Environmental, Social, Governance, ESG for short. This is a topic that elicits all kinds of reactions, depending on your personal beliefs. Those who wish to support a move away from fossil fuels will often seek out investments to support their concerns. The wind generation industry is one such investment option. It is interesting to know that the wind generation farms that have popped up are often not owned by the actual power companies, but rather by investment firms who sell the power generated to the utility. Upon completion of the construction of a wind farm, the costs associated with building the wind mills is financed through long term bonds issued by the investment firms through an underwriter.
Just like any financing, the repayment is supported by the self-liquidating asset, generating the cash flow to repay the principal and interest. No pun intended. The structure of the financing, in this case, long term bonds, should be prudent enough to allow for a sufficient cash flow coverage cushion to absorb events that might impair the repayment. This might be failure of a number of the wind generators, reduced lifespan of the farm, or even a market change that would move power generation to another source, creating an obsolescence.
Recently there has been a number of stories that indicate that wind energy generation investment is much riskier than originally expected. First off, most wind generators have a 15-year economic lifespan. While individually they may last longer, on average there will be failure of one or more components which will take them off line near the 15-year mark. The initial bond financing put the maturity dates of these bonds at 19 years, a full 4 years after its economic life. By structuring the amortization in this manner it opens up more cash for the owners of the investment company and puts the bond holders at significant risk since the self-liquidating asset generating the repayment will be gone before the debt is paid off.
Second is the problem of the wind generators themselves. The technology has improved allowing for enhanced generation of electricity over time, 1 million watts against 15 million watts today. However, greater efficiency has come with a level of fragility that is impacting the generators lifespan. Currently 65% of operations and maintenance costs in wind farms are unplanned. Corrective spending is on the rise and is expected to hit $4 billion by 2029. This obviously taps into the repayment cash that was supposed to support the bond repayments. Unfortunately, if wind generated bonds begin to fail, investors who are interested in ESG will move cash to other options jeopardizing future investments, not only in wind but likely other higher risk endeavors. Time will tell.
Looking for a used car? The lots are full so selections are good. However, the dealers are in a pickle. In June alone used car prices fell 4.2% and there is no end in sight. This was on top of a 2.7% drop in used car prices in May. A 7% drop in two months is unheard of and unsustainable for many dealers to stay in business. Of course, the balloon had to pop since during 2021 and 2022 used cars were more expensive than new vehicles. This was primarily due to lack of supply of new units. Now that the manufacturers have replenished the supply chain and filled the new car lots, expect the used car prices to continue to plummet through the summer
While still elevated above target levels, both the CPI and PPI are well off the monthly peaks. Overall prices are rising in a controlled fashion, and in some cases like used cars, we are seeing deflation in a number of areas. With the moderation in inflation, optimism in the economy is growing. Both the Small Business Optimism Outlook and the Michigan Consumer Optimism Index improved to levels near pre pandemic levels. The Atlanta Federal Reserve is estimating the GDP for second quarter at 2.3% with a similar outlook for the third quarter. With luck, maybe we won’t even need a soft landing.
Have a great week.