Recently I wrote an article critical of the wind and solar industries. Admittedly, I am highly skeptical of the industry, and critics could easily dismiss my article based upon my bias. When making a decision on an investment, investors should get a perspective from both sides. This article analyzes the arguments of a supporter of wind and solar, Ramez Naam.
Here are the major arguments presented in the defense of wind and solar made by Ramez Naam, and my responses:
Ramez: "China outspent the U.S. almost 2 to 1 in 2012, we spent $35 billion, they spent $65 billion, deploying wind and solar, mostly solar."
Me: To me, the last thing I would want to see is that the Communist Chinese Government has decided that it wants to compete in the wind and solar sector. The Chinese government is given money in the form of Certifiable Emissions Reduction credits through the UN's Clean Development Mechanism (CDM) program. The entire program is designed to get developed nations to fund development in developing nations.
The CDM was designed to meet a dual objective:
To help developed countries fulfill their commitments to reduce emissions;
To assist developing countries in achieving sustainable development.
This CDM mechanism is so detached from the market, and reality, that China is literally building wind farms that aren't even attached to an electric grid. Unfortunately, that isn't a joke.
China ... benefits from wind projects under the CDM,...Of the recent projects submitted for registration for China, the vast majority are wind projects, about 70 percent,... However, about 30 percent of China's wind units are not connected to the country's electric grid.
I could do an entire article on the stats included in the above linked report, but the relevant point isn't the numbers, it is that wind and solar are not market driven industries, they are a construct of a political movement. Does anyone honestly think First Solar (FSLR), Trina Solar (TSL), LDK Solar (LDK) and JA Solar (JASO) have a chance against the Communist Chinese Government when the UN is funding their investments? I don't. Until the U.S. wind and solar companies get equal funding from the UN, and the playing field is leveled, China is playing with other people's money, and the deck is stacked against companies that try to compete against them.
With so many of China's "clean energy" projects covered by the CDM, it is not surprising that clean energy financing is led by China. China's clean energy investment surged 92 percent in the second quarter to $18.3 billion, according to Bloomberg New Energy Finance. [iii] China has been the biggest market for wind turbines for several years and has recently quadrupled its goals for solar installations.
Ramez: "This is going to be a multi-trillion dollar industry. For two reasons, one is solar prices especially are going to come underneath the price of fossil fuels, wind also in some areas."
Me: There is no evidence of that, at least not on a non-subsidized basis, and if it were true, there would be absolutely no reason for government involvement, or at lease subsidies. There are also tremendous advancements being made in the discovery of fossil fuels here in the U.S., so predicting the future price of oil and gas is guesswork at best, as is the future price of wind and solar.
Additionally, even if wind and solar are cheaper per kw than gas, they still would have to sell as a substantial discount to fossil fuels, so just getting under fossil fuels won't help the wind and solar industry. Reliability and consistency is the problem with wind and solar, not costs.
As of the end of 2010, China led the world in installed wind capacity, with the United States a fairly close second. By the end of 2010, China had installed almost 45 gigawatts of wind turbines, while the United States had installed 40 gigawatts. The irony is that with 11 percent more wind capacity than the United States had in 2010, China produced only about half the amount of electricity from wind that the United States produced, according to the International Energy Agency. In 2010, China produced 50.1 billion kilowatt hours of wind powered electricity while the United States produced 94.65 billion kilowatt hours from wind energy.[ii] That lower amount of wind generated electricity for China is due to its transmission system not being able to handle the growth in wind capacity.
Until we can control the weather and rotation of the earth, we will never be able to power our homes at night with solar or fly our jets with wind. If wind and solar were truly a viable energy source, Solyndra would have powered its plant with solar and it didn't, it used conventional electricity sources. As stated above, China is literally being paid to invest in this technology. I doubt they would be doing it if they were using their own money. If someone was paying you to put solar panels on your roof wouldn't you?
