E2 – Barry Norris

Barry Norris is the founder of Argonaut Capital Partners, a climate sceptic and has some compelling arguments against the offshore wind in the UK.

SUMMARY

Barry Norris is the founder of Argonaut Capital Partners and a climate sceptic.

In this conversation, he makes a compelling argument as to why the UK should not engage in the construction of a significant expansion of offshore wind capacity in the UK. Barry explains that when it’s windy, we already have enough wind power. Barry uses the analogy of a factory to think about electricity production and calls wind and solar unreliable workers as they only produce when the sun is shining or it’s windy day and argues that consumers need power when they turn on the light.

Huw and I thought Barry made a powerful argument.

Some takeaways

“The costs of building a UK grid powered exclusively by renewables will be financially ruinous. It will also result in a grid that produces abundant electricity for a few days a year and prohibitively expensive power the rest of the time. Rationing power according to the weather for industry and consumers will be the logical result…. energy generated by the wind was inherently capricious and unreliable”

Barry argues in the podcast that the UK Government target to build 50GW of offshore wind by 2030 is fundamentally flawed. That it’s a waste of money as we already have enough wind power when the wind blows.

To put this argument in context here, it may be helpful to provide some context. Onshore wind farms face planning objections and we already have captured the best sources with the least environmental impact. The first chart shows how onshore wind has grown but we now have similar capacity across onshore wind, offshore wind and solar.

UK Renewable Capacity History

Source Behind the Balance Sheet from Department of Energy Data

The second chart shows how much more productive the offshore wind has been – from similar capacity, it has overtaken the output of onshore and each dwarfs solar. The UK is not very sunny.

 

UK Renewables Historical Share of Generation

Source Behind the Balance Sheet from Department of Energy Data

Renewables have taken share of generation from coal – its share has fallen by more than 20 percentage points over the period. And dirty fuel overall has declined from 44% to 10% of the total.

UK Generation by Fuel Category

Source Behind the Balance Sheet from Department of Energy Data

So that’s the past. Barry’s argument is that we have enough wind now. On windy days, wind can produce near 100% of our power. On still days, it cannot do anything, and we therefore need reliable base power.

The economics are straightforward – gas in the form of CCGT plants are quick to start up and wind down; nuclear is clean but needs to be kept running (both to recover the high capital costs and because technically, you cannot just switch the plant off when the wind starts.

Barry also argues that offshore wind is expensive at a cost of £5m per MW – probably 3 times the cost of a CCGT or more. Hinkley Point is likely closer to £10m per MW but of course can run virtually 24/7.

Barry argues that e already have enough wind. For the full argument, you had better read his blog, particularly the most recent piece on wind, “BRITAIN’S A GONER WITH THE WIND”.  Here is his breakdown of wind’s market share by half hour periods in the last 3 years:

UK Wind Intermittency

Source: Argonaut Capital

Barry argues that when we have plenty of wind the power price tends to be very low, which si why wind operators need to have revenue guarantees. Here is his table of low power prices in 2021 with the share of wind:

Wind Share on Low Power Price Days

Source: Argonaut Capital

Here is an alternative view of how when it’s windy, power is cheap as there is an excess of supply.

High Wind Supply Coincides with Low Power Prices

Source: Argonaut Capital

Barry argues that there is no point in building masses of extra wind power because when it’s windy, there is a glut of supply. The grid already pays windfarms not to produce on windy days.

The argument therefore is that adding another 35GW of offshore wind will do nothing for electricity capacity on days when there is no wind and will only increase a supply excess when it’s windy.

It’s clear that there is a requirement to have base load capacity and in my view, we need more nuclear if we are to achieve net zero – there is no viable alternative in the UK. How much wind power we need is debatable, the way forward is SMRs.

We have a good discussion on all this in the podcast and I really recommend that you listen in, as Barry explains it better than I can here. A major drawback of podcasts is that you cannot put up a chart – perhaps I should think about using video as this is a subject which warrants using that medium. Let me know your view. 

About Barry Norris

Barry founded Argonaut Capital Partners in 2005 after a spell at Neptune. He is the CEO and CIO of the firm. Barry manages both long only and long-short funds. Barry graduated from Cambridge University in 1996 with an MA in History, and in 1997 with an MPhil in International Relations.  He is a regular contributor to the financial media, appearing on Bloomberg TV and CNBC and has had opinion pieces published in leading UK dailies.  Barry's writing is on the Argonaut website.

Links

Argonaut Capital website which includes Barry’s blog where he explains wind economics in more detail

Twitter 

HOW STEVE KNOWS THE GUEST

I met Barry when he did a presentation at the Moneyweek conference in 2022 and found his viewpoint different and thought it was important to hear from someone more sceptical about the virtues of renewable energy so that we can have an informed debate on the podcast.  

Co-Host Huw Van Steenis

I am delighted to be teaming up with Huw van Steenis for this mini-series. Huw is a Vice-Chair and Partner at Oliver Wyman. He advises investors and helps them capture opportunities and mitigate risks posed by the transition to a lower carbon economy. Huw currently serves as a member of the Investment Committee at the Oxford University Endowment and co-chair of the World Economic Forum’s Global Future Council on Responsive Financial Systems. Previously he was Senior Advisor to the Chief Executive of UBS and Chair of the Sustainable Finance Committee. Before this, he was Senior Advisor to Mark Carney when he was Governor at the Bank of England. Huw worked at Morgan Stanley mostly as Global Head of Banks and Diversified Financials research. He and his teams won numerous awards , including being voted #1 in investor surveys 12 times. Before anyone asks, that's 12 more times than Steve.

