The Corner

Regulatory Policy

Green Bubble Inflating

Wind-turbine generators in Desert Hot Springs, Calif., 2011. (Mario Anzuoni/Reuters)

Writing from the U.K. in an article for CapX, Bill Blain (who “absolutely believe[s] climate change is the biggest challenge humanity faces”), takes a look at wind power and other renewables and is not impressed:

 The brutal reality is offshore wind is far less efficient than promised and requires much more expensive maintenance. They break down, sink into their foundations and don’t generate anything like the power expected. For all the due diligence, they simply won’t ever make any money unless the price at which they sell energy is dramatically increased – at which point they make zero sense.

This will feel very familiar to many investors who have seen all the blithe assumption about operating and maintenance costs on all kinds of technological green marvels fail to meet expectations. Biowaste generators, biomass, thermal pellets – you name it, and the rosy assumptions failed to materialise because the difficulties in making them work and keeping them working were glossed over by the promoters.

Most of the smart money already knew that about renewables and is deeply sceptical. The not-so-smart money still laps the deals up. Sadly, renewables is likely to become another charming but flawed investment thesis…

And it’s not just renewables that are attracting big bids because someone else is assumed to have checked that they actually work. There are a host of other green assumptions that are unlikely to stand up to rigorous testing. Whatever you believe about recycling lithium batteries, it’s challenging. They are toxic to mine, toxic to process and toxic to dispose of. As the surveys now show, if you diligently use your electric car for 300,000 miles it will achieve carbon neutrality – as long as you don’t worry about how the electricity is made or how the batteries will be recycled.

And yet, what looks ominously like a green bubble continues to inflate.

To take just one example, here is Jamie Powell writing for the Financial Times’ Alphaville about the joint venture recently announced between auto manufacturer Renault and Plug Power, a hydrogen and fuel-cell company:

The joint venture between [Renault and Plug] will see them work together across three verticals: research and development, manufacturing, and sales.

Although, judging by the share price reaction, Renault need the most help with the latter. At pixel time, the French car company’s shares are up 1.5 per cent to €36.80 on the news. That gives it a valuation of just under €11bn.

Yet in early trading, Plug Power’s share price is up 17 per cent to $62.36, giving it a market capitalisation of $30bn. Yes, that’s billion with a ‘B’. [earlier Powell had noted that in the third quarter of 2020, the loss-making Plug had reported revenues of just $107 million].

So, in short, the press release caused the market to forecast that the discounted value of Plug Power’s future cash flows from this joint-venture agreement will be worth almost exactly a third of Renault’s market value (which, as a reminder, is the discounted value of its total future cash flows).

Okay, yes, we know. The market might be saying: “Well, it’s got this deal in the bag, who’s to say Plug Power can’t secure a few more of them now?” Or perhaps it’s: “This will help the company accelerate its R&D and manufacturing expertise, pulling forward its cash flows by a few years.” But . . . that still doesn’t quite make any sense relative to the extreme price action.

In fact, none of this stuff does. Not to bang the drum too hard, but it’s hard not to think this green energy/electric vehicle mania is going to run out of charge. And when it does, no one will be want to left stranded with an empty battery.

In late January 2020, Plug was trading at around $4. It closed today at $69.50.

This is not to single out Plug, or to comment on its merits as a company or, indeed, its valuation, but it’s hard not see its rise (at least in part) as a symptom of a green bubble that is well underway.

So, if you prefer, there’s also this from the Financial Times (and there are many other examples to choose from):

Automotive tech start-ups catapulted on to the US stock market via blank cheque vehicles have together amassed a market capitalisation of approaching $60bn even as several are yet to book a single dollar of revenue or make a product.

The electric vehicle sector proved fertile hunting ground last year for special purpose acquisition vehicles, which take companies public by raising money from investors and then cutting deals.

After stock markets recovered from a March meltdown when the pandemic erupted, blue-chip mutual funds, private equity firms and retail investors ploughed money into Spacs, which often bought companies with grand ambitions but limited track records.

With technology disrupting the automotive industry, investors have raced to secure exposure to potential winners — whether battery makers, manufacturers of other forms of power storage or developers of the “lidar” sensors that some believe are key to the development of self-driving cars.

Yet according to a Financial Times analysis, the nine auto tech groups that listed via a Spac last year expected revenues of just $139m between them for 2020. They include QuantumScape, a battery company backed by Bill Gates and Volkswagen; the hydrogen truck start-up Nikola; and the lidar company Luminar Technologies.

It’s not hard to see what is behind this green bubble. As I noted the other day:

Companies now tell anyone who is willing to listen about their plans to operate in a sustainable manner. Others, better still, like to boast of how their products will be assisting in the fight against climate change or otherwise are helping the planet “heal,” a positioning that makes them the darlings of “socially responsible” investors, as well as attractive plays for investors who aren’t too bothered by the environment but like the look of a bandwagon, especially when it is being pushed along by government, regulators, and institutions wanting to green their portfolios.

Don’t overlook the extent the role that regulators are playing (or are about to play) in driving a torrent of cash into (at least nominally) green investments. I’ve written before about the mission creep by regulators now determined to do their bit (as they see it) to fight off climate change, often (allegedly) on the grounds of risk control, a distinctly dubious proposition on any reasonably balanced consideration (FWIW, when it comes to climate change, I’m a lukewarmer) of what lies ahead in the next five to ten years.

Writing in Real Clear Energy, Rupert Darwall examines in some depth the way that regulators have being using climate risk as a way to expand their mandate, focusing in particular on the CFTC (the Commodity Futures Trading Commission — I wrote about the Commission in this context here), and on the way that it operating in a manner that is — let’s be kind — not altogether trustworthy. The whole article is very well worth reading, but, when thinking about a green stock bubble, I’d flag this (my emphasis added):

The CFTC makes no secret of seeing its job as finding ways to channel capital toward net-zero investments. When financial regulators and central bankers start playing climate politics under the guise of promoting financial stability, they lose focus on their core responsibility. Markets thrive on diverse, often conflicting, views of the future. They over-heat when a single view predominates. Savage corrections can follow… And therein lies the true threat to financial stability.

That’s an inconvenient truth that is unlikely to be included in the list of risks compiled by regulators who appear to be ready to allow ideology to trump their prudential responsibilities.


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