

When I signed off for the holidays, I'd hoped America would avoid blackouts as an Arctic Blast howled southward from Canada. I particularly was worried about how Texas and the Upper Midwest would hold out. I had nagging suspicions about the Southeast, as we'd recently covered that the North American Electricity Reliability Corp.'s recent long-term reliability report oversold the region's stability.

The Southeast crapped out--even the Tennessee Valley Authority, which saw rolling blackouts for the first time in its 90-year history. Duke Energy's blackouts are now being investigated by FERC and NERC. I don't want to take guesses about what went wrong, so I'll leave reporting on that until the investigation's results debut. Meanwhile, in New England, oil spared the grid blackouts during the storm.

For now, I want to talk about natural gas. Since the turn of the century, America has phased out coal in place of just-in-time natural gas. Natural gas weds itself better to the spot market, as combined-cycle turbines can ramp up and down with the whims of demand. This has also made CCGTs ideal partners for wind and solar. Environmentalists and gas industry dons like Enron's Ken Lay and Chesapeake's Aubrey McClendon had a chummy time together because of this. That changed after 2012 for a variety of reasons.

Natural gas revealed its Janus face over the holidays: part Jesus, part Judas. In places like Texas, it saved the grid. Wind and solar output were often dismal, as to be expected in a crisis. Unlike Uri the year prior, the pipelines and turbines held.

But there were also natural gas production problems.

And there were pipeline problems, which elucidate some of the Southeastern tribulations. "Supplies from Appalachia to the Tennessee Valley and the Midwest more than halved from typical levels," reports Bloomberg. "Issues were exacerbated by mechanical problems at pipeline infrastructure, including at a compressor station in Ohio operated by Enbridge Inc.’s Texas Eastern Transmission Co., which invoked force majeure on some gas supplies. The Tennessee Valley Authority, a federally owned power provider to several southern states, and Duke Energy were forced to order rolling blackouts to conserve energy."

Natural gas makes up nearly 40% of American electricity generation capacity. Its fuel is not stored on site and its pipelines are vulnerable. These facts should not commit this fantastic technology to the dustbin of history, but rather inspire greater sobriety about how America moves forward in its energy policy. The Inflation Reduction Act is about to clog interconnection queues nationwide with intermittent resources--wind and solar. We struggle to find the path toward regulatory sanity with nuclear. Coal has entered the King Lear phase of its rule.

Do we expect events such as this holiday storm to become more or less frequent given these facts? "This is the the third winter in a row that freeze-offs caused natural gas production to drop at least 8 billion cubic feet a day, underscoring the increased frequency of output-disrupting storms," Bloomberg reports. Capacity shortfalls, according to NERC, will be general all over America in the next ten years.

In the medieval era, markets lived on the same ground as carnivals. The thrill of the market's tapestry of chance, surprise, and opportunity has been woven into commerce from the start. There is much to celebrate in this. But it is not an unalloyed good, as without moderation the carnival dissolves into a hazardous fantasia. When it comes to electricity, the Lord of Misrule has upended the old hierarchies: out went reliability, in came immediacy. Out went baseload, and in came a smorgasbord of fancies anchored in desires for a reality more mutable than the physical world can admit. But the carnival has ended. It is the morning after. The Lord of Misrule's crown appears a limp jester's cap in the daylight. Now is the time for reason.

Inflation Hammers American Mining

Building or operating a mine has never been more expensive than today.

"In late November, Michael Sinden, vice-president of data with The Northern Miner Group, presented inflation data at the Canadian Mining Symposium in London, showing that mining operational and capital expenditures are reaching 20-year highs," reports Northern Miner.

Of course, every industry is facing inflationary headwinds. “There’s no question mine costs are increasing and will continue to do so, but the ability to pinpoint where inflation is coming from and the ability to mitigate it is critical," Sinden said. He believes mining is getting hit from several angles, especially electricity and fuel costs. “Anything hydrocarbon related is inflating costs at a mine," he said.

