The Power of Power – Water, Energy & Infrastructure

For those of you who would prefer to listen:

The mercury level hit 101 in San Francisco this week. It was 104 degrees in London over the Summer. There is too much water in the south. Not enough out west. Rivers are running dry around the globe. We are living in the age of extremes. Planet Earth keeps sending messages. Challenges need solutions. There’s no time like the present to act. 

California experienced an all-time record demand for power this week, as the sweltering heatwave sent temperatures well over 110 degrees throughout the state. It stretched the electricity system to its limit. Air conditioners were maxed out. The California Independent System Operator, referred to as CAISO, oversees the electrical grid. CAISO issued a Stage 3 emergency power alert. Many of you received it on your phone Tuesday afternoon. Stage 3 is one step below ordering utilities to start rotating blackouts to ease the strain on the system. It worked. Demand fell as Californians shut off lights, limited use of heavy appliances and increased their thermostats above 78. That solution is merely temporary.

There was a high-pressure heat dome that sat over the southwest, well beyond the Golden State. It was there all week. The heat in Reno hit 106 degrees. It was its hottest September day ever recorded there, smashing the previous high of 96. Salt Lake City hit 105, breaking a September record going back a century and a half. Salt Lake City sits at 4,000 feet in elevation. September has seldom been this hot. 

Stretched grids aren’t relegated to American soil. The largest nuclear plant in Europe, which happens to be in Ukraine, was fully disconnected due to repeated fire from Russian forces. That’s not all. Plummeting water levels from drought and overuse are threatening many regions. It is weighing heavy on hydropower and nuclear power that needs water to cool their reactors. As challenged as things are in America, Europe is in much worse shape.

The global energy crisis has taken a turn for worse, and is now set to impact nearly every corner of the global economy. Supply remains scarce and expensive. This is triggering knock-on effects throughout the system, with pretty much every industry already dealing with soaring inflation. The outlook isn’t looking much better, as companies and consumers prepare for a coming recession with questionable energy sources to get them through the Winter.

Russia said its Nord Stream pipeline will remain shut beyond last week’s 3-day maintenance halt. This is the primary provider of natural gas to Europe. The Kremlin had originally said that the closure was due to a leak. Now it stated that supplies will be suspended until the “collective West” lifts sanctions. So, with Russian Oil supplies shrinking, you’d think OPEC (Organization of Petroleum Exporting Countries) would be willing to increase supply. Nope. The opposite. OPEC+ recommended a 100K barrel cut starting in October. They pointed to the growing risks of a global recession. The decision will have little effect on actual production, since the group’s output is already running well below target, but the psychological impact is clear. The small cut effectively reverses the 100K barrel increase that the organization said it would add to the market after President Biden’s visit to Saudi Arabia. Remember, Russia is a member of OPEC+. So, there’s that.

European energy ministers called an emergency meeting in Brussels this week as the ongoing energy crisis is getting worse. The discussions were centered around possible immediate intervention measures to stem the runaway gas prices. Natural Gas has seen its price in Europe spike 6X this year, triggered by the Russian invasion of Ukraine. There is no quick fix or easy solution here. High prices and/or supply cuts could result in the de-industrialization of the European continent and social unrest. Stress is already sky-high on the subject. In such desperate times, it’s a natural inclination to look out for oneself first. Individual countries are doing that. The most controversial of the measures being debated is putting a price ceiling on gas imported from Russia, and how the caps would impact different regions and countries. The unity of the European Union keeps getting tested. 

Some European countries are not waiting on policy from the EU. They are taking things into their own hands in an attempt to shore up their own energy infrastructure. The Netherlands just set up two floating liquefied natural gas terminals which can convert LNG (Liquified Natural Gas) into gas to be pumped across onshore networks. Germany, which has relied on over half of its gas from Russia, is also trying out the floating gas system. Italy and France are considering it too.

The backbone of the US Economy is a vast network of infrastructure. That means ports (both sea and air), roads, bridges and tunnels are required to allow for the free flow of goods and services. Without it, freight won’t move. Rail lines, planes, trucking and ships stall. Functional electric grids and reliable internet are essential too. We got a taste of it when the supply chains were strained in response to Covid. The pandemic pretty much exposed every vulnerability of our society. Many of the systems currently in place throughout America were built decades ago. Bridges are structurally deficient, and dated piping for drinking water and wastewater poses serious risks to public health. This is 3rd World stuff. It’s no secret that the United States ranks low around the world with its antiquated infrastructure. That can has been kicked for decades. Delays and rising maintenance costs are a major drag on sustainable economic strength. 

