Whether its BlackRock CEO Larry Fink’s call for a “tectonic shift” towards sustainable investment, or U.S. President Joe Biden’s plan to spend US$2 trillion to boost clean energy use over four years, there’s no shortage of high-profile momentum behind climate-friendly investments these days.
Predictably, the pumping of cash into hydrogen-powered commercial trucks, off-shore wind turbines, and other clean energy solutions, has come with its share of naysayers.
Leigh Goehring and Adam Rozencwajg of the Wall Street research firm G&R Associates are among the latest to point to a bulging bubble. The veteran global commodities experts warn the road to a renewable-powered future will be tougher than anticipated. Worse, they expect it to be littered with over-valued companies and inefficient technologies that fall short of carbon-cutting goals.
“Over the last 12 months, green energy momentum has exploded. Investor euphoria has now reached new heights bordering on mania,” the investment firm wrote in its latest quarterly market commentary.
“Every green energy proposal we have examined relies on the trifecta of wind, solar, and electric vehicles combined with various battery technologies. In recent months, a renewed ‘hydrogen mania’ has broken out as well, which adds a fourth leg to the green energy stool,” they added. “These plans, including the current hydrogen craze, are bound to at best severely disappoint and, at worst, outright fail in what they attempt to accomplish.”
‘Dramatic growth is already priced in’
The iShares Global Clean Energy ETF (ICLN) has surged more than 111 per cent in the past year, as of Monday’s close. Goehring and Rozencwajg note the fund’s holdings traded at 70 times earnings, six times sales, and 6.25 times book value, when their research was published last month. This, they said, suggests “dramatic growth is already priced in.”
“Stretched valuations leave investors vulnerable to any setback or delay in the green energy transition,” they wrote. “What would happen if the energy transition proved more challenging than anticipated?”
Goehring and Rozencwajg said the rate at which special purpose acquisition companies (SPACS) are crowding into clean energy is yet another troubling sign. Green-focused SPACs raised US$40 billion in 2020, according to their research.
“Given how challenging clean energy product development can be, we fear the bulk of these green SPACs will likely end up being written off entirely,” they said.
The pessimistic take on carbon-friendly SPACs is shared by analysts at Sanford C. Bernstein. Often called “blank cheque companies,” they drum up investment before identifying a target to take public. Bernstein analyst Inigo Fraser-Jenkins recently questioned if the structure provides adequate transparency for environmental, social and governance-focused (ESG) investors.
‘Little hope in solving the CO2 problem’
On Tuesday, a report from the International Energy Agency (IEA) suggested that global emissions could climb in spite of rising clean energy deployment and recent COVID-related impacts on fuel consumption.
The report showed the decline in greenhouse gas emissions in 2020 was the largest on record. The agency noted that while low-carbon fuels and technologies such as solar and wind reached their highest annual share of the global energy mix last year, global emissions were actually two per cent higher year-over-year in December.
“Most energy transition plans advocate the widespread adoption of renewable energy and electric vehicles to drive down carbon emissions. Unfortunately, our research suggests these plans have little hope in solving the CO2 problem,” Goehring and Rozencwajg wrote in their report.
“Over the past two decades, Germany has aggressively pursued its renewable-centric ‘Energiewende’ plan, taking renewables from two per cent of all German electricity to nearly 40 per cent — by far the most aggressive renewable push in the world. Over the same period, carbon emissions per unit of energy fell by only 12 per cent. Not only is this reduction a far cry from the projected 50 per cent reduction in most energy transition plans, but it is also no better than those countries that did not adopt a renewable energy push.”
60 years to gain market share?
Citing famed University of Manitoba climate scientist Vaclav Smil, Goehring and Rozencwajg do not expect renewable energy adoption at a rate that would justify the recent surge in investor interest. Smil, whose fans include fellow climate change author Bill Gates, has long been skeptical of a rapid transition to clean energy. According to his research, it historically takes between 40 to 60 years for a new energy source to gain significant market share.
For Goehring and Rozencwajg, a transition to a mix of solar, wind, and other clean renewables would be a mistake with what they view as more efficient nuclear and natural gas options readily available.
“As much as 25 to 60 per cent of the energy generated in a renewable system is consumed internally, compared with three per cent for a modern gas plant,” they wrote. “According to our models, wind and solar would mark the first time we have seen a widespread shift into a much less efficient source of energy conversion.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.