SailingStone First Quarter 2024 Commentary

In their 1Q 2024 Commentary, SailingStone discusses the need to redefine Energy Transition objectives, create a quantitative framework to evaluate the solutions that meet them, and the critical role that natural gas will play in decarbonization.
“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.

Click here to continue reading the full commentary.