 

TRANSCRIPT

This AI generated transcript has been lightly edited for clarity. Any mistakes are ours.

steve (00:28.722)
So, Barry Norris, I’m really excited to talk to you. I’m really looking forward to our conversation because I know you’ve got some very controversial views. And listen, you started Argonaut in 2005, so almost 20 years ago, crikey. And you had, I don’t know, was it about seven years of investing experience before that? Is that right? Did you always want to be an investor? And what gave you the courage? To launch your own firm at what would it be age 30? I mean, that’s quite brave.

Barry Norris (01:01.352)
Yes. Foolhardy, some might say. But look, I think, you know, I got into investing, I wouldn’t say by accident, because it was certainly a conscious choice, but without really having thought much about my post -university career until about five to midnight when I was about to leave university. So, you know,
my first degree at university was in history, and then I did a postgraduate in international relations. But I wanted to do something where I could think about the world. And one of the things that is obviously great about being a fund manager generalist is that pretty much everything that goes on in the world, certainly in economic terms, is interesting.

And you have a massive choice to discover and invest in many different industries. So there’s a massive sense of freedom doing that, but it’s also, I think, an industry for the intellectually curious. And you kind of never run out of things to be curious about. So, you know, the great Charlie Munger always used to say that, you know, an investment career is an accumulation of wisdom, which I think is right. And the fact that he was still investing in his nineties, obviously the logical consequences of that is you start off in investing with maybe some instincts and some intelligence, but that’s a different thing than investment wisdom. And I’ve always thought that if you think about, the career of fund management, there’s a lot of, well, I wouldn’t say there’s a lot of, but it’s easier to have a few good years in a row than it is to still be investing when you’re 90. And staying in the game means that your good years aren’t just because you took a lot of risk. And so inevitably, if you drive the car in fifth gear all the time, you’re going to crash at some point.

And I think the really good investors know when to accelerate and know when to decelerate and have some idea of investment cycles, the macro. And I think one thing also that I think I’ve learned is that people always expect you to when you start your fund, what’s your process? How do you do it? And frankly, what you might have started with shouldn’t be the same,
10 or 20 years later, because you should have learned something. You should have accumulated some wisdom and worked out how to do it better. And, you know, that’s what I love about fund management. And also, of course, you know, I think the two most important things in most people’s lives are their family and their assets. And for some of them to trust you with their money to manage is an incredibly, well, you know, it’s something that, you know, what is a fiduciary duty incredibly seriously. And, you know, that’s not lost on me. That’s not lost on me either. And certainly, you know, as opposed to perhaps many people in the industry today that have to find an additional moral purpose for ESG in investment, I’m very happy to say that making a return on people’s savings and allocating capital more efficiently than government would ever do is enough moral purpose for me.

Huw van Steenis (05:03.886)
Totally. So Barry, I mean, there’s lots we could dig into, but maybe we should start. You argued recently that the energy transition has been a monumental misallocation of capital. And so, you know, Steve and I were just keen to dig in. You know, why do you think it’s been such a policy folly and where are they getting the economics wrong?

Barry Norris (05:24.072)
So I think to answer that, we have to look back at the history of energy transition. So I’m a keen economic historian, though I have to say when I was at university, I thought history was all about great men and maybe even a few great women. So looking back at history, if you think about from Roman age to the Industrial Revolution,

GDP per capita really didn’t change much in 2000 years. And then we had the Industrial Revolution, which started in Britain, which basically involved the replacing of a wood driven energy economy with coal. And coal was amazing because it had so much more compact chemical energy, which could be converted through steam into mechanical energy.

And that saw, if you look at GDP per capita over the last 2000 years, it’s like Michael Mann’s climate change hockey stick, except the data isn’t manipulated. So it actually is really flat for 2000 years. And then it goes up exponentially because we discover energy. So I think they don’t seem to teach that in schools. And I think most of the most of modern society isn’t aware.

that you cannot have a flourishing high GDP economy per capita economy if you don’t have cheap energy. And if you think what happened at the end of the 19th century, oil and gas started to replace coal, or I mean, coal usage keeps growing but grows more slowly, but you just get oil and gas being the dominant energy.

And of course, that led to a revolution, particularly in transportation. And if you think about the history of the 20th century, perhaps one of the reasons why the Allies won World War II is that America at the time produced 80 % of the world’s oil and gas, and the Germans were reliant on extracting synthetic fuel from coal. And then…

Barry Norris (07:49.768)
With each of these industrial, with each of these energy revolutions, you basically get an inferior product replaced by a superior product, which is cheaper and more bang for buck in terms of its power. Now, nuclear could eventually replace oil and gas as a dominant fuel because it’s even more bang for buck. But the problem in nuclear,

is that we haven’t yet worked out a way to do it efficiently. And there’s, you know, it’s pretty difficult to store and move that nuclear. It’s not particularly agile, not as agile as oil and gas. And therefore, we haven’t really worked out how to do it yet. Now, while this energy transition is different, is we’re kind of going back to inferior forms of energy that our predecessors gave up on as

not being particularly efficient, not giving enough bang for buck. And in terms of energy return on energy investment, there’s really hardly any surplus. But if you think about the cost of building a nuclear plant, which are very high, the cost of plutonium that goes into this massive energy generated, you get a massive surplus. But if you think about the cost,

of manufacturing a wind turbine or solar cells, then actually you’re already starting with a big sunk energy costs. So you can’t generate the surplus from the generation that society needs to sustain itself and sustain GDP per capita. And I think before you get into any debate about CO2 and manmade CO2 and whether it ends up with a…

existential crisis, you’ve got this basic point that actually wind and solar can’t do anything other than lead to lower GDP per capita and lower standard of living. Then you’ve got the problem as well that wind and solar being intermittent doesn’t really solve the problem of how you power energy grids because the very nature of

