Capital Letter: Green Energy’s Inconvenient Moment

The week of September 20: ESG, energy, Carter vs. Biden and much, much more.

Significant portions of the last two weeks’ Capital Letters have been focused on the growing energy crunch in Europe — a crunch that has revolved primarily around natural gas, but which has also highlighted the unreliability of wind energy. This crunch, which is rapidly turning into a crisis, is not just about (far from it, in fact) irresponsible and ill-thought-out climate policies, but it is hard to overlook their baleful effect. There’s a lesson there for the U.S., should we choose to pay attention.

Inside Sources:

“Europe’s experience is the product of foolish energy policy,” says Gordon Tomb, senior fellow for Pennsylvania-based Commonwealth Foundation. “Germany, for example, moved away from fossil fuels and nuclear in favor of wind and solar and its electricity now costs twice that of France’s nuclear-generated power.

“Reliability and affordability of the electric system has to be paramount, even as we look at how we’re making this energy transition, which our members are fully engaged in,” Todd Snitchler of Electric Power Supply Association (EPSA) told InsideSources. “Europe is not identical to the United States but it’s constructive that consumers are sensitive to price increases, especially at a time when there is peak demand.”

Labor Day and the unofficial start of fall may be behind us, but the warm weather is not going anywhere for many parts of the United States.

“We’re not out of the woods when we look at high temps and that’s an area that gets the public’s attention,” says Snitchler. “So, when you have a situation where reliability could be jeopardized and consumers are paying higher prices than they would otherwise have to pay, it can lead to a situation that is not helpful in trying to address the broader concerns about emissions reductions, reliability, and affordability.”

President Joe Biden and progressive Democrats have committed to reducing the use of fossil fuels in order to cut carbon emissions. They see alternative sources like wind and solar as solutions, but critics argue that so-called green technologies are more expensive and less reliable, leaving consumers paying more for electricity that may not be there when needed.

Consumers can expect “expensive, unreliable energy sources” to follow the “replacement of economical, readily available coal-and-gas-fired generating plants with solar panels and wind turbines,” says Tomb. “The outcomes of these policies — job losses and damaged lives — is all too predictable.”

I had hoped that, after its recent — how to put this — mishaps, California’s government might have understood the importance of reliability.

After all (via Fox26, from August):

California officials say five temporary gas-fueled generators will be set up around existing power plants throughout the state to avoid blackouts and boost the state’s grid.

This is a move in the opposite direction from California’s big push toward “green” renewable energy.

“We cannot keep the lights on without additional natural gas and the state’s been forced to go out and find it in an emergency situation,” said Assemblymember Jim Patterson.

But then, from Thursday, September 23:

FRESNO, Calif. (FOX26) — A bill is now on Governor Gavin Newsom’s desk that could disproportionately impact families in the Central Valley and nearby foothill and mountain communities.

Assembly Bill 1346 would end the production of gas-powered small, off-road engines–used in lawn and garden equipment and generators—by January 1, 2024.

To ruin the reliability of a grid and then remove one of the workarounds available to help people deal with it would be quite something.

And do I think that the Biden administration will learn any lessons from the fiasco in Europe?

QTWAIN, as the young people say.

And how are things going in Europe?

Not well. The worsening situation I described last week has gotten worse. The epicenter of the crisis continues to be the U.K., where more than a decade of quite remarkable insouciance (which appears to continue) about maintaining secure energy supplies has combined with governing-class climate fundamentalism to make the country particularly vulnerable to the current spike in (natural) gas prices.

Here’s just one story (there are plenty to choose from), via, in this case, the Daily Telegraph:

One of the North Sea’s largest oil producers is urging ministers to relax legislation so it can pump lower-quality gas into the British grid to ease the supply crunch.

Sam Laidlaw, executive chairman of Neptune Energy, has written to Kwasi Kwarteng, the Business Secretary, to make the case for allowing gas of a lower calorific value into the UK network.

