Investors shun green energy

Posted by TonyN on 30/09/2010 at 8:00 am The Climate, The Wind Add comments
Sep 302010

A recent editorial from the Investors Chronicle posed this question about investment in green energy:

Thursday 2 September 2010 – Jonathan Eley, Editor, writes:

What are investors to make of green energy and other sustainable technologies? Instinctively, it should be a “big thing”. Carbon-based fuels are inevitably going to get more expensive, and governments around the world have pledged to spend mind-boggling amounts of money developing green technology and bribing us to adopt it. Yet despite this positive backdrop, picking winners at the company level has been frustratingly tricky – as anyone who’s invested in the sector will know to their cost.

[My emphasis]

Investors Chronicle

It is not surprising that investors should be both puzzled and worried, as a glance at some share performance charts for leading players in the wind power industry shows:

wind-power-share-prices.PNG

The extent to which public companies involved in what has become known as the green energy revolution can attract the support of investors is, perhaps, one of the more useful indicators of the state of play in the climate debate. However convincingly the IPCC may pontificate about the dangers of global warming and the need to reduce Co2 emissions immediately, and whatever pious aspirations worthy politicians may mouth, this tells us whether rhetoric is translating into action in the real world. Are investors willing to back what they are being told?

Without question, and for the foreseeable future, wind power is the only source of alternative energy that has progressed beyond the pipe dream stage, and can be reasonably described as an industry. It’s been around for about twenty years, and during that time the trading environment in which it operates has steadily improved. So why are there long faces among investors?

Nearly all the nations that are big players in the climate debate have free market economies. I say nearly all because China, which is certainly one of the most influential, still does not exactly fit this template. Surely, if the prophesies of planetary destruction that have become the common currency of environmentalism during the last decade are really taking hold worldwide, and becoming part of mainstream public policy, then this must be reflected in the financial markets. Companies that can really make a difference to the level of anthropogenic Co2 emissions should be booming, and those who are investing in this sector can reasonably expect to see a good return as the market grows. One does not have to look very far to find out why this is not happening.

In order for the value of a commodity to grow, be it gold, copper, oil, wheat, or pork bellies, there must be increasing demand; that is one of the most fundamental tenets of economics. Although there is an indisputable and continuous increase in the demand for electricity as the technological infrastructure that we have come to depend on steadily expands, that does not mean that consumers are willing to pay any price at all to purchase it. The usual rules of competition still apply. Although ethics may play some part in how consumers source their supplies, it is likely to be a very small part. If your company is being ethical, but your competitors are aggressively controlling costs, then unless you can persuade your customers that they should pay a premium in order to support your noble stance, they are likely to shop elsewhere. Green energy is expensive to produce and without subsidies it cannot compete with conventional sources.

Although it may be possible to persuade a proportion of the affluent middle classes in the leafy suburbs of the developed world to make sacrifices in order to feel that they are doing something worthwhile, that represents a very small part of the global energy market. In other words there may be a market for renewable energy as a boutique product, but that is not going to be the kind of operating environment that will attract global players and get stock markets excited. It isn’t going to have much effect on Co2 emissions either.

Governments in the developed world have launched a two-pronged offensive in an effort to overcome this problem. On the one hand they are providing subsidies to the producers in order to moderate prices, and at the same time requiring electricity suppliers to buy renewable energy regardless of the true cost.  On the other hand they are attempting to make renewables competitive by legislation. Carbon taxes and trading schemes are mooted as a means of making conventional power generation more expensive so that, perhaps, the price gap will close.

All these strategies should ring alarm bells for anyone who believes in free market economics. An artificially created market may provide the opportunity for profit in the short term, but it is inherently unstable and transient. At the same time there is the danger that if some countries obediently tax carbon  emmissions, and inflate their industries overheads by so doing, then countries that do not conform to the new ethics of carbon reduction will gain a  very real competitive advantage. When those countries that may prefer not to join the crusade have the kind of industrial clout packed by developing countries like China and India, then the developed world is obviously taking a very big risk.