"Mill and underground capital expenditures are a serious source of inflation as deeper mines and expensive milling equipment are driving up costs. Since 2015, costs have risen 7% on a compound annual growth rate (CAGR) basis or 60% compounded over this period," reports Northern Miner. "When it comes to labour, costs aren’t the problem, at least not yet, CostMine data shows. The hourly rate for labour at U.S.-based mines is only rising at a 2.8% to 3.5% compound CAGR and salaries are growing at a 2.9 to 3.9% CAGR."

Mining is vital to the so-called "energy transition," but mining is itself heavily carbon intensive. If fossil fuels and carbon emissions meet with government penalty, it will only tighten the finger trap around decarbonization, especially if decarbonization is pursued with resource-intensive wind and solar at the expense of all else.

Biden's Offshore Wind Woes

The Biden administration has had high hopes for offshore wind--powering 10 million homes with 30 gigawatt of power by the end of the decade. But now its aspirations are taking on water.

"Shell New Energies, EDP Renewables and Engie asked regulators for a delay in the planning of a proposed joint-venture offshore wind farm, the latest potential setback to President Joe Biden’s goal of powering millions of homes from Atlantic gusts," reports Bloomberg.

This is but another entrant in the parade of difficulties concerning offshore wind on the East Coast. "New England utility Avangrid Inc. asked regulators this month to cancel the power purchase agreements it made with utilities for a large wind farm it’s building. And New Jersey utility Public Service Enterprise Group Inc. said in October it’s deciding whether to pull out of its stake in another offshore wind farm in the Atlantic Ocean," Bloomberg continues. Plus, offshore wind is now encountering ecological challenges on the East Coast.

Things may fare little better on the West Coast, where infrastructure needs for offshore wind are likely to be met with similar challenges. A new study reports that large and expensive industrial infrastructure will be needed along the California coast. "The smaller facility in Morro Bay, for example, could cost anywhere from $11 million to $40 million," reports the Tribune. "The larger facilities off Diablo Canyon and Port San Luis, on the other hand, could cost anywhere from $1.3 billion to $6.2 billion each, according to the study."

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Conversation Starters

1. Last week, Russia imposed a ban on the sale of oil to countries seeking a price cap on Russian crude exports. "Russia on Tuesday banned the sale of its oil and petroleum products to countries that put a cap on their sales price, in a move that threatened more uncertainty ahead for global energy markets," reports the Wall Street Journal. "The Kremlin’s action is an attempt to undermine a plan by the U.S. and its allies to bar the shipping, financing or insuring of seaborne Russian crude unless it is sold for $60 a barrel or less—a sanction leveled in response to Russia’s invasion of neighboring Ukraine."

2. The Keystone Pipeline has returned to operation after a spill took it offline last month. "TC Energy shut down the pipeline, which is a vital conduit for Canadian oil to the United States, after a leak was reported in Nebraska, into a creek. It took several days to contain the leak and then the company proceeded with repairing the damaged piece of infrastructure," reports Oilprice.com. "The 2,687-mile Keystone Pipeline System plays a key role in connecting Alberta’s crude oil supplies to U.S. refining markets in Illinois, Oklahoma, and Texas, as well as connecting U.S. crude oil supplies from the Cushing, Oklahoma, hub to refining markets on the U.S. Gulf Coast through the Marketlink Pipeline System."

3. To date, there is no evidence that Russia blew up its own Nordstream Pipeline. "After explosions in late September severely damaged undersea pipelines built to carry natural gas from Russia to Europe, world leaders quickly blamed Moscow for a brazen and dangerous act of sabotage. With winter approaching, it appeared the Kremlin intended to strangle the flow of energy to millions across the continent, an act of 'blackmail,' some leaders said, designed to threaten countries into withdrawing their financial and military support for Ukraine," reports the Washington Post. "But now, after months of investigation, numerous officials privately say that Russia may not be to blame after all for the attack on the Nord Stream pipelines."

Crom's Blessing