The EU, China Offer Case Study Warnings For Green Economy Stocks

by: Robert Wagner


Government dependency is a tremendous risk for "green economy" companies.

Countries across the globe are abandoning their costly "green" agendas.

The 2014 election may tilt the balance of power against the "green" agenda in the US.

I've written many articles warning investors of the "regulatory, political, geopolitical and fiscal risks" that government dependency exposes "green economy" stocks to. Most of these "green economy" companies are simply not commercially viable, and without government support, there is little hope of survival. The economics are so bad even companies that get excessive amounts of government assistance like Solyndra often fail. When China finally agreed to allow a company to go bankrupt recently, it chose a solar company, and another solar company may be the second.

China's Suntech Power has put its largest subsidiary into bankruptcy, a casualty of rampant oversupply in the solar industry and punishing sanctions levied on Chinese panel producers.

The bankruptcy filing, made in Jiangsu Province, marks the end of a long downward spiral for Suntech's Wuxi subsidiary, once a darling of the solar industry and one of the world's largest panel producers.

Declining prices for solar products and global trade spats have taken a toll on the nascent solar industry in recent years, leading to the failure of several firms heavily dependent on government support.

I speak from experience. I've invested in Rentech (NYSEMKT:RTK) in the past and am a current shareholder of Syntroleum (NASDAQ:SYNM). Both companies were extremely hurt by inconsistent, unreliable, disruptive and counterproductive government actions. RTK has/had promising biomass-to-liquids (BTL) technology based upon the Fischer-Tropsch process. The inability to secure government funding, and local "nimby" and "banana" opposition effectively drove RTK out of the alternative fuels business. RTK recently sold its production demonstration unit to a Chinese company.

Rentech Announces Agreement to Sell Alternative Energy Technology Assets

Exit from Alternative Energy Technologies Business to be Completed in 2014

The equipment purchased by Kaidi will be relocated to Wuhan, China where Kaidi is in the process of expanding its biomass-to-liquids demonstration facility to employ some or all of Rentech's alternative energy technologies. Upon Kaidi's completion of this demonstration facility, Rentech will be eligible to receive up to $16.2 million in success payments based on the performance of the technologies.

Syntroleum has all sorts of promising BTL, coal-to-liquids (CTL) and gas-to-liquids (GTL) based on the Fischer-Tropsch process, as well as a "Bio-synfining" process that produces renewable fuels out of waste fats oils and greases, or FOG. The US Navy has even flown its jets on the SYNM fuel made out of algae. SYNM, however, was pushed to the brink of bankruptcy largely because the government allowed a tax credit to expire, and then expectations of its reinstatement resulted in the markets driving the margins negative. Negative margins existed for a large part of the second half of 2012, so SYNM shut down operations and set in motion a chain of events from which it never recovered. Currently SYNM is in the process of being purchased by Renewable Energy Group (NASDAQ:REGI) pending a shareholder vote approving the transaction. Like RTK, SYNM also recently sold some of its technology to a foreign firm.

Facts are the constantly changing, inconsistent, often overlapping and confusing economic environment that the government creates for the "green economy" is a risk that can't be overstated. One administration will get elected and pass favorable laws, incentivizing companies to create an entirely new industry, and then another administration will come in and repeal all the laws that made the industry possible in the first place. While free market economic principles are the greatest threat to the "green economy," government created uncertainty and unreliability are a close second. The free market simply doesn't function well when the rules are in constant flux, especially when it takes years to build a plant, and many more to pay it off. It is hard to plan for a 30 year plant on a 2 year election cycle.

In the real world of business, when someone signs a contract, it is legally binding. If someone breaks the contract, there are legal consequences. Those rules simply don't apply to the government. Congress can pass a tax credit, and then turn around and immediately repeal it, and there isn't a whole lot you can do about it. The Congress can pass a law, have the EPA implement it, and then the EPA can change the law on its own. Right now in fact, ethanol and biodiesel companies are readying their lawyers to sue the EPA if its final RFS2 fuel RVOs don't meet their satisfaction. The petroleum industry sued them last year, but that is about all one can hope for. No one is going to jail, no one will lose their jobs, no one will be fined because the EPA changed the rules. All you can really hope for is that the judges rule in your industry's favor, and that is a roll of a dice.

The inability to rely on enforceable contracts is a huge problem, and it isn't unique to America. The headline of the article that inspired this article says it all.

Governments rip up renewable contracts

The article goes on to explain how when dealing with the government there are no guarantees. The government does as it pleases, contracts or not. The contracts simply aren't worth the paper they are written on, is the message.

Companies 'do not have a right [to expect the compensation] not to be changed'

Governments across Europe, regretting the over-generous deals doled out to the renewable energy sector, have begun reneging on them. To slow ruinous power bills hikes, governments are unilaterally rewriting contracts and clawing back unseemly profits.

Even if the government doesn't unilaterally re-write or break the contracts, they can change the law, eliminate subsidies or even tax and regulate the entity. If the government doesn't win one way, it simply can use its vast resources to get it another way.