You may recall, Congress passed a massive infrastructure deal last November. It was a bipartisan bill. It was widely popular with the American people. The infrastructure plan will pour over $1 Trillion Dollars in new spending across 8 years to improve the nation’s roads, bridges, rail, internet, water systems and more. It’s drawn comparisons to FDR’s New Deal and Eisenhower’s interstate highway system campaign. It’s been a long time coming. Of course, politics always play a role and skepticism rides shotgun with the optimism in Washington. No matter how you slice it, it’s something. And it’s about time. This infrastructure plan will be improving the systems that were executed by those former Presidents decades ago. So what’s in it? Plenty. Let’s start with:

Water: It’s the key to life. Earth has a major water problem. It’s very clear in the United States. There’s too much in the south. There’s not enough in the west. The Colorado River flows nearly 1,500 miles providing water for 7 different states. The problem is there’s a 23-year drought. That’s this whole century. The Colorado no longer reaches the ocean. 40 Million Americans rely on the Colorado River for their water supply. Millions more eat the vegetables, beef and greens that it grows. It has been said that if the snow melt, which provides the waterflow, does not replenish the reservoirs, it’s possible that water will dip below Arizona’s Glen Canyon Dam’s hydropower intakes sometime next year. That would be a serious problem. It’s impossible for life to sustain without sufficient supplies of energy and water. 

Hoover Dam was constructed in the 1930s under President Roosevelt’s New Deal. Lake Mead was born from it. Today, the lake has its lowest water level since it was created. Arizona, Nevada and Mexico are being forced to cut their water use from the Colorado next year. In case you were wondering, California has senior water rights, which have protected it from reductions thus far. Arizona decades ago accepted junior rights as a condition of congressional approval for the CAP canal that delivers water to Phoenix and Tucson.

Water is investable. Of the $1.2 Trillion authorized to be spent over the next 5 years, $82.5 Billion is geared towards a wide range of critical water investments. This will be the largest investment in water that the Federal government has ever made. It’s designed to improve our nation’s drinking water, wastewater, and stormwater infrastructure. One of the keys is to claim rainwater from running off into the ocean. Trillions of gallons of rainwater in the Golden State flows straight into the Pacific. It’s been estimated that 80% of Southern California’s rain runs that route.

This new law is being billed as a 21st-century plan which involves a long-term water sustainability view. It’s moving away from the previous century’s primary focus on building major dams and water diversions. Ocean water desalination is part of the plan to address the recurring droughts in the west. They’re expensive, but have shown promise in various regions overseas. Innovation makes it possible and new technologies bring down costs. The ultimate success of these investments will depend on how the authorized funds are actually allocated and spent. That’s always the case with government funding. But the need is now. The opportunity is here. 

Semiconductors: Intel broke ground on its new plant in Ohio Friday. This is a major milestone since the CHIPS and Science Act was passed. Intel calls it the “largest silicon manufacturing location on the planet.” The goal is to accomplish 2 things: Reduce our dependence on Asia for semiconductor manufacturing and create more jobs for Americans. There is a clear and growing need to protect US economic and national security interests following the global semiconductor shortage. Chips are in pretty much everything today. Covid fractured global chip supply chains. Device makers scrambled to find chips for their products. Lesson learned. The Intel CEO said this move puts an end to the “Rust Belt” in the Midwest and the birth of the “Silicon Heartland.” Made in America comes at a higher cost measured in Dollars. But our national security is an expense that has a different price tag.

Electric vehicles: $7.5 Billion in the infrastructure bill would be enough to deliver approximately 250,000 charging stations. There are currently 43,600 in circulation today, according to the Department of Energy. Tesla has a massive lead in EVs. The competition is trying to catch up. Federal Dollars flowing into the expansion of charging stations would be a critical boost for all players in the industry. Electric vehicles account for just 1% of cars in America. That number is changing. EVs accounted for 9% of sales in 2021. Nearly 40% of the electric vehicles in the United States are in California.