Ramez: "It is going to be one of the biggest industries in the next 10, 20 years, and we're handing it to China because we're not acting"
Me: First, what is the evidence for this? Who would have thought cell phones and tablets would have toppled the PC 10 years ago, or Apple (AAPL) would be larger than Microsoft (MSFT) or anything having to do with the internet before 1995? Second, we aren't handing anything to China, China and the UN are attempting to construct an entire industry void of market forces. Third, if wind and solar were being driven by the free market, there wouldn't be any "handing" of anything to the Chinese, there would be competition determining winners and lowers. That isn't the case here. What Ramez implies by "handing wind and solar to China" is that the U.S. Government isn't willing to pour as much money into this political movement as UN is. Once again, China is getting so much money that they are building wind farms that effectively don't produce electricity. The only thing China has stolen from the U.S. is a huge amount of wasted capital and unproductive wind farms. The UN would have done greater good for China by funding hospitals and schools, not idle wind farms.
Ramez: "The second is that every country in the world is doing something about climate change and some restriction on fossil fuels in the next few years."
Me: These programs have had absolutely zero quantifiable impact on climate change and atmospheric CO2 levels. The trend of atmospheric CO2 is literally unchanged since these programs were implemented, in fact, if anything atmospheric CO2 has been accelerating upward. The fact that the globe stopped warming over 16 years ago doesn't help either. With very few results to show from these programs, governmental support shouldn't be considered reliable. All that "support" can change with a single landslide election.
Just consider, climate change has been blamed for the extinction of the dinosaurs and woolly mammoths, ending of the ancient Egyptian society, the plague of the Dark Ages, the revolutions of the late 1700's and the never to materialize coming ice age of the 1970s. Climate change is nothing new, in fact, climate change is the norm. Ask a climate scientist to point to a period in history when the climate wasn't changing and watch how fast the subject changes. Atmospheric CO2 was once 10x the level it is today and we fell into an ice age. In my opinion, China is using this "green energy" effort as a smoke screen to hide what is really happening. They are expanding their industrial base and energy production through politically incorrect coal. China literally gets paid to use wind and solar, and they choose coal. That should be enough evidence that market and political forces, even in a communist country, favor fossil fuels over wind and solar.
Unlike the United States, China is building coal generating plants and increasing its consumption of coal to fuel its growing economy, as many other developing countries are doing. According to China's National Bureau of Statistics, China's coal consumption increased 9.7 percent in 2011 to a record 3.7 billion tons, more than 3.5 times the coal consumption of the United States. China's total energy use increased 7 percent, the fastest growth in 4 years to fuel an increase in its gross domestic product of 9.2 percent. China does not worry about using coal, and will most likely be importing U.S. coal as the Obama Administration continues to slowly make it disappear as a generating fuel in the United States.[iv]
A likely mechanism to weaken political support in the U.S. is that the market impact of the U.S. not using coal is to make coal cheaper for China. The "green" policies in the U.S. make coal more affordable for China, and with new coal burning power plants, they are also more competitive. If anything is being "handed" to China, it is the competitive advantage they will get by using cheap U.S. coal. Basically the U.S. is handing China the tools they will use to defeat the U.S. in the global marketplace of the future. I doubt many politicians will be willing to run on that platform once it is recognized by the electorate.
Ramez: "I would invest in renewable energy, green energy, especially solar, but it is a very Darwinian market most of the companies out there are going to fail ... 90% will fail..as an investor you have to invest in the sector not individual stock."
Me: Simply do the math on that one, if 9 out of 10 fail, the one that survives has to have a 1,000% return just to break even. This is a reason to avoid this sector, not to invest in it. This isn't Darwinian survival, this is a recipe for portfolio extinction. Don't take my word for it, when asked if he owned any of these stocks Mr. Naam answered "no", without batting an eye. That alone should be warning enough. Actually, in my opinion, Mr. Naam's own actions offers the best way to invest in wind and solar, do it vicariously. Befriend someone that owns these stocks and ride the excitement through them. Until you see Al Gore add them back into his green portfolio, I would stay away from them, and let Mr. Naam's actions speak for themselves.
Ramez: "Prices are back where they were in the 80s, let's say commodities, and their ready to come down again, so long-term things are going to get cheaper and cheaper and cheaper."