Investment in electricity generation is a highly capital-intensive venture requiring sound strategic decisions covering decades rather than years in order to be profitable. Multinational companies that are not interested in trading opportunities in any one country, or even region, now dominate the power industry. In order to be profitable and grow they need to be able to take advantage of the opportunities offered by a global market, and global scale demand for un-subsidised green energy on a scale that ensures growth on a decadal scale does not exist. This market depends entirely on political measures for its existence. With commodities like copper, oil, wheat, or pork bellies, one can still be pretty certain that they will be in demand ten or twenty years time, although there may of course be price fluctuations. There is no such assurance where green energy is concerned; the market is only as robust as the political and economic policies that have created it.

If growth in the market you are investing in depends entirely on the gross subsidies provided by governments steadily increasing, and also governments continuing to legislate in order to boost demand, you need to be pretty damn certain that the political incentives that underpin those policies are here to stay. At the moment there is no reason to think that this is the case.

The cradle of climate alarmism has been the developed world - particularly the European Union - energetically supported by the United Nations in the form of its Intergovernmental Panel on Climate Change (IPCC) and its Framework Convention on Climate Change. In fact it would not be too much to say that the policies of all governments that aspire to reducing Co2 emissions are founded on their faith in the reports provided by the IPCC.

During the last year, the political and economic framework within which environmental policies are forged has changed dramatically. A combination of loss of confidence in the IPCC, growing public scepticism about a significant human contribution to climate change, and the need to cut expenditure in the face of continuing economic turmoil, has dulled enthusiasm for green energy. In the EU, France, Germany, Italy, and elsewhere subsidies are being cut. Emissions trading schemes intended to create demand for alternatives by loading the cost of conventional energy have become toxic political issues in the United States and Australia. The IPCC is now beset by criticisms of the integrity of its reports that have previously gone virtually unchallenged outside the blogosphere.

Looking to the future, the remaining months of this year are likely to provide a very rough ride for investors in green energy.

In mid-October, an IPCC meeting is scheduled at Busan, South Korea, to consider preparation of their Fifth Assessment Report due to be published in 2013/14. This is now likely to be overshadowed by controversies that could threaten the organisation’s future.  The InterAcademy Council has just published a report that is very critical of the IPCC procedures and past performance, particularly with regard to the way in which it has represented the manifest uncertainties that abound in climate research.

On top of this, the future of the current chairman, Dr Rajendra Pachauri, is in doubt. If the IPCC has problems, then this has happened on his watch. He is now into his second term in office and one of the more startling recommendations of the report is that one term is long enough. The resignation, or perhaps sacking, of the chairman will not enhance confidence in the IPCC. Worse, the issue of whether he should stay or go could split the member states.

If there is one thing that discourages investment it is uncertainty, and it would seem most unlikely that this meeting will pass without there being a good deal of blood on the carpet as the participants try to address the organisation’s problems. It is equally unlikely that a solution that will persuade the wider world that the IPCC has reformed itself and is back on track as a gilt edged authority on climate change can be found at just one meeting. The problems will rumble on.

If that was not enough, a climate summit will take place at Cancún, in Mexico, in early December. A year ago it was expected that this would be the crowning glory of the crusade against climate change, with a global treaty limiting Co2 emissions that had been hammered out at Copenhagen finally being ratified. Far from laying the foundations for this achievement, last year’s summit opened up rifts between the developed and developing world that, if anything, are likely to become even deeper at Cancún. The US has failed to introduce Co2 limitation legislation and is seen by its poorer neighbours as hypocritical when it calls upon other nations to do this in spite of the stifling effect that would have on their economic growth.

No one, not even the newly appointed head of the UNFCCC, is anticipating a breakthrough at Cancún. With the IPCC in disarray it now seems even less likely, and there is the very real danger that any attempt to get rid of Pachauri will be seen as an assault on a champion of the developing world.

Without a global treaty on carbon reduction that will guarantee that signatories everywhere will turn from their wicked fossil fuel ways, and wholeheartedly embrace alternatives, there will be no global market for green energy, and no reason to believe that one can be created any time soon. Until confidence is restored in the IPCC - which could be a very slow, or even impossible, process - cash strapped governments are most unlikely to promote renewables as a priority. Their electorates will not accept the swinging price hikes during difficult economic times that this would entail if the IPCC is no longer seen as a credible advocate of climate alarmism.

