Spanish Energy Boss: Interest Rate Rises will Trigger Renewable Business Collapses

Ignacio Sánchez Galán, Presidente de Iberdrola

Ignacio Sánchez Galán, Presidente de Iberdrola. By Pabloherreros (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Guest essay by Eric Worrall

h/t Willie Soon – the President of Spanish Energy Giant Iberdrola has suggested interest rate rises will wipe out large numbers of highly leveraged “unskilled” renewables businesses.

Iberdrola chief says global renewable sector facing Enron-style endgame

02/22/2018

By Diarmaid Williams

International Digital Editor

The chief executive of Spanish utility Iberdrola, Ignacio Galan, has warned of the prospect of financial disaster for the global renewable energy sector, reminiscent of the collapse of Enron.

Galan said, that the imminent end of cheap finance would have a damaging impact on the new players to the green energy market, adding that these new non-industrial entrants with little experience were making overly aggressive bids on contracts to build renewable energy, thinking its was a financial “el Dorado”.

“Because money is so cheap, many people who have no talent in the sector have been coming with an extremely high level of leverage,” he told the Financial Times. “With the change of the rates, there will be a clean up of the sector.”

Mr Galán was not accusing any new entrants in the renewable sector — some of whom are private equity or infrastructure funds — of the kind of false accounting that led to US energy trader Enron’s collapse in 2001. He was instead highlighting how cheap money was pushing some into a business they did not understand. The warning speaks to a wider fear about the potential disruption to global businesses as central bankers start to unwind a multitrillion-dollar experiment in ultra-loose monetary policy.

Read more: http://www.powerengineeringint.com/articles/2018/02/iberdrola-chief-says-global-renewable-sector-facing-enron-style-endgame.html

The price of ultra-low interest rates has always been gross resource misallocation, especially when those low rates have persisted for a substantial period of time. The rate rises Galán predicts, rate rises triggered by President Trump’s restoration of US prosperity, will separate the wheat from the chaff. Expect substantial squealing in the near future, from failed green corporatists who thought the low interest rate party would go on forever.

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vboring

Raise your hand if you honestly believe that politically influenced central banks will actually turn off the free money machine.
The first one to do so will see their currency appreciate – raising domestic production costs, moving production overseas.
The only way to raise rates in a global economy is if all central banks agree to do so at the same time. Good luck with that.

commieBob

It’s confusing right now. If you think you know what’s going on, and act on it, you could be in for a big shock.
Every time the stock market goes up for a long time, we see lots of idiots who think it can only go up. Never forget: Almost nobody beats the market in the long term. link

South River Independent

Well, if you mean trying to time the markets, you are correct, but plenty of people make money over the long term by prudent investing.

Weylan McAnally

The central banks simply cannot raise rates to more than 2.5% without major impact. It simply cannot be done. All of the economically advanced countries hold crippling amount of national debt. Raising rates to 3.5% would destroy nearly all social program spending in these countries.
Even with our current extremely low rates (2.1%), we still pay $500 billion in interest annually. If rates were raised to 3.5%, then interest payments would surge by 66%. With no additional deficit borrowing, we would see interest payments swell to $830 billion annually. Then we must either raise taxes or borrow more to service debt payments (pay one credit card with another). Disaster will be the result.

Retired_Engineer_Jim

However, rising interest rates only apply to newly-issued debt – all the 5, 10 and 30 year paper out there are paying interest at the fixed rate in place when the paper was issued. So, if Government’s concentrate on 90-day notes they’ll see their interest payments go up with rising rates, lagging by 90 days. But if they can issue longer-term debt, mixed with the already extant long-term debt, then their interest payments will go up more slowly.

Sara

Oh, Enron…. I remember it well…. that long, slow cascade into oblivion….
I believe it was a Monday.

Tom Halla

Yeah. Enron also had a business exploiting regulation, and politicians can change the rules on rent-seekers.

Sparky

Tesla next when subsidies recede and EV’ are exposed to the economics of the market unabated.

