Energy Investors: Beware the Culture Warriors

Mistaking advocacy for advice is all too easy.

They still have to round up the votes. But Washington has reached an old-fashioned compromise to raise federal debt limits—and at least take a stab at bipartisan energy permit reform.

The nature of compromises is neither side gets everything it wants. But American energy companies appear to be winners.

First, this package does not include a broad repeal of the long-term tax credits passed with last year’s Inflation Reduction Act. Second, this package looks like it will include some version of energy permitting reform—not a complete overhaul of existing rules blamed for delaying projects to death, but definitely streamlining for both electricity transmission lines and energy pipelines.

Permitting reform is broadly popular, especially with centrist Republicans and Democrats. So it’s the kind of provision that makes it easier to vote for measures in the debt limit compromise where there’s less consensus, such as the magnitude of spending cuts.

Nonetheless, permit reform is also the kind of issue ripe for culture warriors taking ever-more extreme positions. And now armed with AI-enabled content production tools like ChatGPT, they’re capable of flooding Internet media across the board with their messaging as never before.

On the “progressive” end of the spectrum, we see ever-more frightening images of a future boiling earth with followers urged to take ever-more aggressive action against use of fossil fuels. And on the “conservative” end, culture warriors are urging a backlash to renewable energy, charging climate alarmism is a hoax and that wind and solar adoption are creating worse problems, including landfills overflowing with expired solar panels leaking dangerous chemicals.

One aspect of running my own investment firm that I enjoy most is interacting directly with customers. Last week, a long-time reader sent a pair of articles for my opinion. The first concerned fallout from a broken wind turbine blade in Kansas, supposedly the fault of US wind and solar leader NextEra Energy (NYSE: NEE). The second was a broader piece titled “The True Cost of Energy Generated from Wind Turbines.”

NextEra being a stock I own personally and recommend to customers, I was naturally concerned enough to give the article a good read. But I couldn’t shake the feeling that I’d seen it before. And that was confirmed in part by noticing the word “updated” in the byline. The same qualifier was used in the second article, though the real giveaway this was recycled material was the photo dated 2010!

Taken together, the gist of both articles—which were from the same source—was wind power is neither economically efficient nor environmentally sound as a power source. Both concluded wind depends on subsidy, and well-connected developers like NextEra being able to con local communities for permitting.

Understandably, our customer was concerned wind power developers had “failed to develop maintenance plans for the sustainability of their wind assets.” He worried that a regulatory day of reckoning was coming, with “wind purveyors” being “held accountable for their failures which will have an adverse impact on stock prices.” And he cited actions being taken in the Texas legislature to restrict wind permitting as evidence of a backlash.

Scary stuff for an investor to read—and especially at a time when the only stocks not losing value are those with some connection (however tenuous) to artificial intelligence.

Neither piece bothered to mention that maintenance concerns are still relatively rare in the wind power industry. CAPEX for keeping facilities running efficiently is likely to rise in coming years as equipment ages. Investors can look for that in the “operating and maintenance expenses” line of income statements. And a pattern of substantial quarter-over-quarter increases can be a warning sign.

The point of “depreciation” expense is to exempt certain cash flow from taxation, so it can be plowed back into the business to refresh asset values.  And as wind assets age, I also expect owners to provide a more detailed breakdown of CAPEX between “growth” and “maintenance,” just as pipeline companies like Kinder Morgan Inc (NYSE: KMI) do now.

But at this point, wind power developers are actually turning needed maintenance to their advantage—by “re-powering” facilities, increasing output and therefore profitability.

That’s even what appears to be happening at TransAlta Renewables’ (TSX: RNW, OTC: TRSWF) Kent Hills facility. Last year, management found the concrete foundations at the facility were crumbling, shutting down and launching a major overhaul. But rather than force a dividend cut, the company is getting a fatter contract that will lift distributable cash flow when the work is done!

Failing to address “repowering” efforts in wind would be a pretty major omission from any article attempting to educate the reader on this complex issue. But it’s the rule for advocacy journalism, where the author—human or AI—is building an argument to convince. And presenting opposite sides is clearly anathema to that objective.

And there is the crux of the biscuit: To build real wealth, you need the best information about what you’re buying, holding and selling. But to be informed, you’ve got to differentiate between attempts to inform and to advocate.

Advocacy is what gets attention. But energy issues are usually highly technical in nature, involving questions about everything from energy, physics and chemistry to economics and politics. And it’s critical to recognize when only one point of view is being shown to you.

In the case of the wind power articles I’ve cited here, there were several red flags that they were advocacy. Being from the same source was an easy one.  Identifying that only one side of the issue was addressed required reading the entire article.

Advocacy journalists sometimes set up what’s called a “straw man.” The purpose is to define an “opposing view” in the weakest possible terms, which is another way of reinforcing the position they’re pushing. It’s a little more difficult to detect the advocacy bias than when opposing views are omitted altogether. But a careful reader can smell it out by paying attention to the author’s word choices and the amount of text devoted to knocking down the straw man.

Another thing that struck me about these wind power articles was the lack of input from engineers or anyone who could comment from expertise about wind power. But readers also need to be extra careful about sources authors do cite.

Most people are broadly aware that much of the information on the free Internet is not accurate, if not willfully misleading. And now that a growing number of journalists and others are using ChatGPT to build articles—which actually doesn’t access anything posted after 2019 or that wasn’t available for free up to then--the potential for bad information to proliferate has arguably never been greater.

Try searching “climate change” and you’ll find any number of research organizations with high sounding names being quoted verbatim, from sounding the alarm we’re all doomed to that climate change is a woke sham. And unless you have several days of free time on your hands, there’s simply no way to check them all out on your own—including whether or not they actually exist.

You don’t really have to if you can distinguish advocacy from genuine attempts to educate. But that can be especially difficult if the author is effective using what have historically been called “red herrings,”—allegedly “real life” examples meant to provoke emotion.

The wind power articles I read were highly effective on this front. Who wouldn’t sympathize with owners of a family farm now forced to live next to perpetually flashing lights on the top of always operating and noise-making wind mills?” And who wouldn’t be frightened by the prospect of a blade weighing several tons crashing down on their home or auto?

But examples cited to solicit emotion from readers are a classic identifier of advocacy journalism. And again, if you want to have the information you need to invest effectively, you have to be able to separate argument from fact.

With culture warriors entering the energy debate in force, we can look forward to a lot more advocacy masquerading as information. And the tenor is going to be very much black and white, with opponents not just wrong but actually evil.

Nuclear advocates claim coal and gas are killing the planet, while sun and wind can’t possibly pick up the slack. Renewable energy proponents will say fossil fuels need to be phased out immediately and that nuclear is too dangerous and expensive to fill the gap. And fossil fuels’ defenders will say climate “alarmism” is inducing bad decisions that will bankrupt economies and cause more deaths, by making life-saving energy unaffordable.

Ironically, all do make one valid point: No resource is perfect. That’s why US utilities follow the principal of fuel diversity. The best way to keep electricity affordable when one source is challenged—for example when natural gas prices spiked last year—is to have a diversified power mix.

Encouragingly, regulators in most states still concur. And despite division in Washington, there’s a consensus for that as well. The Inflation Reduction Act reflected decarbonization priorities of both the oil and gas and renewable energy sectors. And so does the energy permitting reform now attached to federal debt limit legislation.

That’s very good news for those who want to invest in energy. But you won’t succeed unless you’re very careful about what your read!