Mr Laidlaw’s bid to ease the shortage gripping Britain came as industry chiefs warned that surging power costs are making their businesses unviable. Steel makers said they could be forced to shut down production following a 50-fold rise in their bills . . .

It is, perhaps, unkind to note that in November, the U.K. will be hosting COP-26, the next big climate jamboree, a fact about which any British prime minister capable of feeling shame ought, under any circumstances, to be mortified — and these are not any circumstances. Unfortunately, the U.K.’s prime minister, Boris Johnson, who has embraced climate fundamentalism with an intensity all too typical of converts to a new faith, is as shameless as he is incompetent. He is now busy shambling around proclaiming the importance of this miserable event, which will do little or nothing to help the climate, but a great deal to trash the economy, and will further empower Xi, Putin, and OPEC.

Some wicked types appear to be hoping that this historic meeting/last chance to save humanity will be marred by a power cut. Well . . .

I was going to write yet more about this, but a rather pressing deadline to write an article for NR about the departure of Angela Merkel has intruded. This task is complicated by the fact that the last time I wrote about her for the magazine (in 2018), I compared her to the late Leonid Brezhnev, not least because she has presided over what will come to be seen as a long period of stagnation. What to say now, only three years later? That things have stagnated some more? World’s smallest violin and all that, but this won’t be easy to write . . .

But before moving on to the Capital Matters week, let’s see what’s happening in the world of ESG. As you may recall, ESG, measuring companies against various environmental, social, and governance benchmarks, is an aggressive variant of “socially responsible” investment. ESG has recently been attracting large inflows of money — and generating something of a bonanza for numerous consultants as well, of course, for those who sell funds labeled (or hastily relabeled) as ESG-compatible.

Aswath Damodaran is professor of finance at New York University Stern School of Business. He recently tweeted a must-read thread about ESG. He has had his doubts for a while, it seems:

Last year, I argued that ESG was the most overhyped, and oversold concept in business (https://bit.ly/3lnozXw), and heard from people who felt I was missing its good points. After a year of searching, I still cannot find them.

Reading Damodaran’s meticulous analysis of ESG from last year, this comes as no surprise. After all, not far into his article, we can read this:

In the interests of openness, I took issue with the Conference Board [the US Business Roundtable (BRT)] last year on stakeholder interests, and I start from a position of skepticism, when presented with “new” ways of business thinking. If the debate about ESG had been about facts, data and common sense, and ESG had won, I would gladly incorporate that thinking into my views on corporate finance, investing and valuation. But that has not been the case, at least so far, simply because ESG has been posited by its advocates as good, and any dissent from the party line on ESG (that it is good for companies, investors and society) is viewed as a sign of moral deficiency. At the risk of being labeled a troglodyte (I kind of like that label), I will argue that many fundamental questions about ESG have remained unanswered or have been answered sloppily, and that it is in its proponents’ best interests to stop overplaying the morality card, and to have an honest discussion about whether ESG is a net good for companies, investors and society.

Spoiler: It’s not, at least in my view (I’ve written about the BRT’s absurd rather sinister embrace of stakeholder capitalism myself on just a few occasions). Sinister? Yes. Stakeholder capitalism, which is increasingly intertwined with ESG, is an expression of corporatism, an ideology that can be relatively benign (such as in post-war West Germany), but which also, rather less benignly, provided some of the intellectual underpinning for fascism. I wouldn’t, of course, claim that the BRT is intent on installing fascism in this country, but it is not unreasonable to argue that stakeholder capitalism (the notion that a company should be run for a series of “stakeholders” rather than, primarily, its shareholders) will lead, at the very least, to the dilution of our democracy.

In his note from last year, Professor Damodaran doesn’t focus on that angle, but he highlights some of the various inconsistencies in the case being made for ESG. These include the lack of agreement over what the required standards should be:

what I find to be good or bad in a company will reflect my personal values and morality scales, and the choices I make will be different from your…