HOUSTON – Billions of dollars’ worth of government investment designed to accelerate “clean energy” initiatives may be rendered moot if lawmakers in the United States fail to consider a basic tenet of supply and demand: getting supplies delivered to those who demand them.
Dana Novakovic, founder and managing director of LBC Energy Advisory in London, issued this warning during a presentation on Feb. 1 at the annual Nape Energy Summit in Houston.
In general, the Inflation Reduction Act (IRA) passed in July is “a bad idea because it is going to add to the inflation,” she said.
Still, there are opportunities to allocate funds productively.
“Deploying capital to those projects [leading] to employment production of goods and services in terms of energy in our case, and therefore bring supply and demand, supply money and supply and services into balance, is going to bring down the inflation in the long term,” Novakovic said. “That's the only way out.”
Novakovic compared the U.K.’s Energy Security Bill, which was also passed in July, with the IRA, finding the methodology of spending in both problematic.
“We’re talking about obscene amounts of capital,” she said.
By 2030, the U.K. legislation is intended to invest $119 billion and in the U.S., the IRA is slated to deploy some $369 billion in clean energy initiatives.
“If we dig these large sums of money – unprecedented large sums of money – and put it in the context of the monetary easing policies [by] effectively printing money, what we [will] see has happened is we have added fuel to the fire in terms of increasing inflation.”
But it’s not the amount of the spending that will accelerate inflation, Novakovic said. Rather, it’s the misallocation of it.
Allocating the investment toward projects that increase employment can balance resource supply and demand at the macroeconomic level and ease inflation in the long-term, she said.
However, current U.S. practice takes a more counter-intuitive approach.
“I would throw in a really controversial statement here that the Fed is actually counting on the recession to fight the inflation. The recessionary movement is going to cool down the economy and cooling down the economy is going to fight inflation. But is that the way to do it?” Novakovic said. “No. It’s about raising productivity.”
Devil in the details
One aspect of the U.K. legislation with some promise is in its small and modular nuclear technology, she said. The idea itself is “fairly sound,” she said.
“And the reason it is sound is because there is existing infrastructure. That is a stark contrast to green hydrogen, [which] is not feeding into existing infrastructure,” Novakovic said. “That is also where fossil fuels have an obvious advantage compared to other sources of energy at the moment.”
Nevertheless, the U.K. is neglecting much-needed investment in hydrocarbons, which continue to fuel the vast majority of energy needs around the globe. And, the U.S. is following a similar path, she said.
“The mistakes that the U.K. government has done in relation to oil and gas policy is very similar to what has happened in [the] U.S. in particular, in relation to imposing the green agenda beyond good measure,” Novakovic said.
And there could be a heavy price to pay for the oversight.
The global green hydrogen market was valued at $1.83 billion in 2021, according to Precedence Research, a market advisory firm in Canada. The figure is expected to top $89 billion by 2030 with a compound annual growth rate of 54%.
Novakovic said at the market’s peak during the first half of 2022, the sector was trading on average at 300 times their EBITDA.
Not only is the performance unsustainable, it represents a misallocation of capital, she said.
“I know what comes after this bubble,” she said. “It's a complete bust. The dotcom boom and bust will be a negligible little, tiny little hockey stick in history in comparison to this.”
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