Investors in green energy will be well advised to accept their losses and get out before the end of the year.

_____________________

 h/t and thanks to Brute who posted the graphs on another thread.

18 Responses to “Investors shun green energy”

  1. 1
    tonyb Says:

    TonyN

    The trouble is

    a) the pay back time
    b) the artifically high energy price on which investment decisions are currently to be made
    c) inconsistent govt policy over the very long term

    With regards to the first, it is only going to be investors with a very long time scale who will be interested. Combine this with b) and it likely to have to be govt led and/or be put in place by utilities ‘bullied’ into it.

    Combine this with the uncertainties of c) and you’d have to be irrresponsibly green or want to burn money in order to go ahead

    I view renewables as an essential insurance policy against those who don’t like us and might cut off our fuel supplies.

    However it is also essential that such energy be cheap if it is to power industry and be acceptable to the public, and that seems an impossible combination at present.

    Personally I would favour a 5 year Govt backed Apollo type project in which all the possibilities were thoroughly explored with fusion and wave/tidal power being the preffered options. This can be done with or without approval at Cancun.

    The best option of all-using our extensive coal supplies- is out of the question when that has to be linked to carbon capture and storage.

    tonyb

  2. 2
    Bill Says:

    I dont follow those windfarm stocks, but they are probably down because 2 years ago investors thought everyone would be building windfarms for decades. With the (unsurprising) failure of Copenhagen, they are just volatile, capital cycle cyclicals with a less certain future.

    As for investing in cleantech startups, the trouble is that every Pension fund in the world
    is doing just that, to gratify the moral pretensions of the Trustees. As a result far more technologies get funded than deserve it, so the eventual casualty rate is even higher than it allways is in startup companies.

    There must be at least 40 well funded solar power technologies around globally today. Even in the extremely unlikely event that they all suceeded technically, there would be room in a commercial market place for only half a dozen or so.

    Its reasons like those above that you would be pretty careful about investing in cleantech – it has most of the makings of a bubble.

  3. 3
    TonyN Says:

    Bill, #2:

    I intentionally avoided mentioning the word ‘bubble’ in the post because it is rather overused at the moment, but I think that you are right. How the ‘moral pretensions’ of pension fund managers will cope with ructions at Busan and failure at Cncun remains to be seen.

    Perhaps what is happening at the BBC may give them pause for thought. I understand that the BBC pension fund is one of the few to be fully ‘ethically’ invested. Its poor performance, and the inevitable cuts in pensions, is now the cause of strike action by disappointed employees. There may be no link between a morally scrupulous investment policy and poor stick market performance, but I am sure that there will be many who are wondering.

  4. 4
    Barry Woods Says:

    [To follow this comment, which is very interesting, you really do need to have a look at the first link and the short video that it leads to. Sadly, I suspect that John Halladay's concerns are ill founded and that the video will be effective in the way the the 10:10 campaign intend: TonyN]

    10:10 Campaign…. No Pressure

    eco groups behaving like this, surely does not help, investors will steer very clear of this insanity…

    Quote from the Guardain:
    http://www.guardian.co.uk/environment/blog/2010/sep/30/10-10-no-pressure-film
    Had a look?
    http://www.youtube.com/watch?v=3UHN3zHoYA0&feature=player_embedded
    Well, I’m certain you’ll agree that detonating school kids, footballers and movie stars into gory pulp for ignoring their carbon footprints is attention-grabbing. It’s also got a decent sprinkling of stardust – Peter Crouch, Gillian Anderson, Radiohead and others.

    An UPSET Friends of the Earth -BOARD MEMBER

    From the Guardian comments (I’ve put some asterisks in….)http://www.guardian.co.uk/environment/blog/2010/sep/30/10-10-no-pressure-film?showallcomments=true#end-of-comments

    JohnHalladay
    1 October 2010 1:33AM

    Actually, I have to say something stronger,
    this film is ****ing ridiculous.
    I am a local Greenpeace coordinator, and a Board member of Friends of the Earth and I just can’t believe that you have produced a film that is so ****ing stupid.
    There, I’ve sworn on the Guardian.
    Jesus, where is your common sense. We’re trying to win hearts and minds.
    This is just ludicrous.

