Is The Green Energy Bubble Over?

  • Date: 15/11/15
  • Michael Lynch, Forbes

I have long warned the Cleantech industry against relying on rising fossil fuel prices and/or government assistance as the primary driver of success. The idea that fossil fuel prices must rise is a myth, and government subsidies might be withdrawn at any time

A major downside to a period of cyclically high energy prices is the attraction of relatively uneducated investors to the sector. Some put money into obvious cons, such as magical new fuels and fantastic equipment like super carburetors, most of which attract attention only from the most gullible. However, there is a gray area, which reflects poor due diligence rather than illegal or unethical behavior, especially where intangible or difficult to quantify effects dominate the prospects for the technology or fuel.

The high-tech industry is extremely prone to this problem, as estimating potential for a product that hasn’t made it to market is challenging, as is understanding a rapidly evolving market. This helps to explain a number of failed acquisitions which later appeared extremely unwise.

Energy does not suffer precisely the same problem: oil, gas and electricity are tangible, and have large markets. Equipment delivering heating, cooling and other services have an output that can be measured. It is much easier to quantify sales, revenues, and markets. Yet Cleantech is a hybrid of high-tech and energy, and there are clearly problems in assessing the prospects for companies, fuels and technologies.

The first oil crisis (1970s) saw a lot of bad investments in energy, such as the Old Colony Oil Shale project in Colorado or the Great Plains Coal Gasification Plant in North Dakota. These failed because of a widespread consensus that oil and gas resources were scarce and that recent price spikes would not only persist but worsen. “Oil is different” from other commodities was the mantra, and irrational exuberance, fed by neo-Malthusians and bad economic theory, resulted in tens of billions of dollars of losses to companies and governments alike.

This time around, there have been two changes: most Cleantech has experienced significant advances in cost and capabilities, and climate change concerns have become a major factor in government policy. Combined with government mandates and subsidies to consumers and developers, wind and solar have boomed, while electric vehicles are being sold in real numbers (unlike the 1990s). Stock prices for many such companies have been strong, and the occasional failure, such as Solyndra, is shrugged off as an outlier rather than a learning experience.

I have long warned the Cleantech industry against relying on rising fossil fuel prices and/or government assistance as the primary driver of success. The idea that fossil fuel prices must rise is a myth, and government subsidies might be withdrawn at any time, posing a serious risk to things like electric cars that depend on them for sales. Technologies needed to appeal to consumers, without significant subsidies, to really make a major impact.

Now, the success of Cleantech is constantly being touted, but the actual picture is much more complex. There has been an enormous amount of investment, in many places mandates are encouraging the purchases of clean power by utilities, and government support is massive in many places. But the warning signs are clearly present and the sector is on the verge of a serious shakeout. […]

One reason for the failed investments in the 1970 was that their poor economics were said to be offset by their “strategic” value, again something difficult to quantify and later avoided as a rationalization for promoting an otherwise unattractive project. Now, “green” has become the new “strategic,” something that is hard to quantify but explains why seemingly illogical investments are endorsed. This helps explain why companies like Fisker and Solyndra received enthusiastic reviews from advocates, rather than careful due diligence.

Further posts will discuss in detail why some of these fuels and technologies have failed as well as indicators that investors are becoming more savvy—or perhaps just weary of green pie in the sky.

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