Barry Norris (10:13.73)
electricity, the beauty of electricity is we can just flick a switch and we can use the electricity. If we’ve moved to a net zero, supposedly, economy, and we are reliant more on electricity, and remember, electricity is only 20 % of all our power generation in the UK at the moment, then

there is always going to be the problem of are we going to move to some kind of mad max dystopian economy where we only go to work when the wind blows or the sun shines because that’s when we’ve got electricity. And I think what I think the net zero Z lot still haven’t figured out is that intermittent power is not really very helpful for energy grids.

In fact, when the market share of intermittent power goes above 10%, below which it’s not really that relevant, it’s exponentially useless because you just can’t store it, you can’t consume it, and you could export it, but then you’re exporting to countries where the wind’s also blowing at the same time, so the power price is really low. If you think about Boris Johnson’s plan to

to for Britain to become the Saudi Arabia of wind. I would argue that that is seriously flawed in that what he was trying to say is that the Saudi Arabia produce oil at $10 and sell it at 90 and they make a massive gross margin on it. The problem is in the UK is that when the wind blows, we already have low power prices and we already have enough installed capacity to use

for wind to generate all of our needs, but only when the wind blows. So the problem when the wind blows in the UK is we can’t just switch industry on when the wind blows, and therefore we can’t consume it. We can’t store it because of the cost of storage, which we can go on with. And we can’t, if we wanted to export it, we’ve basically got to pay people to take it because all over Europe, the wind is all blowing at the same time.

steve (12:36.434)
That’s a movement, yeah.

steve (12:40.498)
Hang on, because you’re making a number of points there. And I just want to unpack, as our American friends would say, unpack some of those. So obviously, wind and solar are intermittent producers. But you said that when the wind is blowing here, we can’t export it because wind is blowing elsewhere. Now, I just want to understand. I mean, I’ve got no knowledge of where the wind blows, in spite of the fact that I’m Scottish.

wind seem to always blow in Scotland. But if we have more offshore wind in the North Sea…

Will it not blow at times when the wind isn’t blowing from the existing turbines? I mean, the wind can’t blow everywhere all at once, can it? Or is that a false premise?

Barry Norris (13:27.432)
No.

Barry Norris (13:32.296)
When it’s windy in the North Sea, it’s windy in the Irish Sea. And I think the problem is as well, there is, if you look at Denmark, where wind is about just over 40 % of their power generation, that is kind of the model we’re trying to get to. But Denmark is a small economy, and it’s in the Nordic power market. And so when the wind is blowing, Denmark,

could export, often not very profitably, to Norway, which prime generation is hydro, or to Sweden, when prime generation is nuclear, and vice versa. But if you look at the prices that Denmark exports winder, it’s a lot lower than the prices that Norway sells them hydro and Sweden sells them nuclear, reflecting the fact that

There’s a premium on energy on demand and there’s a massive discount on intermittent energy.

steve (14:39.186)
No, that’s quite clear. So let’s just explore this for a minute because this value of the energy is critical to the whole equation, isn’t it? And the problem that you have, if you’re selling gas, the value of a therm of gas might be 50 pence on average in the year, but on a cold winter’s day, it might be one pound 50. And on a…

at 7 .30 in the morning on a gold winter’s day, it might be £2 .50. The problem here is that not only do you have the fluctuations in demand, but you have the problem with supply. So it’s a compounded problem, is that right?

Barry Norris (15:25.288)
So, I mean, if I’ve understood your question correctly, just like in any commodity, the spot price will reflect just the cost of incremental supply to meet demand. And…

thing, energy is a spot market because power prices will fluctuate throughout the day because obviously there’s less power used at night and there’s more during the day. There’s more power used in the winter than the summer. So energy and also the cost, just the cost of storage is incredibly high. So

If you think that there’s a battery that is being built in Trafford, Manchester, costing 750 million pounds, and it’s going to be able to store basically two gigawatt hours, and that’s the equivalent.

to about three minutes and 20 seconds of our average use. So if you think that we were, if you think we’re 100 % reliant on wind and solar, you would have to build thousands of these batteries to back up the storage. So I think this is something that.

steve (16:59.664)
Oh.

Barry Norris (17:06.128)
You know, unfortunately, the kind of logical critical thinking about power grids and energy has just been left behind in the kind of political and quasi religious debate that we have on climate change.

steve (17:26.642)
But the point I was just trying to make was that we’ve always had to have the ability to service those extra spikes. So I think about the gas industry, it’s always had to have that incremental marginal demand. And the electricity and the wind and solar is kind of like the converse of that, isn’t it? Because you can’t have just wind and solar, you need to have a backup supply of capacity.

Which isn’t that, I mean, that just means that there are more expensive sources of supply, but that’s not necessarily a bad thing if we’re prepared to pay the price in order to reduce the emissions.

Barry Norris (18:00.68)
Yeah. Yeah.

