#9 - Is the clean energy industry headed for a slump?
Hold on to your hats!
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Unprecedented amounts of private investment has poured into clean energy over the last five years. So much so that people started complaining that fossil fuels were falling out of favour too fast. Clean energy funds attracted so much money it was inflating valuations for companies and started looking like a bubble. The pandemic accelerated this trend. As people were stuck at home, they poured money into stocks, including high-growth energy companies. ESG (Environmental, Social, Governance) investing became the hottest trend on Wall Street.
But the party may be coming to an end, at least for now. And this is a problem.
Clean energy stocks have been losing steam. The S&P Renewable Energy and Clean Technology Index has dropped 12% since 8th November. The iShares Global Clean Energy Index was at 6-month-high on 1st November and has fallen 11% since. Clean energy stocks are not alone of course: tech stocks have also been taking a beating over that time. But clean energy companies are seen as more vulnerable as they are smaller and less well known (other than Tesla).
What’s behind the drop? The downturn had started even before the Omnicron variant was found. There are two other, bigger, worries: the US Federal Reserve will raise interest rates to curb higher inflation; and that it’s ending its asset-buying program. Higher interest rates will make borrowing more expensive for smaller companies. The end of asset-buying could take the air out of the market’s exponential growth since March 2020. Investors are getting jittery and moving out of risky investments.
Some people dismiss all this as greenwashing. But it has had a real, positive, impact. It has made financing for fossil fuels more expensive and promoted financial markets to take clean energy seriously. Financing for oil and coal projects has became more expensive. Tesla's rising valuation alone has forced the car industry to take EVs more seriously. Big Oil's stagnant valuations have forced them to invest into clean energy too. Moreover, governments alone cannot do enough to switch us to clean energy. We need private investment into clean energy too. And many governments are more dependent on coal and oil revenues to cooperate internationally.
If the slide continues, it may lead to a drop in investment into clean energy at a crucial time. Fossil fuels have not hit their tipping point yet, they may yet get back into favour again. There are other dark clouds on the horizon too: solar, wind and battery manufacturers have all warned of rising raw material prices. That may impact investment into clean energy too.
But it’s not the end of the world. The acceleration from fossil fuels to clean energy is inevitable. The only question is how fast we do it. That inevitability creates its own momentum and market incentives. Clean energy companies may be in for some short term pain; some may even go bust. But the medium/long term growth is all but assured. Our planet depends on it.
Chart of the week
Bloomberg estimates global EV sales have hit 10%!
Nonsense