@ Sparky…maybe that is why Musk is hell bent to get his internet satellites in place, asap. He needs that monthly income.

john
Paul Penrose

If you are willing to spend $100K on an exotic sports car (Tesla Roadster), a $7500 tax credit will not affect your decision at all. If the tax credit (which goes to the buyer, not Tesla, BTW) goes away, it may affect sales of the other lower cost models, but not the Roadster. I’ll bet anybody a steak dinner that even after the tax credits stop, Tesla will continue to sell cars. And before anybody accuses me of being a Tesla fanboi, I’m not. I don’t own one, nor do I want one. For my lifestyle they just are not practical. But for the people that want one, cost, practicality, emissions, none of that matters. They want one because it represents the future to them. And because electric vehicles have massive acceleration from a dead stop.

Patrick MJD

“Paul Penrose February 23, 2018 at 8:30 pm
And because electric vehicles have massive acceleration from a dead stop.”
Not really. There is near instant torque, but if you can’t get that down to the road, it’s useless.

A C Osborn

Paul Penrose February 23, 2018 at 8:30 pm “I’ll bet anybody a steak dinner that even after the tax credits stop, Tesla will continue to sell cars.”
Then you would already have lost.
You obviously have not been paying attention to car sales where the subsidies have stopped.
Tesla sales dropped by around 90% along with all the other manufacturers.
https://notalotofpeopleknowthat.wordpress.com/2018/02/06/ev-sales-slump-in-hong-kong-after-subsidies-withdrawn/

MarkW

$7500 may not make that much of a difference for a $100K car, however most of the cars that Tesla sells are priced well below that point.
Nobody claimed that Tesla’s sales will drop to zero if the subsidies end, another strawman on your part.
BTW, the direct kickback isn’t the only subsidy that electric cars enjoy.

MarkW

AC, a 90% drop is still less than a 100% drop. Paul is betting that Tesla’s sales won’t go to zero.

old construction worker

‘Tesla next when subsidies recede’ I believe Tesla will survive. They are getting 12% of their gross profit from CA’s Co2 cap and trade scam. And, if that not enough, CA will bail them out.

Paul Penrose

A C,
Hong Kong is not anything like the rest of the world. I would be very careful about extrapolating trends from there onto other countries. Especially since the subsidies were much higher than anywhere else.
MarkW,
While it is true that there are currently more Tesla models available for sale with sticker prices much less than $100K, the majority of cars actually sold and delivered to date are in fact Roadsters, which are in that higher price range. And while I did concede that the lower priced models would take a hit when the tax credit ends, I don’t think it will be as great as some seem to think. For many, the purchasing decisions around cars are more emotional than rational, and for some, electric cars are just “cool” and neither economics nor practicality will sway them. I would also like to see a description of all the other direct subsidies that Tesla receives from the government. Not the indirect ones for the whole electric car industry and/or “renewable” power in general. All well run companies will take advantage of all the tax breaks and incentives they can. How many people opt to not take a tax deduction they are allowed, even though it may be subsidizing some specific lifestyle choice?

PaulH

Didn’t Enron pioneer the carbon credit trading scheme?

john

That was Cantor Fitzgerald.

Patrick MJD

Gore was involved in that too IIRC.

Wharfplank

We’ll see if it’s a meaningful functional rate rise or just one of those shot-across-the-bow messaging types.

NW sage

The Law of Supply and Demand always wins eventually. In this case the cost of money (interest rates) result in loans for infrastructure that are not sustainable when measured against the value of money in all other applications. The central bankers who set these rates are doing so for political (monopoly) reasons, not sound business reasons. As the cost of money goes up because of demand from applications that can support these higher costs the cheap energy costs will not be so cheap any more. Basic economics 101!

Bill Illis

The issue with renewables from an investment point of view is that only a few investors get paid out. The guys who set up the schemes in the first place – the big money people.
The majority of the other investors lose everything – as in ALL of it. This is how the capital investment strategy is laid out. The gullible investors are like the junk bond investors of the 1980s and the smart money people still make a killing.
This guy is just warning people/investors that if interest rates go up even a little, the gullible investors are done and will lose their shirt “even faster than they would have otherwise”. There are lots of gullible investors who get caught up in this scenario once (or even twice) but they don’t lose their shirt many more times that that. Unfortunately, there are lots of them lined up for the next solar plant / wind farm investment scheme.

Sparky

Sheeple for the shearing….. wool for the wealthy eco-elites,..