Barry Norris (18:08.936)
Well, I would look at it the other way. I would look at it and say there are very few applications for power when it wants to turn up relative to power when you need it. So the analogy that I’ve used is basically a grid needs reliable workers and unreliable workers are pretty much no use at all.

steve (18:25.008)
No, sure.

Barry Norris (18:39.28)
And the only reason you’ve been able to get away with unreliable workers is if they’re a very small market share, but they’re still useless. Right? And so the problem is, you’re basically, think of the UK grid as the factory, and we’re basically saying, we’re going to tax reliable workers, which are the gas -powered power stations, and we’re going to subsidize…

the unreliable workers, and we’re going to give the unreliable workers 15 year contracts, and we’re going to make the reliable workers kind of work whenever we want. We’re not going to even give them a contract. They’re just going to have to turn up when the unreliable workers don’t turn up. Now, what would be the consequence of that on the factory’s productivity? You could basically hire as many unreliable workers as possible.

infinite unreliable workers and it still wouldn’t solve the problem because they might all still not turn up one day and you’d have to go back to the reliable workers. So actually the unreliable workers have no value at all relative to the reliable workers.

steve (19:54.29)
Well, that’s, well, that’s, what you’re saying is they’ve got no economic value, but they may have a value if we put the right price on carbon, the right price being enough of a price to just.

Barry Norris (20:10.184)
because that doesn’t affect when they turn up.

That just says that the tax rate on the reliable workers doesn’t hold to the economic behavior of the unreliable workers.

Huw van Steenis (20:22.394)
So Barry, look, I take your point. And also we need to distinguish here between also the investment opportunity and then the fundamentals, because obviously, if the government’s choosing to subsidise, you might still want to take advantage of that. If you do a trade off between energy security, the affordability and then the environment, because your hard thesis is to have zero renewables, you could say there’s a case where if you are constrained of how much gas you can buy, let’s say Germany was,

having a proportion of your energy mix coming from renewables, which is obviously then much better on the environment, there’s a percentage where it might actually be helpful. So I don’t know. I’m not sure why zero is the right number. I can see there’s more of more comments.

Barry Norris (21:03.378)
Because, right, even if you believe that climate change, man -made CO2 emissions are going to cause an existential crisis for society, which frankly I don’t, if you’ve got an economically useless product, which wind and solar is, what’s the question to which that’s the answer?

Because I get the fact that if you actually believe in the existential crisis, environmental crisis, and probably given that this is an investment podcast, we shouldn’t go into that. Wind and solar doesn’t solve that if it’s economically useless. You could only solve that problem if you’ve got a product which can replace

oil and gas, and then you work out, well, what’s the additional cost of replacing oil and gas? What’s the premium I’m willing to pay to replace fossil fuels? And is that premium something that we can afford to pay as an economy without ruining the economy? But if what we’re saying is we know wind and solar is

is the unreliable worker, which is never going to power the grid because we’re still going to need the reliable workers. However much you pay for it, and however much generation capacity you’ve got, it still doesn’t solve the problem because it doesn’t economically replace the reliable worker. So therefore, if you really want to have a net zero,

generation, the only way to go down it is nuclear and hydrogen because hydro isn’t scalable. You have to build nuclear.

Barry Norris (23:07.592)
But in reality, that just gives you a nuclear powered grid. And electricity is just 20 % of all of our energy use. And energy consumption is different from energy production as well. And the other thing that we’ve been doing, obviously, in the UK is kind of off balance sheet CO2, moving the manufacture of the electric car to China.

and the carbon footprint of making the battery in the first place. And then when it gets into the UK, on the assumption that electricity could be produced on a carbon -free basis, we bring our footprint down. But really, you’re just robbing Peter to pay Paul, because the electric car has still got that footprint from day one that was made in China.

Huw van Steenis (24:03.086)
Sit, sit.

steve (24:03.154)
We’ll get to electric cars in a minute because I want to just finish off on the wind because I don’t think your argument is well understood in a wider sense. Now, I want to just make sure that we cover it because what you were saying is the government wants to have 40 or 45 gigawatts of offshore wind by 2030. And you think that’s daft because the amount of wind we’ve got today,

is enough when it’s windy. Is that right? Is that the sense?

Barry Norris (24:35.944)
Yeah, yes. So the fact, the constraining factor here isn’t the amount of generation capacity we’ve got in the UK, it’s the weather. And since the days of King Canute, we can’t control the weather. Well, maybe we can. Maybe that’s what climate change tells us. We can if it’s man -made CO2. But I don’t believe we can control. We can’t make the UK, we can’t make the wind blow in the UK more consistent.

That is the problem.

steve (25:06.482)
So when it’s windy, we’ve got enough wind power to power most of the country.

Barry Norris (25:09.254)
Yeah.

Correct. So I don’t know why I was the first person to do this analysis because it seemed to be pretty obvious. But you could break down power generation in the UK into half an hour of discrete periods. And it’s important to do that because basically the closest the spot you get, the more accurate your data is because everything gets lost in an average over a day or over a month or whatever.

steve (25:37.97)
Sure. Yeah, yeah, yeah.

