The green glut

With Biden in charge, the green energy trade is about to get very crowded, writes Matthew Lynn

The United States, a country famed for its gas-guzzling cars and urban sprawl, will have net zero carbon emissions by 2050 and its power industry will have decarbonised by 2035. On this side of the Atlantic, the European Union is planning to spend the bulk of its €750 billion Coronavirus Rescue Fund on climate friendly technologies. Meanwhile France is putting €30 billion towards what its PM calls “ecological transition”, and Germany is spending €60 billion on its Climate Action Plan. Even the UK is starting to spend big money, with more and more power coming from renewable energy sources and petrol-powered cars set to be phased out by 2035. By any measure, vast sums of money are about to be committed around the world to making energy production a lot greener.

But hold on. Amid the blizzard of plans, targets and investment programmes one point is easily missed. This is about to become a very crowded industry. True, climate change is a serious issue. But we are also about to see a massive burst of over-investment. In fact, green energy is about to turn into a classic boom and bust cycle of over-investment leading to too much supply and collapsing prices. Plenty of money will be made selling the infrastructure for all the investment, but not much by any of the companies themselves. And the price we pay to heat our homes, and power vehicles and factories, is about to fall dramatically – with a lot of losses along the way. It might be worth it to save the planet, but it is still going to be a very bumpy ride.

With the departure of Donald Trump from the White House, and with Joe Biden taking his place, the debate about shifting to net zero economies is just about over. Trump sympathised with climate change sceptics, but Biden is committed to a green transformation of the American economy with a plan to spend $2 trillion on achieving that over the course of his four-year term. You don’t need to be Greta Thunberg to see the sense in that. The UK Parliament and other governments have declared a “climate emergency”, but even if climate change is not quite the extinction event it is sometimes made out to be, alternative energy sources are better for air quality, create less pollution, and with technology rapidly advancing, and prices tumbling, often cheaper as well. From either perspective, the sooner we switch from fossil fuels to cheaper, greener alternatives the better.

President Biden is putting some big bucks behind making that happen. There will be a new research agency tasked with developing climate technologies, an earthbound equivalent of NASA. There will be half a million public charging stations to encourage the take-up of electric cars. Tax credits will be available for renewable energy projects, and money will be sunk into carbon capture. And that is just for starters. But it is not just the United States. Every major developed country in the world is pouring tens of billions into electric cars, battery technologies, solar and wind power and hydrogen based fuels. France’s President Macron is leading efforts to make Europe a leader in battery technologies with billions sunk into new factories and joint French and German national champions. Japan is spending $100 billion on wind and solar power with a target of 27 per cent of electricity generated by renewables while companies such as Nissan and Toyota are aiming to capture the mass market in electric vehicles. The list goes on and on.

The vast quantities of money being spent on green electricity generation means that the developed world at least will soon be awash with the stuff

The chances are a lot of it will work. The cost of solar power has fallen by more than 80 per cent over the last decade. Onshore wind power has fallen by 39 per cent in cost over the same time, and offshore wind by 29 per cent. The cost of powering an electric car is tumbling: according to Bloomberg New Energy Finance, a $90,000 battery pack for a Tesla a decade ago would cost just $11,000 now. The result? What were expensive luxuries are moving into the mass market. In Norway, sales of electric vehicles have now overtaken petrol rivals, and many other countries will reach the same tipping point soon.

Here is the catch, however. We know from countless economic cycles that when you get over-investment you also get a glut. The vast quantities of money being spent on green electricity generation means that the developed world at least will soon be awash with the stuff. Keep in mind that our overall power consumption is not rising. In fact, it is either stable, or in many countries falling slightly as we also spend more money on energy saving products (our light bulbs consume far less energy than a decade ago). The UK is a fairly typical example. Our total energy consumption has dropped seventeen per cent from its 2005 peak, and is back to levels last seen in 1965. We haven’t been getting poorer over that time, we have just been using power more efficiently. If we carry on working from home once the Covid-19 epidemic ends, then we will need less energy to power commuter trains and heat vast office buildings. The result? A massive increase in supply is about to hit a market where demand is in steady decline. You don’t exactly need to be Adam Smith to work out that means just one thing for prices: they are going down. Add in some cheap undersea cabling and countries such as the UK will be able to buy lots of discounted renewable energy from France and Germany (and possibly even the US as well, although the cable will be pricier). There will be so much of the stuff – and it’s tricky to store – that countries will have to sell electricity for whatever they can get.

The same is true of electric cars. Deloitte forecasts that global production will rise from four million vehicles in 2020 to twelve million in 2025 and 21 million in 2030 as batteries get cheaper, and that is before you factor in all the investment in stepping up production. Volkswagen alone plans to make three million by 2025. With so many on the market, often from heavily subsidised factories, prices are only heading down. Electric planes are a little further away, but with the Government sinking money into research may arrive sooner than anyone thinks. Every “green” market is going to be flooded.

There are two important points in that for investors, or anyone following the industry. First, the only real money will be made by the companies selling the infrastructure and equipment. There will be fortunes made in selling solar panels and wind generators, building battery plants, and designing hydrogen fuel cells. Consultants and engineers will be in demand and will see their salaries rocket. But the returns on all the stuff they are making will be miserable. Next, the price of energy is about to fall dramatically because there will be so much of it around. Electricity will be cheaper than ever and the price of oil and gas will slump as well, putting huge pressure on the countries that depend on it for survival. Green energy is set to become a huge industry. But it is also about to witness a classic boom and bust cycle of over-investment, excess supply, and slumping prices as the market becomes flooded. That will be great for consumers – but treacherous for investors, and very expensive for governments.

Matthew Lynn is a British thriller writer, financial journalist and publisher. He is the author of the “Death Force” series of novels

 

 

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