    Presumably this is John….. And I salute him!!!!!

    http://www.foe.co.uk/what_we_do/about_us/board/board_members.html

    John Halladay
    Friends of the Earth Trust and Limited Elected Board member for South Central
    Member of: Engagement Committee
    Elected: 2008
    Due for re-election: 2011
    John’s particular interests in the environmental field include recycling, the concept of individual carbon allowances and the effect of increasing world population on the environment. He works as a Human Resources consultant greening the employment practices in UK companies and is also the joint co-ordinator of Bracknell & District Friends of the Earth.

    Best comment is just a link to this: (josh might appreciate it)

    http://www.frexx.de/sburns.jpg

    JohnHalladay
    1 October 2010 1:27AM

    God knows I’m on your side but this just panders to the morons who think we’re ‘Eco-fascists’ – own goal, guys.
    Kill it and do something better.
    Disturbing!

  5. 5
    manacker Says:

    Put your money into Shell instead (hands off of BP for the moment for obvious reasons, as well as Exxon Mobil, which appears to be overvalued right now following an expensive acquisition.

    Max

  6. 6
    manacker Says:

    PS “Fossil fuels” are apparently deemed to be “sinful”, and “sin” has been a good business ince time immemorial.

  7. 7
    Alex Cull Says:

    Re green energy, there’s also this article in BusinessGreen about declines this year in the amount of renewable energy generated in the UK:

    “The DECC today said lower than expected wind speeds and rainfall led to a 12 per cent fall in renewable electricity generated between April and June, compared to the same period in 2009. This setback follows a smaller but still notable decline between January and March, again compared to last year.”

    And: “With speculation mounting that the government is considering cutting the feed-in tariff subsidy for small-scale renewable equipment, 69 industry figures and other experts will today publish an open letter to the government warning such a move would “shatter” confidence and put future investment “in mortal peril”.”

    Going by the quotes at the end of the article, RenewableUK is still confident that the UK will be able to meet its 15% renewable target by 2020 – including at least 30% of electricity. Even with heroic, “Great Leap Forward” measures in place (unlikely in the current climate), I suspect that is being a little over-optimistic.

    Re the “No Pressure” video, TonyN, I’m wondering whether you might be being a little over-pessimistic about its likely consequences. The majority of comments in the Guardian have been resoundingly negative about the film; there are quite a few supporters of 10:10 who have been calling for it to be withdrawn, and as I’ve mentioned in the other thread, they’ve actually taken it down (for the moment at least.) Also, I’m not exactly sure of this, but I think 10:10 have quickly re-organised their web site and taken out the internal “Mini Movie” links to this page (http://www.1010global.org/no-pressure).

    To me, this is looking more and more like a spectacular own goal, and I cannot help asking the question – what on earth were these supposedly media-savvy people thinking?

  8. 8
    TonyB Says:

    Barry Woods

    when I saw that the greenpeace guy you mention was in favour of personal carbon allowances my sympathy for him waned. Few things will do more to reduce our freedoms than that stupid notion. Google for my article ‘crossing the rubicon’ which went into the subject of proposed ration cards. 10.10 and Greenpeace are all as extreme as each other

    tonyb

  9. 9
    Jack Hughes Says:

    A few more problems with ‘renewables’ – especially wind:

    They need regular power stations as back-up for when the wind stops, so they are no good for reliable base-load. They possibly could work for intermittent usage with the ‘right kind of wind’. Maybe the Guardian could pilot this idea and only run their presses when there was a fair wind?

    The huge subsidies are affordable when they are only 1% of annual supply. But not affordable if we ever reach the green dream of 30%-plus.

    The lifetime green cost of these schemes seems to be right off the balance sheet. Solar cells for example have short working lives compared to the inputs in manufacture and installation. Offshore wind looks flakey in a similar way.

    Anyone who has seen a steel mill or a cement works cannot look at these green ideas seriously. Windmills use huge amounts of steel and concrete in their manufacture and installation.