Barry Norris (25:40.936)
So you break it down and you could say, what I did in my research, which is on our website, is say, in those discrete half an hour periods, what was the wind market share and what was the spot power price? And basically what it tells you, I mean, there are lots of other things that impact the power price as well as whether it’s windy or not. You know, the price of.

price of gas, whether it’s summer or winter, whether it’s half time in the football match, whatever. You’ve got all this noise in the data as well, you’ve got to try and filter out. Basically, we basically demonstrated that over the last three calendar years, there’s a whenever the wind

market share has been very high, i .e. the wind has been blowing, then the power price is very low. And whenever the wind market share is low, the power price is very high. And conversely, whenever the power price is very high, the wind market share is also very low. And whenever the price is low, the wind market share is also very low. So there are all those four variables of it. Now, that tells you,

that we already have enough generation capacity in the UK to take advantage of the way the wind blows. So the question I have is, given that we can’t make the wind blow more consistently or blow more, what is the purpose of building more? And you kind of get two answers, right? One is, well, we could store the surplus.

in an effective and cost effective way, which given the cost of batteries, you can’t. And I think that the net zero Zlots have lost that argument. And they’ve now moved on to hydrogen as a way of storing it as well, which we can go into it. But that’s also just an economic cul -de -sac. And then if you can’t store it, well, we can export it. But again,

Barry Norris (28:06.216)
Show me a day when our weather is coming from Scandinavia and Germany in general. So generally, that’s effectively when the wind blows in the UK, the correlation to the wind blowing in the rest of Europe, the export markets is also high. Therefore, the…

the export opportunities only come when the power price is low. So then the question is, okay, Barry, we get that. So why are all these wind companies prepared to build their wind projects if they could only make a loss when they’re exporting it? And the answer to that is it’s not their loss because that’s why they build these projects with a guaranteed price. And that’s why they refuse to build them.

unless the government guarantees the price. So let’s look at our scenario where the latest guaranteed price in the auction this year is going to be £75 per megawatt hour. Now, it’s important to think that that’s in 2012 prices. I don’t know why they try and make it this complicated. So you’ve got to get an inflation adjustment.

that, which means that that today is about 100 pounds per megawatt hour based on the inflation that we’ve had since 2012. And over the 15 -year length of the contract, the price goes up by inflation every year. So it may be 100 today, it may be 150 on average over the length of the contract.

Barry Norris (30:01.64)
The reason why that price needs to be guaranteed is because the wind operators are able to insulate their own business from the costs of intermittency. And those costs of intermittency are passed on to the UK electricity consumer in the form of higher energy prices. So your average Danish wind farm that is building most of these wind projects,

They don’t care about intermittency because they’ve passed that economic risk onto the UK electricity consumer. And so even though their business adds no economic value, it’s a massive con whereby they are pretending it does, but they’re passing on the cost of that to the UK consumer. So they will build infinite amounts of these wind projects.

until they have to pay for the costs of intermittency.

steve (31:03.442)
So Hugh, why is the government set this goal to have all these wind projects in the North Sea? What’s the political imperative?

Huw van Steenis (31:14.572)
Well, look, so I’m not, I’m not sure I should be speaking on behalf of the government here, because I’m also having some concerns with the way it’s been shaped. But I think it’s a sort of a it is partly as Barry said, it’s because they’re trying to copy the sort of Danish type model of getting a higher percentage of wind. And, you know, look, to be fair, there is a trade off of energy security, the price and the environment, we can differ to disagree what’s the right way to do it. And I’m with Barry, I would definitely go more nuclear. But nuclear, to be fair, doesn’t swing. It’s a very level load.

steve (31:18.29)
No, no, I wasn’t expecting you to be a spokesman, but…

Huw van Steenis (31:43.182)
And so, you know, even a French originally were going to try and have 80, 90 % of their energy from nuclear and they had to cap it because they couldn’t swing for the winter and so forth. But you’re right, I would have a much sweeter mix of nuclear, but it’s to try and go more like, as I say, go more like the Nordics. Sorry, Barry.

Barry Norris (31:59.364)
Steve, if I was to say why did they do it? Because they don’t understand how energy, and particularly electricity markets work. And they think that net zero is politically popular. And there is a group think in the way that they’ve all believe that this is the way forward without questioning it. And that’s the basic problem. But I think as you rightly points out,

Ironically, nuclear doesn’t blend well with wind and solar because nuclear has got the opposite problem to wind and solar and it’s on all the time. You can’t switch nuclear off. The way that you have to actually do it is gas is superb at balancing. This is the value of gas.

steve (32:48.05)
Yes, absolutely.

Barry Norris (32:53.448)
We already halved our CO2 emissions in the UK. Part of that is we got China to manufacture a lot of things that were dirty, but it was mainly because we switched from coal to gas, and gas has got about a quarter of the CO2 emissions to coal. So, you know, I think the problem is that once you say you want to go to zero carbon emissions, you never actually…

realize how we have the CO2 emissions, it switched coal to gas without actually switching to an economically inferior product. In fact, it was economically superior because the cost of extraction were much lower. And that’s why halving CO2 emissions was actually economically beneficial because of the way we did it. We switched to a cheaper source without impacting the quality of the power generation. Now,

steve (33:42.522)
Yes.

Barry Norris (33:48.872)
One of the problems, but by saying we want to get to 100 % net zero, rather than, we’ll just stop at 50 % because we’ve done our bit, or we’ll do 80 % as we were going to do up until a few years ago, is that you actually remove the fossil fuel, which is the best for power generation, which Britain’s got a lot of, which could be extracted cheaply.

