“For every complex problem there is an answer that is clear, simple, and wrong.” – H.L. Mencken
In our last quarterly letter, we discussed the importance of relying upon first principles when trying to understand the Energy Transition and the potential implications for investors. Current expectations in some circles, however, seem to reflect individual and institutional preferences for a specific end rather than a careful consideration of the many complexities associated with the global transition to a lower carbon economy.
Working backwards to try to rationalize a desired outcome often requires the use of assumptions that defy first principles. When investors and stakeholders do not understand the absurdity of those assumptions, you end up with unreasonable expectations for both energy systems and costs.
A good example of this is Lazard’s Levelized Cost of Energy (LCOE) Analysis, which has been to renewable energy investors what half-cycle economics were to oil and gas investors during the shale revolution. By excluding the costs associated with “firming intermittency” in the past, some investors and policy makers were led to believe that adding wind and solar power to the grid would reduce electricity costs for consumers – making renewables a win/win for both consumers and the environment. However, as the chart below shows, when the cost of “firming intermittency” is included, renewables are more expensive than combined cycle gas turbine (CCGT) plants in many regions, especially when realistic assumptions regarding asset lives and utilization rates are used.
The above information does not constitute investment advice. Please note that these unaudited estimates have been prepared in accordance with our typical procedures for estimates and as such, final month-end prices may not have been received for all positions. Performance for all strategies is net of fees. Returns have been adjusted where applicable to reflect the highest level of fees available. The PEP Energy Equity Opportunities strategy performance is that of an investor invested in the USD share class of the one-year tranche. The performance calculation assumes that the investor’s account participated fully, on an applicable pro forma basis, in all investments, and was assessed a 1% management fee and 10% incentive fee. Additionally, the performance calculation assumes that all investors were given the same economic terms with respect to their investment. From Inception (May 1, 2022) the performance of the PEP TE&M Opportunities Fund is calculated pro forma to represent the highest fee level offered for the strategy. The performance calculation assumes that the investor’s account participated fully, on an applicable pro forma basis, in all investments, and was assessed a 1.5% management fee and 20% incentive fee subject to high water mark. Additionally, the performance calculation assumes that all investors were given the same economic terms with respect to their investment. Individual investors’ returns will vary from the strategy returns due to the timing of subscriptions and redemptions. Indexes are unmanaged and have no fees or expenses. An investment cannot be made directly in an index. The strategies represented consist of securities which may vary significantly from those in the indices listed in the Estimated Net Performance Benchmark chart, and performance calculation methods may not be entirely comparable. Accordingly, comparing results shown to those of the aforementioned indices may be of limited use. Please refer to fund documents for terms and appropriate risk disclosures. As a reminder, please note that the information provided is confidential and should not be forwarded or distributed by any recipient. If you would like to add someone to the distribution list or have any questions, please feel free to contact us at ClientServices@PickeringEnergyPartners.com.
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