Hi folks, quite a bit this month – two pieces on the energy front and then a fun auction podcast.
A quick summary:
⚡️ Energy Solutions
☀️ Is Bitcoin good for renewables?
🔨 A fun crypto auction
🥇Investment of the decade?
🇫🇷 Is Macron in Trouble?
🇷🇺 What countries are with Russia?
⚡️ Energy Solutions
Energy security and carbon emissions are time-critical matters. The core solutions being proposed are:
Renewables.
Nuclear.
The intermittency of renewables is widely under-appreciated as a problem. Renewables cannot work as a pure solution without having affordable long-term energy storage, which we don’t have today. Going into renewables blindly without an energy storage plan will keep countries reliant on natural gas.
My view is that nuclear power receives insufficient support relative to renewables (“All-in on Renewables: A Mistake for Humanity”). Countries that promote nuclear (France, Finland) will prosper relative to those that attempt to go down a renewables route without having a plan for long term storage and blunder into continued reliance on natural gas.
I forwarded my article above to quite a few friends and authors of independent newsletters that I follow. The three types of response I got were:
Relying on solar/wind is an expensive/risky strategy and we should pay more attention to nuclear.
Solar/wind and batteries are getting cheaper quickly while nuclear is getting more expensive. However, we still need to figure out long term storage.
The point on nuclear getting expensive is true. I attribute that to an incorrect assessment of the risks of nuclear power arising from the cases of Chernobyl and Fukushima.
Still, I’m still open to solar/wind + storage and got some good reading from friends allowing me to do some modelling of the costs of high-uptime/reliability power grids. You can play around with the model here. I’ll now summarise my findings.
A natural gas framework:
In the US today, gas is about $6 per MMBTU. In Europe, it’s about $31 per MMBTU. This is why there are projects to build liquid natural gas terminals now in Europe to import by ship rather than pipeline.
At this higher gas price in Europe, corresponding electrical prices are north of about $300/MWh (30c/kWh) when including non-gas operating and capital costs. This is why electricity prices are going up for consumers in Europe.
For reference, the nuclear plant being built in the UK at Hinkley Point C (which is criticised for being far too expensive) is projected to offer power for about $130/MWh (13c/kWh).
What about solar + batteries?
Solar power is at a disadvantage in Ireland because the panels only operate at an average of about 10% of their rated power capacity. There’s also a big seasonal variation in sunshine because we’re pretty far north, so you need to size a solar array for the wintertime.
At or towards the equator, e.g. Texas, things are a lot better and solar can have about 30% capacity factor (which is the power out compared to if the sun was shining 24 hours per day). Also, there is less seasonal variation in sunshine so you don’t need to overbuild solar panels to the same degree as in Ireland.
Very crudely, I think solar power costs can get down towards $0.05/kWh today, maybe a bit lower. If you’re close to the equator, you can also mostly rely on short term battery storage to give fairly consistent power. There’s a solar + battery project being built by Blockstream (a Bitcoin mining company) and Tesla that aims to do this. More on that in the next section of this newsletter, but the long story short is that battery storage adds (optimistically) about $0.12/kWh to the cost of power.
I’ve modelled out that solar+battery system (here), and I estimate costs of $0.15/kWh and about 70%+ uptime. My estimates are optimistic because I’m not allowing for cloud cover or for seasonal variations. However, it seems this solar + battery could provide a fairly reliable source of power (that would still need to be complemented with gas or long term storage) for a cost of around $0.2-0.25/kWh. That said, this is still quite a bit more expensive than nuclear (especially when you allow that solar+battery still has some down-time).
What about hydrogen?
I called up a company making hydrogen electrolysers and they said they were very busy (a good sign!), but I did get some rough pricing for a 1 MW electrolyser of about $1.7M. The idea of hydrogen storage is to turn water into hydrogen (using electrolysis), store it, and then burn that hydrogen in a gas turbine (the costs of which are well understood because they are like natural gas turbines) to generate power when required.
I put together an estimate of a hydrogen production and burning system (second tab of this spreadsheet) and found a cost of power above $700/MWh (70c/kWh). If electrolyzer costs go down like Lazard (a research agency) expects, then maybe we can get to about $400-$500/MWh (40-50c/kWh). This (future projected cost) is:
Pretty high compared to power costs from natural gas in Europe today (30c/kWh), but better for energy security and carbon emissions.
Pretty high compared to nuclear (13c/kWh).
A summary graph
You’ll see in the spreadsheet that I put all of the options for a high-uptime grid together (I’m cheating a bit with solar+battery because that wouldn’t provide full uptime):
Basically:
The cheapest high-uptime option today is power made with US natural gas. (Yes, wind or solar on their own are cheaper and not shown, but without storage they don’t provide high-uptime).
Electricity powered by gas is a lot higher in Europe than in the US.
The costs of nuclear are between the costs of natural gas power in US and in Europe.
Solar+battery looks ok in an equatorial or near-equatorial location, but still is more expensive than nuclear (and solar+battery still has some downtime for cloud and seasonal reasons).
Solar/wind + Hydrogen looks a lot more expensive than the other options for a high-uptime grid. Of course hydrogen can be useful as a fuel for transport, but that’s not what I’m analysing here (which is getting a secure power grid).
