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Educational Alpha: EGS - My Baader Meinhof Hack

April 27, 2023

By William (Bill) J. Kelly, CAIA, the President & CEO of the CAIA Association.


When our first son was born, we chose the given name of Samuel because it was so unique, an old-world name that we would single-handedly bring back to our generation, or so we thought. When our Sam was born, there was another Sam everywhere we turned … in our neighborhood, amongst our circle of friends, and up and down the halls of his preschool. Was there a vast conspiracy afoot to steal a page from our family playbook? Turns out, it was just another case of a “frequency illusion” less commonly known as the Baader Meinhof phenomenon.

What does this have to do with EGS (Enhanced Geothermal System), ESG (a first cousin anagram), and Earth Day? Everything and one thing. Earth Day was first celebrated in 1970. Nixon was president, the Beatles were disbanding, and the patent for the very first computer mouse was issued. Perspective can be eye-opening when trying to measure progress and fifty-three years later, the scorecard can feel a bit demoralizing. Ironically the ESG moniker has become ubiquitous, giving great cover for those attempting to measure everything and nothing at all.

This Earth Day I decided to try a new hack. I wanted to find something on the solution side of the ledger that I knew precious little about. I chose EGS and just like the story of my son Sam, I have had another Baader Meinhof moment. It has become a bit of a progressive learning game as it first felt like it was my term. That sense of ‘ownership’ has made a certain frequency illusion to become a frequency reality whenever I come across it as I read The Economist, the FT or the WSJ.

I know the cynics will wonder where I have been on this subject, and rest assured I am aware of the first use of this power dating back thousands of years and have spent quality time in Nagano Prefecture’s onsen baths. However, harnessing EGS as a viable solution in the mix of renewable energy sources has gotten a bit of a renewed lift of interest in the US because of the recently passed Inflation Reduction Act.

On the positive side of the ledger, geothermal energy is anywhere you choose to stand. The core temperature of the Earth is 5,200 degrees Celsius, and the solution is literally underfoot for all of us. The footprint of needed land is substantially smaller than that of a solar or wind farm and the base-level technology already exists thanks to the fracking tools and technology mastered by the oil majors. There will be no such thing as a dry-well in geothermal space and often existing oil wells can be repurposed to capture this cleaner energy. The World Economic Forum recently published a relevant article explaining the current state of play.

It is not all rosy though. EGS requires a substantial investment in further infrastructure, project permitting can take up to a decade, and there are real environmental threats as messing with Earth’s plates could invite greater earthquake risks. Then there are the free-spirited blockers over at The Burning Man Project that have weighed in, too. Ultimately, a move from fossil fuels will resemble a well-diversified portfolio of uncorrelated solutions.

In honor of Earth Day, choose to be smarter and more informed about just one thing, and call it your hack, or your Baader Meinhof moment. Knowledge is power, and that too is an energy that should be renewed today, as we cannot afford ignorance nor the passage of another 50 years of wasted perspective.

Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.

About the Author:

William (Bill) J. Kelly, CAIA is the President & CEO of the CAIA Association. Bill has been a frequent industry speaker, writer, and commentator on alternative investment topics around the world since taking the leadership role at the CAIA Association in January, 2014.