PiperPaul

“…the smart money people insiders still make a killing…”

PQ

The real disaster (at least for solar) is when all of these PPAs that underpin the original construction roll off.
The PPA period is fairly easy to value, but all financial buyers still ascribe some value to the post-PPA “merchant” power period (generally the last 10 years of the useful life). It also has an outsized NPV impact because the merchant period is assumed to be unlevered.
But, what most people fail to realize is that in 20 years time, with solar installations growing exponentially at 30% per year, the market will be so saturated with solar production during your daytime hours that prices will be driven to zero, or even negative (don’t believe me: California is already experiencing negative pricing on some days, and they aren’t even close to their 50% renewable goal).
There is no value in solar after the PPA expires. Financial buyers of renewable energy are going to be left holding an empty bag. It’s literally a terrible business plan.

Sparky

But,.. in Calif,… my grandfathered “NetMetering” allows me to sell at “retail” for 30 years causing grandma and the poor to subsidize my already paid for panels that demonstrated a 24% ROI and 5 year payback. Great crony eco-capitalism that I enjoy to the detriment of the poor and ignorant. I’ve been opposed to Solar subsidies and Netmetering scams,.. but was eventually ‘coerced’ to do Solar by the ‘invisible hand’ of the manipulated market. It’s only common sense. When perverse incentives are set up,.. you’ve got to be a moron not to take advantage of. I do expect that my ‘night-time’ rates will be at a premium i a few years as the Kalifornian kafka kooks drive people to battery investments to support the silly skewing of the electricity-economics in phase one. Time will tell what they’ll do with the re-cycling issue of LiOn in 15 or so years,..

Latitude

They will just pay each other $20 million apiece…and declare bankruptcy

Every day, the good News just keeps on arriving. I wonder how much good news the Warmistas can take before they re-think their Mantra.

joelobryan

It should have been evident to any investor in the US that when Tesla acquired Solar City (to keep Solar City from going under in liquidation) the solar business model was doomed. And that happened when subsidies were still in-place.

I find it remarkable that few seem to be aware that we are in the midst of a 38 year bull market in bonds.
Even more remarkable is that fewer still comprehend that a pronounced bond bull is a depression.
The Great Depression was in fact a bull market in bonds.

J Mac

The Obama regime held interest rates artificially low, abetted by a sympathetic Fed and ‘adjusted’ low inflation rates. This allowed Obama to run up $10 Trillion more in US debt, leaving the huge debt burden for future generations to struggle to pay when inflation rates were again truthfully calculated and interest rates raised accordingly.
Yes, raising interest rates will drive investments into products with real rates of return on the capital investments. Simultaneous elimination of wasteful ‘product support subsidies’ will further chill those products with marginal rates of return. 0% ‘interest rates’ were never sustainable… and neither are the marginal ‘investments’ those low interest rates propped up.

MarkW

Interest payments on the debt became the largest single line item in the budget years ago. And that was with a decade of artificially low interest rates.
If the interest rates are allowed to return to normal levels, the deficit is going to explode.

Weylan McAnally

If rates return to historic norms (3.5%), then debt payments would balloon about 66% to about $850 billion annually. This would crush nearly all discretionary spending in all the advanced economies with onerous national debt. The central banks simply cannot raise rates much past 2.5%. It would crush all social spending.

J Mac

MarkW,
Just so. We have to get the US economy growing again while restraining unnecessary new spending and inflation, if we are to have any chance at generating the tax volumes needed to pay down the debt.

michael hart

The other cheek of the ar$e that is the global warming scam (moderation here I come, but it is the most appropriate word), is the so-called “social cost of carbon”.
Thus they use the new economic calculus of the social cost of carbon to make fossil fuels appear uneconomic. Simultaneously, making unreasonable assumptions of future interest rates, they imagine future capital costs for their “renewable” green machine to be approaching zero, i.e. free money. With hypothetical free money available, almost anyone can claim to be a successful green investor in their models. Even the likes of Lord Stern and his green buddy Mark Carney who is, alarmingly, still Governor of The Bank of England.

David

Surely I’m not the only person to think that an electric car with a roof consisting of solar panels (with a back-up recharging facility, nach..) is the obvious next step..?
We are constantly told that cars spend 95% of their lives stationary….

