Eve of Disruption is not a parody of the famous 1960’s anti-war ballad by Barry The Plane Truth: Massive plane damage was inflicted on Allied planes by anti-aircraft fire during World War II. Concerned military officials recruited the Statistical Board Group at Columbia University to analyze the damage reports on the returning planes and to suggest places to add protective armor. The overwhelming damage that was reported was on the fuselages of the aircraft. The generals concluded armor should be added to the fuselage, an expensive and heavy solution. This data was handed to Abraham Wald, a math wizard and a Jewish refugee from Cluj, a Romanian city considered to be the capital of Transylvania. Wald looked at the data and said “Not so fast.” “What you need to do is to add armor around the motors!” He pointed out that the most damaged planes didn’t return. Therefore, the dearth of returning engines meant they were most the vulnerable spots if one assumed a random pattern in the shooting, but a random pattern was not seen in the damage. The data has been skewed by “survivorship bias.”
A similar type of analysis seems to underpin many of the ESG projects. The pursuit of projects that do not use fossil fuel are advocated without a true look at the carbon cost of producing the project. Enormous federal money is being pushed at electric cars, but very little at hybrid cars. Yet nine hybrids can be produced for each EV which greatly limits the amount of “carbon bad” lithium that is mined and provides very good carbon savings. The IFO think tank in Munich compared CO2 output in a Tesla Model 3 versus a Mercedes C220 diesel sedan, measuring carbon output in production and in use of the cars. They calculated the Mercedes released 141 grams of carbon versus 156-181 for the Tesla. As the percent of German electricity derived from coal declines, the comparison will improve, but the point is that total carbon reduction should be the way projects are measured instead of the doctored PR statements that dominate today. They are the analytical equivalent tying only one shoe. There are hundreds of acres of abandoned first generation electric vehicles in China that tip the EV benefit calculation, which assumes a long life for electric cars. Recently, the UK government announced a plan for their airports to be net zero by 2040. Airports is literally true, as the plan does not include airplane emission. We are now safe from the carbon footprint on electric walkways.
Where and how a battery is made and the source of electric power are what moves the needle on carbon generation. Many of the glass panels made for solar panels in China are produced in coal powered factories. The same “survival bias” governs the good feelings over installing the solar panel as customers see the green panels and enjoy its output, but the net carbon math is not so inspiring. The pure carbon calculation also fails to account for “human” math such as forced labor and grim working conditions in lithium mines. Certainly, pursuit of an improved environment makes sense, but it needs to be done by sensibly accounting for all the benefits and detriments.
The U.S. electric grid is likely to be the major bottleneck in the plans to move towards electric vehicles. If you convert ten percent of today’s auto fleet to electric, there is insufficient capacity to charge cars, run air conditioning, computers, etc. The PJM Interconnection, a large grid operator, analyzes power production for both retiring fossil fuel plants and the development of newer renewable sources. The former, they report, is declining much faster than the latter is rising. By 2030, a large imbalance is expected. Last summer’s California brownouts and orders to not charge your electric vehicle are prologue to 2030. A net power reduction of 10,000 megawatts is expected by 2030. That is enough power to light eight million homes. The Inflation Reduction Act of 2022 provided billions to support U.S. chip production. Under this program, a new $100 billion dollar plant will be built in Upstate New York. It will require more power than the state of Vermont. No plans have been provided to create that power. Political and utility leaders need to give serious thought to correcting this. Continued access to power has now become a key due diligence item for thoughtful PE investors.
I’m Rob Morris and I approved this blog.