Over the past five years Tony Seba has been one of the most prescient analysts of the shift from conventional energy sources to alternative energy sources and from ICE vehicles to EVs. Five years ago when he published a book and a series of notes on why EV will replace ICE much faster than expected, some of us were sceptical. Five years on we have to concede that Seba understands the future of energy & transport much better than almost anyone else out there. In his latest publication for his think tank, Rethink, Seba & his co-founder James Arbib take aim at the conventional power generation industry. If you are investor in power plants, coal, oil and ports you should read Seba’s work.
Seba says that mainstream investors have underestimated the actual cost of electricity: “Since 2010, the LCOE figures published in mainstream analyses and used by policymakers, regulators, civic leaders, utilities, asset owners, and investors have significantly underestimated the actual cost of electricity generated by prospective coal, gas, nuclear, and hydro power plants…The LCOE methodologies used in virtually all mainstream analyses contain the same critical error: they assume a high and constant capacity factor (utilization rate) for the entire lifetime of any individual power plant. In doing so, they assume both existing and newly-built power plants will be able to produce and sell the same number of kilowatt-hours each year throughout their 20+ year operational life. Widely-cited sources that commit this error include the International Energy Agency (IEA), the United States Energy Information Administration (U.S. EIA), the World Bank, the International Renewable Energy Agency (IRENA), the Department for Business, Energy & Industrial Strategy of the UK government, the Australian Energy Regulator, the National Renewable Energy Laboratory (NREL and OpenEI), Lazard, Stanford University, the University of Texas at Austin, the MIT Energy Initiative, and the Natural Resources Defense Council (NRDC).”
So why are all these people wrong. Here is Seba’s view: “Capacity factor of conventional coal, gas, nuclear, and hydro power plants will not remain high or constant, but will instead decline dramatically over the next 10 to 15 years as they are outcompeted and disrupted by the combination of solar photovoltaics, onshore wind, and lithium-ion batteries (SWB). In fact, capacity factor in conventional energy has been dropping since at least 2010. For instance, the average capacity factor of coal in the United States has fallen from 67% in 2010 to just 40% in 2020 – first because of competition with cheap gas from fracking, and now because of SWB. In the United Kingdom, coal capacity factor has collapsed even faster, from 58% in 2013 to just 8% by 2019.
Mainstream LCOE analyses thus artificially understate the cost of electricity of prospective coal, gas, nuclear, and hydro power plants based on false assumptions about their potential to continue selling a fixed and high percentage of their electricity output in the decades ahead.”
So what are the implications of the faulty assumptions made by conventional investors in power plants? The answer says Seba is ‘overinvestment’ i.e. too much money has been invested in conventional power plants and this assets will now rapidly lose value and thus create a bad debt crisis: “Because LCOE figures and asset valuations are very sensitive to the capacity factor parameter, these false assumptions have made conventional energy assets appear to be much more attractive than they actually are. As a result, they have attracted far more investment (over $2.2 trillion in fossil and nuclear energy in the electric power sector worldwide since 2010) than they otherwise would have based on a realistic assessment of capacity factor and LCOE.
For instance, the United States Energy Information Administration (U.S. EIA) assumes that coal power Plants entering service both today and in 2035 will enjoy a capacity factor of 85% for their entire operational lifetime, despite the fact that the real figure is already less than half of that, and thus inaccurately report their LCOE as about 7.5 cents per kilowatt-hour. Our analysis indicates that even if such facilities could somehow retain a capacity factor of 10% after 2035, rather than collapsing altogether like they already have in the UK, the cost of their electricity would be more than 10 times higher than the U.S. EIA’s published estimate. Investment in an asset class above and beyond what the fundamental value can return, based on shared and widespread false assumptions, is the very definition of a financial bubble.”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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