In Italy, one of Europe's largest economies and one that lavished billions in subsidies on the renewable sector, the government in 2013 applied its so-called "Robin Hood tax" to renewable energy producers. Under the new rule, renewable energy producers with more than €3 million in revenue and income greater than €300,000 must now pay a tax of 10.5%.

I absolutely love the misguided analogy to Robin Hood. Robin Hood didn't "rob from the rich and give to the poor" in any modern sense. Robin Hood fought a tyrannical government that was taxing and regulating its people into poverty and desperation. Robin Hood effectively implemented a tax cut/rebate for the people and ignored onerous and oppressive taxes, laws and regulations. Robin Hood is the 12th century equivalent of Ronald Reagan, forcefully implementing supply side economics at the end of sword. Robin Hood robbed from the tax collector, and gave the money back to the people that paid the taxes. Robin Hood hunted on lands deemed to be off limits by the government. Robin Hood ignored the rules, regulation and taxes that the tyrannical King had imposed on his suffering people, and used deregulation and tax refunds to improve the lives of himself and his people.

The consequences of losing government support are significant. Once the government decides it can no longer afford to, or has lost the political will, the dependent firms stand little chance to stand of their own.

The result of these and other changes, says the solar industry, has been a surge in bankruptcies and a massive decrease in solar investment.

Losing support isn't difficult because the return on tax payers' investment is usually shockingly poor, and essentially counts as nothing more than capital cronyism at its worst. Once tax payers' start to pay attention, and learn what poor investments many of these "green" projects truly are, they express their anger at the ballot box. Once that happens, the results can be catastrophic.

As in Italy, Belgium's renewable sector in the county has gone dark -"imploded" in the view of a solar industry publication. Many companies shrank or went bankrupt...Perhaps the most dramatic moves occurred in Spain, for years the poster child for those touting a transition to green energy. Since 2000, Spain has given renewable producers $41-billion more for their power than it has fetched on the open market.

Not only is the promise of clean, affordable, reliable energy a total mirage, so are the jobs. The jobs exist only as long as the government agrees to continue to waste tax payers' money. Once that willingness is gone, so are the jobs. It is shocking how little viability there really is without government support for these industries. As mentioned above, even China is struggling to keep its "green" companies afloat.

The fallout in Spain was immediate. Its solar sector, which once employed 60,000 workers, now employs 5,000. The wind sector is estimated to have laid off 20,000 workers.

Not only are these programs a threat to the fiscal health and energy security of a nation, they can be disastrous to companies gullible enough to buy into an industry that can't function without government support. There is a reason the Solyndra plant relied on conventional power to run its solar panel plant.

Ikea - the Swedish furniture retailer that became enamoured of renewables - announced it was cutting its losses and abandoning a solar plant it had built in Spain.

Facts are, promises made by politicians often aren't even good until the next election. The ever changing environment would be difficult enough for competitive products, let alone uncompetitive ones.

Europe's renewable energy investors are facing a harsh reality - that the promises from politicians can be taken away at any moment. Canada's renewable energy investors may soon face that same reality.

Not only has the "green economy" come under fire in Belgium, Spain, and Italy, it is also losing support in the UK, Germany and Japan.

As the support for climate change legislation weakens, clearly defined investment opportunities will develop. In those articles I highlight how support for climate change is already weakening in the UK, Japan and Germany and I speculated that it will soon weaken in the US as well.

Looking forward here in the US, the consequences of the next election could be substantial to the "green economy." Fighting climate change barely registers on the list of issues concerning Americans, and Republicans have been gaining in the polls. If the Republicans are able to take the Senate, the Democrats will lose control of the powerful Environment and Public Works Committee. The man that will be taking charge is one of the most vocal opponents of green energy not only in the Senate, entire Congress, entire government, all of America, but the entire world. One only needs to read how his enemies portray him in their articles to understand what a threat he is to the "green economy."

Climate Denier Jim Inhofe Says He Could Lead Senate's Top Environment Committee Next Year

Inhofe, who wrote a book called, The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future,..has been one of the most obstructive Senators when it comes to meaningful climate change legislation...In 2006, Inhofe compared environmental advocates to the Third Reich. More recently, Inhofe claimed that cold weather disproved his substantial opposition and that fewer Senators are supportive of efforts to address climate change...Inhofe is up for re-election this year, but he is unlikely to lose his seat.

Even without control of the Senate, the Republicans in the House have been pushing the anti-green energy agenda and have been having congressional hearings. If the Republicans do capture the Senate, their opposition to "green energy" is almost certain to grow. I get a lot of heat for taking a position on the climate change "science," but I've looked into it, and I wouldn't want to be a climate change researcher called in front of Congress to defend why my model has been off on such an epic scale. Bottom line, tax payers have spent a fortune on this "science" and the resulting models have proven to be a complete waste of money, with essentially no explanatory power whatsoever. I could have run a regression of the global temperatures against the S&P 500 over the last 15 years and gotten better results than the CO2 driven climate models.

Disclaimer: This article is not an investment recommendation or solicitation. 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. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also own calls on REGI.