I’m keen to continue this investigation. I’d like to see some of these options (like wind+hydrogen) being built out at scale with costs made transparent – just like what the Bitcoin project is doing for solar+battery. I would consider trying to do it myself, but I think the business case for hydrogen looks bad for grid storage. Maybe building out a wind+battery project in Ireland is a better option? Wind+battery is harder than solar+battery though because you need to store energy for longer (which strongly hurts battery economics – see tab 3). Or, maybe we should build a nuclear plant in Ireland (obviously tricky because such a large investment and public concerns)?
What do you think? Let me know.
☀️ Is Bitcoin good for renewables?
When people say Bitcoin wastes tons of energy, a common Bitcoiner response is that Bitcoin enables renewables because one can mine Bitcoin when there is cheap power.
I’m pretty skeptical of this and have written about this before on my crypto blog. The problem is that Bitcoin mining computers (ASICs) don’t like cycling on and off (thermal cycling). Further, if you only operate your computers when there is cheap power, they are sitting idle a lot of the time and not earning Bitcoin like computers that are running all of the time.
We’re going to find out who is right because Blockstream (a mining company), Block (the company that owns Square and Cash App) and Tesla are building a solar+battery Bitcoin mining facility in Texas!
Based on public information, I was able to model out their costs here. The long and short of it is that:
To be competitive as a Bitcoin miner, you need to be getting energy at less than $0.03/kWh. I know that because I spoke to three of the top Bitcoin mining companies a few months ago.
With solar+batteries, I project power costs for this project (which will be in Texas) at $0.15/kWh. Further, the payback period on the capital invested (in computers, wind plus batteries) is about 8 years, which is pretty long for such a high risk investment (one would be hoping for more like <3 years).
I think Bitcoin mining makes more sense with remote sources of hydro or geothermal power, because that power is consistent. It’s an uphill battle for solar/wind+batteries, but I am open to being wrong (as I am with nuclear power above).
P.S. Thanks to my friend Leo for reading and references for modelling. No doubt I can improve the modelling further still.
🔨 A fun crypto auction
Two weeks ago I got involved as a bidder in an auction for a token called Stargate.
[BTW, that hammer emoji 🔨 is meant to be an auction hammer, but they didn’t have the right hammer ☹]
There are lots of crypto blockchains out there, and Stargate is a bridge that allows you to easily transact between blockchains. It kind of unifies the ecosystem, which should be a good thing in principle. There are other companies and protocols trying to do this but Stargate got out of the blocks first.
The way to think about the auction is a little bit like how the stock of a company goes for an IPO (initial public offering). Anyway, I recorded it and it’s about an hour long. On Spotify. You can also find it by searching my name on Apple Podcasts or Stitcher. And sorry in advance my voice gets bad towards the end because I got COVID.
🥇Investment of the decade?
Peter Thiel (Paypal founder, Facebook investor etc.) made a somewhat unhinged speech at Bitcoin Miami this past week. In short, he thinks Bitcoin is the new gold. And, just as gold was as big as equities in the 70s, he thinks Bitcoin could be that big today.
[For reference, Bitcoin is worth less than $1 Trillion today. Stock markets are worth more like $40 Trillion.]
I’m prepared for the Bitcoin I own to go to zero. At the same time, I think there’s a meaningful chance it will be my best performing investment over the next ten years.
Interestingly, Thiel trashed Warren Buffett in the speech for myopically supporting the current banking/currency system. Buffett and his partner, Charlie Munger, have previously called Bitcoin “rat poison squared”.
I think Buffett and Thiel are both smart. I own quite a bit of Berkshire (Buffett’s company) and Bitcoin, so I’m hedged 😂.
Interest rates are incredibly low and have been trending lower for decades. My low-to-moderate-confidence view is that low interest rates are underpinning high stock and real estate prices, so I think stocks and real estate (and cash, because inflation is bad) may do badly over the next decade or two. What else is there to buy? Commodities, gold, Bitcoin? Capital is going to have to flow somewhere.
Buffett won’t be around forever, and I think more advanced technology companies will overtake Berkshire, so I’ll have to move out of Berkshire over time. That’s for another day…
Overall, what’s happening is unpredictable, which is why I own a mix of Berkshire, Store Capital (real estate), cash and crypto, plus a small amount of gold. I’m not sure that’s a great strategy but it’s hopefully not terrible!
What I’m more sure of is that the trend towards low interest rates (real and nominal) is bad because it means either (or both):
The US and European economies have become unproductive (i.e. low interest rates) relative to the mid 1900s.
We are at the end of a big cycle of monetary policy where the US dollar is losing international power and low interest rates are required to temporarily sustain unsustainable long term debt. (This is the Ray Dalio narrative).
🇫🇷 Is Macron in Trouble?
Not according to the betting markets. Macron is about 1/4 or 1/5, meaning about a 75-80% chance of winning:
🇷🇺 What countries are with Russia?
Chart showing the recent UN vote to suspend Russia from the Human Rights council. Hat tip to my brother for sharing 🎩:
That’s it for this month. Please forward on to a friend if you enjoyed reading. Cheers, Ronan