Because it’s got some CO2, you say, oh, we don’t want any of it. That’s the problem. We need to recognize the value of gas. I was just looking before we started this podcast, the gas price per megawatt hour before carbon tax at the moment is 20 pounds per megawatt hour. It’s a fifth of the cost that we’re paying in the next wind auction for wind generation.

and it turns up where we want it to turn up. And we could easily get, if we have an electricity network, which is predominantly powered by gas with some nuclear, we could cut our CO2 emissions by 80 % in terms of, certainly in terms of electricity generation, I’m not quite sure about transportation and not impact on

the environment, not impact, I’m not going to talk about the environment, not going to get into the climate change debate, but that is the relatively painless economic way to do it. And of course, there is lots of gas, indigenous gas in the North Sea. There is lots of gas that we could frack in the UK and we could actually export energy to the rest of the world. The pound would be strong again, as it was in the 1980s.

We would be the best economy apart from Norway in the entirety of Europe. That’s why this political thing to get to net zero is so economically devastating because we give up gas, which is so incredibly valuable.

steve (35:44.754)
I like that, I that you’re so steady.

Huw van Steenis (35:50.126)
Thank you.

steve (35:51.538)
Yeah.

steve (36:04.946)
The thing I don’t understand is why there hasn’t been a lot more research done on carbon capture and storage. There was quite a lot of initiatives quite some time ago, in the 2000s, and then the government kind of sort of ran out of steam. It seems bizarre to me, but the problem with nuclear…

Barry Norris (36:24.744)
I think to be honest, Steve, carbon capture is, I’m not going to sort of criticize the motives for people involved in carbon capture, but you’re basically addressing the wrong question. Carbon capture is something that if you give any company enough subsidies, it will tell you that it can do something economically useful. I think just carbon capture is going the wrong way about it.

Think about it this way, right? Carbon capture is a way to keep using fossil fuels, but to reduce CO2. What we’ve done by not realizing the value of gas in the whole of Europe is that we end up burning wood, which is the one fossil fuel which has got more CO2 emissions than coal. And we call it sustainable because you can grow another tree. Well, if you wait long enough,

You could get more, you could wait for more fossil fuel to grow under the sea.

steve (37:28.85)
So just one thing on nuclear, because the issue with nuclear is quite expensive. You’ve got the risk of the capital cost in the construction, and you’ve also got the risk in the decommissioning, the cost of the decommissioning. I mean, do you have a view on what it costs to produce nuclear? Nuclear energy, okay, interesting.

Barry Norris (37:49.992)
Look, I mean, I’m invested in Cameco and I’ve had some investments in nuclear on the basis that at some point, governments will have to realize that intermittent forms of power generation are economically ruinous. And then the next place they look will be nuclear because they can’t get out of this.

religious net zero thing. So they’ll go to the next best thing, even though it’s more expensive. But if it was down to me, I still think nuclear involves a hell of a lot of some capex. We haven’t worked out how to do it cheaply. And frankly, it’s less economically ruinous than wind and solar because it’s economically useful, the product it produces.

but it still is a very heavy price to get to net zero. And my point is we’ve halved our CO2 emissions just by switching from coal to gas. If you get rid of the net zero CO2 and just say, we’ll have some, we’ll aim to halve again from here, you could have an economy that is powered by gas and that would be very cheap. I mean, if you think about gas today, 20 pounds per megawatt hour for gas.

steve (38:56.912)
Oh yeah.

Barry Norris (39:16.2)
We could, if we actually started drilling for it and frack it for it, we could export it again.

steve (39:23.154)
Don’t use that word fracking. I don’t want people demonstrating outside my office. Let’s leave these politically contentious things because we want to talk about investing. If you’re right and if people start to believe you and we stop spending as much on wind and solar,

Barry Norris (39:28.68)
It’s totally illogical this aversion we have to fracking is totally illogical.

Huw van Steenis (39:32.91)
Yep.

steve (39:49.842)
One of the consequences of wind and solar is that you have to change the grid. That’s true in the UK. It’s true in the United States because where you get the sun and where you get the wind isn’t where you get the people, where the people consume the power. So there’s been quite a lot of investment going into companies that can service that.

Do you think that that investment, so just thinking about the stocks, those stocks that are benefiting from the reinforcement of the grid, is that dangerous, do you think?

Barry Norris (40:28.424)
Yes, because you’re, I mean, talk about if you’re in a hole and you keep digging. It’s just like, you’ve got something which is economically useless, which eventually…

I mean, the irony, Steve, is there’s a whole industry of sustainable investing, which is totally unsustainable because it doesn’t produce anything of any economic worth. It’s totally reliant on government subsidies, and it only works when interest rates are zero. So, okay, if wind and solar are unsustainable in that way, and at some point, when the economy hasn’t grown for 20 years,

governments realize that one of the reasons why it hasn’t grown is we went down this wrong -headed net zero path. Then all the other investment, you don’t need that either. So, yeah, I mean, I just wouldn’t be in these kinds of investment. They’re just… When somebody says, quite funny because when somebody said to me,

steve (41:33.074)
Okay, no, that’s fine, that’s fine.

Barry Norris (41:41.8)
10 years ago, what is sustainable investment? I’d have thought something is still around in 10 years time because it made enough profit to still be around. But there seems to be a new definition of sustainable investment.

Huw van Steenis (41:56.258)
But also, Barry, the shift in interest rates has moved the world a little bit more in your direction. The biggest interest rate shock in 45 years has hit the renewable stocks incredibly hard. I’m sure you’ve probably shorted some of them. You had some very big moves. And a lot of the private equity guys are investing at LNG and actually across Europe. And even with the green taxonomy, gas got jammed in as well at the last minute.

