Saul Bellow, Nobel Prize Winner for Literature, noted “a great deal of intelligence can be invested in ignorance when the need for illusion is deep”. This neatly segues into the travails of short-term office lessor, WeWork, which recently filed for Chapter 11 bankruptcy protection in the U.S. Whatever value remains (if any), once it emerges, is clearly going to be somewhat less than the $47bn achieved in a private funding round in January 2019 or even the $9bn valuation secured in October 2021’s flotation.
From inception, an obvious flaw to WeWork’s business model ensured it was a very high risk venture. There was a potential mismatch between expenditure on the long term leases it acquired on trendy office space and the short term revenue it secured from letting it out. If the latter differed too much from the former, a problem was always going to result. And no amount of ‘free’ Fair Trade latte frappuccinos and preferred gender pronoun stickers was going to fix it.
However, did we really need to debate the chances of success too deeply when WeWork was responsible for statements like this. ‘(W)e strive to be a place where every individual – regardless of their background, colour of their skin, gender, political or religious beliefs, sexual orientation or difference of any kind – is welcomed, included and cherished.’ Wow, it sounds like even Nigel Farage could blag a gig here but if only WeWork had added ‘as long as they pay the rent and don’t cancel their contracts’, it would have sounded a touch less disingenuous.
But that’s the curious thing about modern life. It’s not the dispensation of drivel that’s a crime, it’s pointing it out or refusing to be influenced by it. Perhaps it was forever thus; Mark Twain opined “(T)hose who don’t read the news are uninformed while those who do are misinformed”. Perhaps he’d been reading The Guardian? I mention the latter because it had a metaphorical fit of the vapours when September’s government auction for 7 offshore wind projects drew no bids. Apparently, this dealt a blow to ‘Britain’s climate ambitions’ and left The Guardian positing without a hint of irony, ‘how did things go so wrong for Britain’s most successful clean energy sector?’ Just for the record, that would be an industry that’s so successful it requires government subsidy not only to exist but also to continue.
None of the UK’s biggest offshore wind developers took part in the auction after many complained the strike price guaranteed by the government had been set too low. Of course they did; they don’t want this indefinite subsidyfest to ever end. Laughably, ‘they warned’ that the auction would not be successful. Back to The Guardian again, ‘until recently, offshore wind was considered Britain’s cheapest source of electricity. But ….. the industry has faced a double economic blow that has compounded costs. First, the cost of building and installing wind turbines has rocketed because the price of materials has risen sharply owing to the energy crisis. Then the cost of borrowing money to finance projects has climbed in line with global interest rates.’
This really is a target rich environment. Who considers it Britain’s cheapest source of electricity? It clearly isn’t. As for the rise in costs, offshore oil/gas uses similar materials and has to pay for skilled labour, yet still manages to bring home the bacon. Furthermore, ‘rocketing’ construction and installation costs have nothing to do with ‘the energy crisis’. It’s the result of a wave of structural inflation unleashed by over-spending governments and their money printing central bank accomplices, as witnessed by the fact that material and labour costs have risen universally.
As for the cost of borrowing, offshore wind could deal with negligible funding costs, the result of 300 year low interest rates but a return to something approaching normality has scuppered it? Oil and gas seem able to cope just fine with present debt costs. Renewable UK (the trade association for wind, wave and tidal power industries) said it would require “urgent action” to fix the investment framework including a reform of contracts and more support (I suspect the word ‘subsidy’ would be more appropriate than that word ‘support’) for the supply chains affected by the failure of this year’s auction”. It tweeted ‘latest offshore wind auction results are a missed opportunity for UK’s economic growth’. Well, economic growth that requires constant featherbedding is the wrong kind of economic growth. In fact, once the subsidy is accounted for, it’s not growth at all; it’s the diametric opposite.
Last month, the government announced it will increase the guaranteed price offered for offshore wind projects at its next auction in March by approximately 60%. We’ll see what response it draws but bear in mind UK offshore oil/gas production suffers a 75% tax burden and still delivers competitive energy. With all Western governments skint, there’s a limit to how much subsidy wind power will ultimately be able to leach from naïve administrations and hard pressed bill payers. To our eyes, it is now obvious the decarbonisation transition will require extension. As Twain didn’t say but might have done, ‘reports of oil’s death have been greatly exaggerated’.
If you would like to listen to our latest podcast please click here Episode 37
It’s the post-Thanksgiving, pre-Advent edition of Just Williams and it’s coming at you with twinkly lights, frosty paths and the faint whiff of a warm mince pie.
As always we catch up with the last global economic news before Duncan & John offer pithy insight into the investment markets with that laser-like focus that you have come to expect.
Christmas has indeed come early.
The value of investments and any income from them can go down as well as up and you may not get back the amount originally invested.
This material should not be considered as advice or an investment recommendation. Investors should seek advice from an authorised financial adviser prior to making investment decisions.
John Newsome can be contacted on 01423 705123 or john.newsome@williams-im.com. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.