    But one point to remember is that both Cameron and Clegg have financial interests in wind energy through their wives.

  10. 10
    manacker Says:

    Jack Hughes

    But one point to remember is that both Cameron and Clegg have financial interests in wind energy through their wives.

    Aha! Now we see how the political wind blows (or “it’s an ill wind that blows no good…”)

    Max

  11. 11
    TonyN Says:

    Alex, #7:

    The video is getting 10:10 and action on climate change talked about, and probably by a far wider audience of younger people than the average Guardian reader. I seem to remember Beneton running a very successful series of adverts that many people found offensive some time ago.

    Concerning the apparent reduction of output from wind turbines over the last year, that reminded me of an opinion from a meteorologist that I saw a while back who pointed out that there seem to be long term (multidecadal) variations in the prevalence and strength of westerly winds in the UK, and that wind energy development had taken place during one of its up phases. Of course a year is far too short a time to draw a conclusion from, but interesting nonetheless.

  12. 12
    G. P. Brown Says:

    CAn someone enlighten us on how the Danes are getting on with using large amounts of wind power.

    I believe they are not finding it quite as wonderful as they anticipated.

  13. 13
    manacker Says:

    G.P. Brown

    There are several flowery reports out there describing the Danish success with wind power, but most of these skip over the economics and the other problems with wind farms, in particular their lack of reliability and need for a backup power generation source when there is not enough or too much wind.

    This report points out the problems with wind power generation.
    http://www.aweo.org/ProblemWithWind.pdf

    Denmark is cited specifically:

    Despite their being cited as the shining example of what can be accomplished with wind power, the Danish government has cancelled plans for three offshore windfarms planned for 2008 and has scheduled the withdrawal of subsidies from existing sites. Development of onshore wind plants in Denmark has effectively stopped. Because Danish companies dominate the wind industry, however, the government is under pressure to continue their support.

    In general, the report concludes:

    It is wise to diversify the sources of our energy. But the money and legislative effort invested in large-scale wind generation could be spent much more effectively to achieve the goal of reducing our use of fossil and nuclear fuels.

    As an example, Country Guardian calculates that for the U.K. government subsidy towards the construction of one wind turbine, they could insulate the roofs of almost 500 houses that need it and save in two years the amount of energy the wind turbine might produce over its lifetime.

    Country Guardian also calculates that if every light bulb in the U.K. were switched to a more efficient one, the country could shut down an entire power plant—something even Denmark, with wind producing as much as 20% of their electricity, is not able to do.

    According to solar energy consultant and retailer Real Goods, if every household in the U.S. replaced one incandescent bulb with a compact fluorescent bulb, one nuclear power plant could be closed. John Etherington claims that switching the most-used bulb in every house of the U.K. would save as much as the entire output of all existing and proposed on-shore wind plants in that country.

    So you are right in writing about Denmark’s wind power

    they are not finding it quite as wonderful as they anticipated

    Max

  14. 14
    TonyN Says:

    PB Brown, #12:

    You should also have a look at the Country Guardian website which links to a paper about the Danish wind energy experience.

  15. 15
    Alex Cull Says:

    TonyN, re your #11 and a lack of steady westerly winds, I think the shifting of the NAO might be relevant here. For quite some time we’ve tended to have a positive NAO (here‘s CRU’s graph) and thus prevailing westerly winds (and milder, wetter winters), but a negative NAO brings weaker westerly winds and colder temperatures, thus possibly some bad news for the wind industry. Also the sort of “blocking highs” we had during the big freeze earlier this year are not ideal for wind turbines, either; I’m wondering what sort of output we had from wind power during January this year – not much, is my guess. If we do have a similar cold spell this coming winter, it would be interesting to monitor the energy situation to see what percentages we’re actually getting from wind during those times – rather on the low side, perhaps?

  16. 16
    peter geany Says:

    Hi everyone. I’ve not posted for a while as I have been very busy. I keep looking in though and TonyN you have picked an interesting subject here and one that will be at the centre of what happens over the next 10 years.