So I think beneath the big rhetoric, the facts on the ground are shifting. But I don’t know if that’s, may not be as fast as you want.

Barry Norris (42:34.856)
I mean, I think the balls on alternative energy will explain everything that’s happened in the last two years solely as a function of interest rates. I don’t think that’s true. I think it’s a function of the fact that the product that these companies produce is economically worthless. And the fact that interest rates are not zero anymore means that they have to demonstrate

that it is worthless and it can make a profit outside of being subsidized. So, you know, my point would be that this whole form of investing has run out of political capital because governments have reached a limit of how much it can sustainably subsidize these industries where government debt is already very high. It’s run out of investor capital.

because they’ve all lost so much money and it doesn’t work. They can’t lever up. The reason why zero interest rates work is that you only got a return as an equity investor if you could stuff the project with 95 % debt and therefore, you could lever that 5 % equity. When interest rates go up, you can’t do that anymore. You have to have much more equity and that’s what makes it a marginal economic product.

just completely useless when interest rates are higher. And then thirdly, I would say that the consumer, and you can see this all over the energy transition.

doesn’t want to buy the energy transition products anymore. So it’s run out, you know, and they’re fed up with more useful products being banned. So the whole thing has been reliant on government coercion as well. So if you think about, I don’t know, you know, just talk about the electric car. Now, I argued 18 months ago that…

Barry Norris (44:40.966)
We were at peak electric car 18 months ago because those people that could afford to buy an electric car and wanted to do so as a kind of penitence for their sins, which is the way I look at a lot of this spending, had already done so. And everybody else, people that couldn’t afford it, just said, well, if I…

I’m not prepared to buy an electric car because they’re more expensive. I’ve got to charge it overnight and electricity prices are high. And if ever I want to do a journey more than 10 miles, then I worry about running out of electricity. And yet 18 months ago, analysts covered the car industry had us going to 100 % EVs in the Western world in between about five to 10 years. And I said at the time, that’s incredibly…

This is just group think this is never going to happen. And so I say that that has run out as well. And therefore, you know, I would say the problem with this whole energy transition is irrespective of the debate whether we need to cut manmade carbon emissions because of the theory that these are causing rises in

global temperatures and that we can’t mitigate those or that they don’t have other things that will rebalance them like more green plants doing photosynthesis or more water vapor as cloud also being something that will stop the earth heating up. Irrespective of all of that debate, we’ve…

We’ve reached the end of this and we can’t do it in the economically additive way that we were promised. So we were promised that the energy transition was going to be pain -free economically. And I think people have realized that irrespective of the climate change debate, that was never true. And when you get into that economic debate,

Barry Norris (46:59.08)
You then say, well, what am I prepared to pay for net zero? And then, you know, we’ve been, I think what’s frustrates me is that this is the biggest economic question of our day. And actually, I think we’ve been allowed to debate how much it’s going to cost, which is why I focus on that. Once you debate how much it’s going to cost,

can leave it to others to actually have a debate about man -made CO2 emissions and their effect on climate change because you’ve been able to push that away as a taboo subject when we were told that the whole thing was cost free. And certainly in a properly functioning democracy, you don’t have a parliament that decides to go to net zero after a two -minute debate and no vote, which is what we had in the UK.

steve (47:56.818)
This whole I mean the whole reason that we’re doing the podcast Barry is to better understand the the economics I mean, that’s why we’re you know, that’s why we’re doing this and I mean the logical impact of all this is That it’s inherently highly inflationary isn’t it because you’re investing in unproductive capacity

Barry Norris (48:03.688)
Yeah, absolutely.

Huw van Steenis (48:04.718)
Exactly.

Barry Norris (48:20.296)
Yeah. Well, it’s economically destructive. You obviously have a political choice as to whether it’s inflationary or deflationary. It’s deflationary if you do nothing about it. So all of this will lead to a massive misallocation of capital. It could only be sustained by more government borrowing to fund subsidies and government coercion.

to ban more useful things. Therefore, you get lower GDP per capita. And then the government has a choice because that’s obviously politically unpopular. So you have a choice at that stage. You either drop it and backtrack and say, well, maybe actually Britain might be a better place with two, whatever it is, degrees warmer. And have a different narrative. So, you know, all these scientists, they were wrong all along. They misled us. Or…

Or you say, we’re going to print money. And that’s where you’re right. It’s inflationary because you have to have a gap in society. If you’re not growing productively, if real GDP isn’t growing, well, nominal GDP growing is the next best thing for politicians.

steve (49:37.714)
Yeah. So is your portfolio positioned that way?

Barry Norris (49:43.464)
Well.

Huw van Steenis (49:44.11)
Yeah.

Barry Norris (49:47.944)
On the outside world, it might seem that this is the only thing I ever do any research on or articulate in my portfolios. But actually, my day job is managing a long short fund. And I have a lot of different things going on. So the important thing when you’re managing a fund, particularly a fund which…

is my duty as it were is to generate double digit uncorrelated returns in a sustainable way, i .e. a consistent way. I can’t allow my views on any one subject to dominate my portfolio. So I’m solely here to maximize profit and

We’ve done well shorting some of these ESG stocks over the last couple of years, but they’ve not been the only thing we’ve been shorting. So I would say, I think one of the things that I look for in things to short in the market is where you think there’s an area of the market where there’s just a lot of group thing.

and people have just bought into a narrative and have actually the economic behavior and the investing behavior has just become dominated by a narrative without any kind of discussion of numbers or how sustainable the profit generations. And that’s so, you know, when you said, well, it could well be AI, but you know,

steve (51:35.504)
AI, that sounds like AI.