Me: The only way wind and solar have any chance whatsoever of succeeding is if commodity prices become prohibitively high. Al Gore even writes about that theory in his book Earth in the Balance. If the expectations are that the price of commodities like oil, gas and coal are going to fall, the major mechanism by which the entire green energy economy is based collapses. Mr. Naam is describing the economic death sentence for green energy while at the same time recommending it for parole. I'd say stick with his original verdict, parole will only postpone the inevitable.
In conclusion, I am not a fan of wind and solar, in fact I think they are awful investments. I describe wind and solar as political agendas, not investments. I would avoid them like the climate change caused plague of the Dark Ages. What the linked video proves however is that critics like myself don't make the most effective agreements against wind and solar, their supporters do. Dismiss everything I say based upon my bias, and simply watch the video. I'm pretty sure an unbiased person will be persuaded to stay away from wind and solar from what their supporters say.
In expectation of some nasty comments, I am not opposed to all green energy companies, in fact I am heavily invested in 2 of them. I invest in them because they have a commercially viable process and sound economics backing them. One of the stocks Rentech (RTK) has a 61% ownership in a fertilizer MPL called Rentech Nitrogen Partners (RNF) which provides them plenty of cash flow while they work on market applications for their technology. They also have technology related to the Fischer-Tropsch process which I believe is the best commercially viable solution to our energy crisis. I say commercially viable because this technology has been in commercial use since World War II. SASOL has used this process for over 30 years.
SASOL in South Africa has produced liquid fuels from coal for approximately 30 years. Many U.S. oil companies have been conducting research and have built pilot plants or smaller plants. Interest in Fischer-Tropsch fuels is increasing because they will lessen dependence on foreign oil, reduce the number of different fuels required, and reduce environmental impacts because they burn cleaner than other liquid fuels.
The RTK process can be applied to Gas-to-liquid, Coal-to-Liquid and even garbage-to-liquid processes. RTK can literally take garbage, gasify it and turn it into fuel. The problem RTK faces is that it takes a lot of capital to build one of these plants, and has yet to find way to bring their technology to market. Currently the domestic economics don't support their technology, but as pointed out above, China has no issues with using coal and may be more welcoming.
Chief Executive Hunt Ramsbottom said that the current cost of natural gas--$3.25 per million BTUs compared with a high of $13 five years ago--makes it tough for his fuels to compete. Also, crude oil prices are in the low $90-a-barrel range, and his products aren't commercially viable unless crude goes well above $100. Plus government enthusiasm for alternative energy has cooled.
"It doesn't make sense to pursue alternative fuel technologies here in the U.S." Ramsbottom told the Business Journal last week.
Instead, Rentech will focus its alternative fuel technologies on overseas markets, particularly Asia and Latin America. In the United States, it will continue to rely on a growing revenue stream from its share of a fertilizer production unit and a soon-to-be announced venture in the traditional fuels sector.
Syntroleum (SYNM) is my favorite "green energy" company, and the U.S. Navy used its renewable jet fuel to fly their jets last summer in the "Great Green Fleet" demonstrations. SYNM makes their "renewable diesel" fuel by taking 7.6 lbs of waste grease and processes it into fuel. Before all the regulations, "yellow grease" was trading around $0.11/lb, so at those prices their process is highly profitable without government assistance given current market prices for ultra low sulfur diesel. SYNM also has Fisher-Tropsch technologies, and those to me are the most promising. There is a relatively limited supply of yellow grease, but there is plenty of natural gas and coal that can be turned into fuel.
The problem SYNM has is the same problem RTK has, they are new technologies, so getting a first of a kind plant up and running can be difficult and expensive. SYNM has a plant built, but has been unable to get it running at full capacity on a continuous basis after over 2 years of trying, and the plant is currently idle. These investments aren't for the faint of heart, and can be very challenging to own, but in my opinion at least they have processes that have potentially commercially viable applications that fit nicely into today's energy infrastructure and fill a market driven demand. Wind and solar don't offer that in my opinion.
I would recommend people who choose to invest in green energy do the research and find the companies that can stand on their own without government support. Those, in my opinion, are the ones that will survive in a Darwinian market. It makes no sense to me to invest in the green energy dinosaurs when all it takes is a political meteor to cause their extinction.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.