Metals & Mining: Roughly 43% of all mined copper is used in building construction. Another 20% is used in transportation equipment. There’s going to be strong demand for the red metal. Copper is a critical part of the green energy theme too. Electric vehicles use 4-times as much copper as traditional internal combustion vehicles. The transition to solar and wind energy will require major investments in copper, as well. Renewable energy uses more than four times as much copper as oil and gas. So, any infrastructure-bill spending earmarked for green energy should stoke serious copper demand. Copper is a major element in the Digital Age.

Broadband: If we needed a reminder of why fast and reliable internet is critical in a modern economy, we certainly got it in 2020 when millions of American workers and students had to adapt to working from home. The trend was already in place. Covid accelerated the pace. Not everyone was ready. More investment is needed. More cell towers and 5G infrastructure is coming. Universal broadband coverage is in the Bipartisan Infrastructure Investment and Jobs Act. The whole country needs to be more high-tech.

Energy: It’s also important to remember that having a modern high-tech infrastructure would mean nothing without safe and reliable energy sources. Renewable energy has made huge strides as innovation and development have advanced supplies the world over. But it is far from enough. The war in Ukraine has exposed how vulnerable the Global Economy is to supply disruptions. For years, there has been a push to go green. That is essential for the climate and sustainable success. Renewable energy is the future and a big part of the present. But it cannot replace fossil fuels yet. 

Hydrocarbons are still the most cost-effective sources of energy at scale. Some countries have even reverted back to coal, the dirtiest of traditional energy sources, to keep the lights and heat on. Desperate times call for desperate measures. The United States is stacked with natural gas. America has become a large exporter. Europe needs what we’ve got. Technological innovation provides the solution. Liquifying natural gas allows for transport overseas. It didn’t use to happen. It is now, with increasing frequency. America is exporting natural gas to Europe. It’s become an alternative to Russia. That is significant. 

Nuclear: $6 Billion over 4 years is going towards nuclear energy. There’s still a stigma, with memories engrained from Three Mile Island and Fukushima. But nuclear has got to be part of the portfolio of solutions. It already accounts for 20% of electricity produced in the United States. It was a major source in Europe before the green movement accelerated. But renewables have proven to be insufficient to replace traditional energy sources. And Vladimir Putin proved what dependence on Russian Oil & Gas can do. We need multiple sources of stable and cost-effective energy sources. Nuclear fits that category.

California is requiring that all new cars sold by 2035 must be zero-emission vehicles. That’s a big ask and a very bold move. So, the irony of this week with the excessive heat, the governor encouraged people to minimize charging their electric vehicles. Critics sure jumped on that contradiction. The fact is you can’t always think about tomorrow. You can’t always think about today, either. If you can’t feed your kids or heat or cool your home today, you’re not even thinking about the future. If you’re living comfortably, not worried about mounting bills and debt, it’s easy to lose sight that not everyone is thriving today. The gap between the present and the future has got to be bridged with a variety of energy solutions.

This Winter is going to be another big test. It’s not clear that Planet Earth is ready. China and India are modernizing with huge populations to provide for. They need lots of energy, and the cost in Dollars plays a seemingly bigger role than the cost to climate. Let’s face it, it doesn’t matter what the United States or Europe does if China and India aren’t onboard with climate. There has to be a compromise. And decisions have to be made. Kicking the can and switching directions is not useful. It’s been said that it’s an inconvenient truth that the climate is changing. Indeed. We’re living it. This week is more proof. It’s perhaps also an inconvenient truth that the world still runs on crude.

In closing, it’s the end of an era in the United Kingdom. Queen Elizabeth’s reign lasted 7 decades, the longest in the British monarchy. Her legacy is considered complicated. There are strong beliefs on both sides. She lived through so much, from the Blitzkrieg of London, which occurred for 57 consecutive days, to the pandemic called Covid, which still impacts us today. I offer 2 of her quotes that are useful and reflective today:

“It is through this lens of history that we should view the conflicts of today, and so give us hope for tomorrow.”
“It’s worth remembering that it is often the small steps, not the giant leaps, that bring about the most lasting change.”

Crisis brings opportunity. There are challenges aplenty on Planet Earth. We are going to need to innovate our way out of all this. It’s going to take time. It’s going to take patience. It’s going to take brains. It’s going to take guts. It’s going to take a whole lot of capital. Necessity is the mother of invention. And it is all very investable.

Have a nice weekend. We’ll be back, dark and early on Monday.


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