Huw van Steenis (51:37.358)
Yeah, yeah, yeah.

Barry Norris (51:41.448)
Thankfully, we’ve not had any shorts in AI yet. But you say, you know, you started your business when you were 30. I mean, I think that’s just also a function of the fact that there are certain people that work well in bigger organizations, there’s certain people that work well in smaller organizations. And kind of, you know, being able to step back and think about things in a really critical way, I found…

I’m more able to do that as kind of like a Lone Ranger rather than being part of a big battalion. Because I think as soon as you’re part of a big organization, your thinking becomes dominated by, well, you know, what do I need to think to advance in this organization, rather than I’ve done some value -added research and I think I’ve got a view which is differentiated.

So I think also, you know, I’m not doing down a skill set that could do well in big companies or people that are consensus builders or stuff like that. But I would say that’s good for, that’s not a good trait to have in investing. Good investors are like cats. They’re not herd animals.

steve (53:03.602)
Interesting.

Huw van Steenis (53:04.494)
And I was going to say, given your thesis, given we’re now into the third year of the renewable stocks underperforming, and actually by big numbers, do you think the work, the best of the short is behind you? Or do you think there’s a lot more to go?

Barry Norris (53:19.144)
Well, I think that you know, no, because all of these companies will eventually go to zero without government subsidies because they don’t produce anything useful.

Huw van Steenis (53:26.254)
But the government subsidies are quite long dated, so they could drift along for quite some time.

Barry Norris (53:31.836)
Yeah, potentially. But you know, it’s the look. If you look, so you look at, let’s say, Orsted, where we’ve had a short for the last two years. Now, the what really attracted us to Orsted was obviously that the thesis on offshore wind, and that was the best way to play it. But also that, you know, this is a company that just reports group accounts, you never get

any insight into the individual projects unless you’re prepared to look at the local accounts filed in companies house of the wind projects. And so you never get a good insight into the actual levels of leverage in the business because often they’ll proportionately consolidate the special purpose vehicle. There’s loads of off balance sheet there, blah, blah, blah.

Now, I think part of the thesis in Austin played out last year in that they basically admitted that they couldn’t produce wind power for below a subsidized price of 100 pounds per megawatt hour. And therefore, they had to write down a lot of projects and not do the projects in the US. And…

that it stopped by being a growth stock to people actually thinking, well, actually, maybe those bullish assumptions I made just aren’t true anymore, and I’m worried about the balance sheet and how it funds it. But the company managed to kind of explain it away by saying, well, we need to raise prices because of temporary supply chain issues. So my point, and also issues related to the US, which, you know,

particularly US supply chain issues. So my point is, well, why do you need to raise prices given that your contract you’re being awarded is over 15 years and not two years, and you’re already got these upwards only inflation adjustments, so you’re already compensated by inflation in the contracts. And most people bizarrely have bought into this. And they also think that, okay, if you look at the offshore,

Barry Norris (56:00.102)
win CFDs in the UK. Basically, they were all above £100 per megawatt hour up until 2017 when they dropped to 50. And then they kind of went down to I think about 38 at the low. Bear in mind, we’re talking about it’s not the proper number because it’s 2012 prices, etc., etc. But most of their assets in the UK have been built,

Huw van Steenis (56:24.046)
Yeah, right.

Barry Norris (56:29.64)
on those 50 pound headline CFDs. So how profitable are those going to be? So I would say, all of those assets, they haven’t been written down. None of the analysts are saying, so all of these assets that you’ve built in the UK for 50 pounds CFDs, how profitable are they? They’re not profitable. And then you think, if you think the average subsidy still in the UK,

wind generation is probably nearer £150 per megawatt hour, simply because the subsidy regime was even more generous before 2015, where you had £150 CFDs or ROC certificates and all of this. So there’s also the question of what’s the life of the wind turbine? Because they tell you it’s 15 years,

they can point to the wind farms that are still very profitable that have been going for 15 years. But they’re only very profitable because 15 years ago, the subsidy was 200 pounds per megawatt hour. Try upgrading the turbines when you’re only getting paid 50 pounds per megawatt hour and you’re in deeper and deeper water because all of the best sites have already been taken. So I just think this is going to…

And then you think about where the Labour government want our capital to be allocated. They want to do even more of this, not less. It’s going to be a massive scandal.

steve (58:11.442)
Well, listen, Barry, that seems like a good point to end this wonderful conversation. It’s been fascinating talking to you. We are doing this to get both sides of the story because we want to get at the truth. So, Hugh, Barry, thank you very much. Oh, before we go, I should just ask you, Barry, where can people find you? I always forget to ask that.

Huw van Steenis (58:19.872)
Agree.

Barry Norris (58:31.784)
Thanks a lot.

Huw van Steenis (58:32.398)
Thank you very much.

Barry Norris (58:38.056)
So a good starting point is our website argonautcapital .co .uk and the main fund I run is the Argonaut Absolute Return Fund, which is a long short equity fund.

steve (58:50.866)
Cool, well we’ll put that in the show notes. Thank you.

Huw van Steenis (58:55.342)
Fantastic, thanks Barry.