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Circle of Competence Issue #69


"Graham's wonderful sentence is an investor needs only two things: cash and courage. Having only one of them is not enough." –​ Seth Klarman


Energy misconceptions - Absolute Return Partners' July Letter (Niels Jensen)

The paradox of rising renewable costs and rising electricity prices (Forbes)

I wanted to juxtapose these two articles because I had no idea that increased penetration of renewables, despite falling production cost per kilowatt hour, could potentially lead to rising consumer prices.

Let's take these one by one. First, according the Niels Jensen (partner of Absolute Return Partners):

In Europe (I do not have corresponding numbers from the US), every 1% increase of wind and solar in the energy mix has raised electricity prices by more than 3% (Exhibit 5).

This is (in economic terms) an absurd misallocation of capital and is one of the key reasons why GDP growth continues to decelerate. According to BP World Energy Statistics, between 2000 and 2016, about $3 trillion was invested in renewables and a further $1 trillion in network upgrades to support the switch to renewables.

Second, the Forbes article states a potential cause of the rising consumer prices despite falling costs of production (emphasis mine):

To cost-effectively scale up renewables, they must be sited where they are most productive – in places with plenty of sun, wind and land. That is typical