    There is obviously a sea change occurring throughout the world on the subject of AGW. One of the key factors that will accelerate this and something I have said must happen is that scientists are coming out and reclaiming science. There is a long way to go but it has started. It will accelerate as the money dries up.

    If one keeps one’s eyes open one will notice that the world is awash in Natural Gas and Oil. Part of this has been falling demand for oil and part is to do with Shale gas. In fact the price of gas has dropped in the US dramatically. I just can’t help feeling that peek oil is in for a surprise, and the notion that gas and oil are fossil fuels is losing ground by the day. It will be received wisdom for some time to come but I fail to understand how we can call gas and oil extracted from tens of thousands of feet below the seabed in rock that is not sedimentary a fossil fuel.

    But the biggest accelerator of change is money. I have been doing some digging of my own and just can’t help getting the feeling that the heady days of 96 to 2008 are over for good. There will be no recovery as there was after the Dot Com bust. This time its governments that are bust, and the only reason most of us are not bust is that the Government has had to hold interest rates artificially low otherwise we would all default within about 3 months.

    The whole western world and those countries that have aspired to our standard of living have copied the US monitory system. Unfortunately this has removed the differences that were always about, and if the US goes down then we all go down. I just cannot shake the feeling that our current banking system transfers too much wealth from the population to a small number of bankers. (I’m talking institutions here not individuals) What this has unwittingly done has removed our spending power, as we pay back our debt. It has also removed the room for further large Tax hikes to pay government debt. This is tricky.

    Now all the government green schemes are just a tax on individuals disguised as a utility bill or some other similar means. How can these schemes be extended in the current environment? The answer is they can’t, because the way the previous Government has structured it we all will start to pay more and more in Tax. This is very tricky.

    So if you are smart don’t invest in any energy scheme that promises a bonanza, as there is none. The Only group of individuals that seem to be still living in the Age of Stupid are our Politicians. Although I can see what I predicted would happen if the Tories came to power, a cut back on the green schemes, Cameron I suspect will not go as far as I want and throw the whole climate change bill in the bin. Perhaps this is because he has strong personal beliefs; certainly he can use the Lib-Dems as the excuse, but in 10 years we will have a completely different monitory system and AGW will be but a distant dream. But just how much damage will be done in the mean time?

    One last point; we have not seen the last of our monetary crisis. I believe we are just at the beginning, and it could get worse. The best case is we bumble along until Europe and the US come to their senses. For the Euro Zone that requires a split of the Euro into a northern zone and a southern zone, perhaps with Ireland. Much will depend on the US elections next month as the spending that Obama is doing makes Gordon look like Shylock.

    I nearly forgot. Two companies in 2007, both making cars and both are making a loss. One does the thing that all companies need to do when facing a crisis, one goes begging to the government. One finds its recovery depends on control being handed to the government, the other swallows hard and goes to back to basics. One of these companies is forced to rigorously adopt a sensible business practices, and do things like produce cars that their customers want. One is told that the money is dependent on them building cars that the government want. One is back in profit now, one is not.

  17. 17
    TonyN Says:

    Peter Geany, #16:

    There is an interesting review of a new book on energy policy here:

    http://www.americanthinker.com/2010/10/energy_and_climate_wars.html

    It also has some very pertinent things to say about ‘peak oil’, on which I certainly agree with you.

  18. 18
    Alex Cull Says:

    Peter Geany: “If one keeps one’s eyes open one will notice that the world is awash in Natural Gas and Oil. Part of this has been falling demand for oil and part is to do with Shale gas. In fact the price of gas has dropped in the US dramatically.”

    Peter, you have some very good points there. One blog I follow is nohotair by Nick Greely, which provides frequent updates about shale gas; the potential seems immense. Inexpensive and plentiful natural gas must impact on renewables at some point; how could it not?

    Even if the UK remains dead set on its course of giant-scale windmill construction, more and more people will surely realise that our energy bills are going through the roof to pay for a technology that delivers a tiny fraction of the energy we need, while a large volume of cheap, accessible (and relatively low-carbon) fuel is there for the taking, right under our feet.

    TonyN, just to say the Energy and Climate Wars book looks interesting, and will see if I can obtain a copy.

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