EV-Ho Ho Oh No

Here at the WPO we like a good meme as much as anyone. Actually, maybe not as much as anyone, but we like a good meme. Anyway, some of our favorites are those how it started, how it's going memes. This week we got some interesting news from Ford that made us dip into the way back machine and pull some tidbits from a 2021 press release which we've posted below.

How it started.....

How it's going......

For those that have been long time readers of the WPO, you might guess we weren't too surprised by this statement or news....really the only surprise was, it took this long. Specifically as it pertains to Ford, we always thought converting the F-150 and Mustang into EVs was a losing game. The only buyer was going to be the same person that bought the grocery getter version of the Hummer, the H-3. If you're a H-3 owner, we apologize if this is offensive, but you know who you are and you own the decision. Anyway, we digress.

Someone asked us this week, after the Ford news, if we thought AI was the next version of EV and net-zero over exuberance. While admittedly, there seems to be a little AI bubble, the answer is no. Our issue with EVs was always infrastructure along with adoption. While Ford's 2021 investor day strategy might have seemed bold, it was conservative to what some prognosticators were predicting with thoughts of more than half of all vehicles sold in the US would be electric by 2030. Call it simple math or common sense, the infrastructure required was always going to a huge challenge with that kind of growth and scale. While the main piece of EV infrastructure, was/is charging stations, the behind the scenes things like local distribution metering and the accounting have also been burdensome, not to mention special net metering tariffs. These days running a lemonade stand darn near needs a full suite of customer relations management tools, so you can imagine the behind the scenes solutions needed to accommodate a drive in your EV down to the local lemonade stand, Where you charge while you wait for the little baristas to pour you a glass while trying to up sell you on a cookie. While it's a given the local utility appreciates your support of local entrepreneurs, they need to meter and charge you the proper amount and rate and somehow flawlessly get it on to your invoice for the next month. Not impossible, but scalable to half the new vehicles sold, not easy.

Back to the question of AI becoming EVs? Along with the response above, our answer is this....if you know a teenager ask them to prioritize helping with homework, writing some cool music, making a movie with their friends, doing a simple search without pages of ads, and driving an EV. Our guess is the EV dream has no shot against compute power. Oh by the way, if you need more proof, Ford is repurposing some of it's EV battery technology to "energy storage business serving datacenters.".

PJM Capacity

Recently, PJM's capacity auction resembles following a Wagnerian Opera or one of Shakespeare's tragedies. Fair disclosure, we've never actually seen a full opera by Richard Wagner, or any opera, but it sounds like a cool metaphor, or simile, or....

We may not have covered this in past writings, but it's important to understand the basic function of the capacity market. The market is intended to be a tool to incentivize building generation assets making sure supply meets demand. In PJM there is supposed to be a three year lead time allowing for planning purposes and the ability to construct and come online. In MISO, that lead time is one year which in our opinion, kind of defeats the purpose, but that's a topic for another time.

A couple weeks ago we covered the total cost of wholesale power in PJM. The biggest component was energy, but if you recall, capacity was a 3x year over year from 2024 to 2025. Wednesday PJM released the 2027/2028 Reliability Pricing Model (RPM) Base Residual Auction (BRA), better known as capacity auction. The cleared price was the negotiated cap (another topic we've covered) of $333.44/MW-day which was expected. There was a lot to digest in the auction so we picked out a few things.

From the report,

"RPM cleared 14.8% Installed Reserve Margin (IRM) or 5.2 percentage points below the 20% IRM. The IRM is the reserve margin determined to be necessary to maintain a one-day-in-10-year Loss of Load Expectation (LOLE). Per OATT Attachment DD, Section 16, a shortfall of greater than one percentage point triggers an investigation into the cause of the shortage. Further, if a shortfall of greater than one percentage point continues for two additional BRAs, this will trigger a Reliability Backstop Auction. If a Reliability Backstop Auction is warranted, the Tariff requires that PJM make a filing with FERC prior to its execution."

It doesn't take some sort of expert certificate to read that as a kind of oh oh and if the words don't make sense, the table below doesn't make the results read any better. Frankly, we weren't 100% sure what, or how a Reliability Backstop Auction is or how it's conducted so we decided to turn to our favorite search engine assistant to find the manual. The definition used words like special and last-resort procurement mechanism. These auctions are called upon with a zone specific shortfall, or as our favorite assistant put it...."an emergency capacity auction PJM runs only if the capacity market fails to secure enough resources to keep the lights on in a specific place".

It's worth rehashing something we've mentioned before. A few years ago, some of the state members, specifically Pennsylvania, became alarmed by the rising costs of capacity as customers were having to wear the burden. An agreement was put in place to put a temporary floor and cap on capacity prices which has been hit in the last two auctions. PJM, does run a simulation without the floor or cap to see where the market would have cleared. As shown below, 27/28 would have cleared at $529.80/MW-day which is roughly 60% higher than the cap price. Estimates had this number reaching into the $700s and it's not unthinkable should the demand keep rising.

Cocktail Corner-The Bond Market Always Knows 2.0

We couldn't go a writing without AI, so we saved it for Cocktail Corner...sort of.

A few weeks back, we mentioned how the bond market always knows and at your pre-Thanksgiving parties, while "simpletons" are talking about stocks, you mention how you only follow the bond market. The example we used was Oracle and how the protection price on bonds (credit default swaps) had sky rocketed. Earlier this week, Oracle's stock took another big hit as Blue Owl Capital pulled $10 Billion in funding for a Michigan data center. While the datacenter plans aren't dead, this is a mega compute power capital provider and not a great look for Oracle. This weekend, at your Holiday gathering with the same crowd, you can remind them, the bond market always knows.

If we need some sort of disclaimer here, you know the drill, this isn't investment advice and all that jazz- this is just Cocktail Corner.