Steve from Rockwood

The cost of integrating such a design into a car that already works beautifully on gasoline wouldn’t be worth it. We already have autos that get 50 MPG that people are not buying in droves, choosing Ford F-150s and Chevy Silverados that get 11 MPG and cost 50% more. Why even think about solar panels?

J Mac

Steve,
My 4 wheel drive 2017 F150 has a dual turbocharged 3.5l V6 capable of an SAE certified 375 horsepower and 470 lb-ft of torque, under fully loaded conditions. It is my tow vehicle for a 23 foot hard top boat we use for fishing out in Puget Sound. The boat and trailer (with all fuel and fishing gear aboard) weigh +7000 lbs, requiring a capable tow vehicle with the traction necessary to get in and out of algae slippery launch ramps around the Sound. Fully loaded, with 3 people/gear on board and boat/trailer in tow, it still manages better than 11 mpg.
I recently drove this truck on a ~ 300 mile round trip (lightly loaded and no trailer) to Ocean Shores and achieved an average 21.5 mpg. In the hilly local driving I do near my home southeast of Seattle (550 feet altitude, in the Cascade foothills), it routinely achieves 18 – 19 mpg.
Awesome power, traction, load and towing capability, replete with driver and passenger technological comforts in the cabin, and respectable mileage! What’s not to love??!!

Richard G

My 2014 Dodge Durango gets 18 city and 28 Hwy. Those are my actual numbers from 80,000 miles of driving.

MarkW

Car roofs are curved, so you either need a specially built panel, or you will have to piece such a panel out of many small cells mounted individually.
There’s also the problem of making the roof thicker, which increases the wind resistance of the car, as well as extra weight.

Tom in Florida

Don’t forget the vandals who will spray paint those roof top panels just for kicks.

R. Shearer

Think W/m2

Retired Kit P

“A wind turbine killed a female Raven that I befriended and have known for the last 15 years. Her mate cried for two days then disappeared.”
John from Boston provided a link and suggested that the comments be read. Not sure why.

Retired Kit P

I did some research on Iberdrola. It is not a surprise to me that ‘a leader in wind’ only has 14% of its capacity in wind but has a lot in nuclear, gas, and coal.
A utility only needs a picture of one wind turbine and solar panel to be ‘green’.

the football coach of the Buffalo Bills , Marv Levy, once observed that once you get a reputation as an early riser you can sleep till noon :p

beng135

Spanish energy “boss” says:
“Because money is so cheap, many people who have no talent in the sector have been coming with an extremely high level of leverage,” he told the Financial Times. “With the change of the rates, there will be a clean up of the sector.”
Sounds like a good thing…..

Ha,ha,ha,ha,ha…. now that’s funny. Real market forces will work to undermine global renewables…ha, ha, ha, ha, ha!!!!!

Here is a story of interest, “Britain vows to cap ‘rip off’ energy prices for millions with new law”, …https://www.reuters.com/article/us-britain-energy-cap/britain-vows-to-cap-rip-off-energy-prices-for-millions-with-new-law-idUSKCN1GA00D?il=0
Those rip off prices are entirely caused by the big push for expanding wind/solar over the last decade or more. Now it is clear that the high prices can be devastating to folks on the low end of the spectrum. Especially during a cold winter such as the UK has experienced in recent weeks. That wouldn’t be much fun to feel like you were camped out in your apartment due to the chill inside.
excerpt from Reuters story “…Home power bills have doubled in Britain over the past decade to an average of about 1,150 pounds ($1,500) a year. …”.

Gunga Din

Mr. Layman here. (I’m not a scientist or an economist.)
Many are into the whole “Man’s CO2 will cause CAGW” for political/ideological reasons. It doesn’t have to be true If can be used to advance political power to achieve their goals. It “stuck to the wall”.
Many are only into “CAGW” to make a buck. They need the above in power to keep making bucks. As soon as the above’s political clout lessens, so will their support of those who are just out to make a buck.
(Al Gore might be one of the exceptions.)

ScienceABC123

What Ignacio Galan is saying is that renewable energy was never economically viable.

Pixie

In Europe they will just pour in more tax payers money… no problem…