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What Could Clean Energy Industry Learn from .com Bubble?

It is new. It is promising. It is future. Clean energy industry has been labeled by echoing slogans for the past decade and is even called a “modern day gold rush”. Obviously, demand for energy is mounting while fossil fuel reserve dwindles; growing emerging economies are experiencing phenomenal energy, especially electricity consumption increase and developed world’s demand is still growing stably. In addition, the environmental cost of traditional energy sources has been proved scientifically, and more importantly, severe pollution has impacted residents directly in industrialized areas and the entire mankind is threaten by potential fatal consequences from global warming. Clean energy is the way out of these serious issues. That is the big trend. Peroid.

No wonder clean energy has obtained ever-increasing press coverage, favorable policies from governments and legislators, and attention from stock market and private investors. New concepts, brilliant prospective, high investment flow, favorable policies, and a fast, industry-wide investment-driven growth – doesn’t all these sounds familiar?

Yes you got it. The dotcom bubble is not far away from us. During that wave of exuberance, investors were also correct in almost all aspects – internet and relevant new technologies will reshape the landscape of many industries and daily life, policy was also favorable, capital intensive nature of information technology could attract lots of money and add value to it, and eventually, internet based business models would be successful. However, they were wrong in how fast this would happen and what percentage of the business would be successful.

If we do a bit comparison, it is not hard to find current clean energy investment wave shares some features with dotcom bubble at least in following ways:

First of all, they are both considered technology intensive, rule-changer industries, which will influence most of other industries and almost all aspects of our life. But rules will not change by days or even years.

Just as internet, clean energy will bring changes to supply chains, traditional manufactory, and our life style; moreover, renewable energy will deeply influence the geopolitical power and result in possible national interest redistribution, and has long term environmental benefit. These factors give new energy an even stronger identity as an innovative rule-changer, and ultimate life-saver for the earth in many environmentalists’ eyes.

However, even the growth trend is clear and potential is solid, the specific direction is still vague after cheap cash has flooded in. Dotcom bubble was inflated by website mania, amongst which most business model were totally impractical and unprofitable. It is exactly the same situation where people still have no idea about new energy sources that is efficient, stable, safe and affordable as traditional energies in most regions. Which clean energy source is practical and how soon it will be is left to research development and long-term observation to answer. Hopefully it is before the stop of investment inflow.

Secondly, the excitement aroused by the potential growth may blind investors to see the realistic growth barriers. People take their time to adapt to new things. It was true for internet that, even if a better service was provided, people were reluctant to switch in most cases. For energy industry, it is far more than just people’s mind to conquer.

Huge amount of fixed assets need to be replaced by another round of investment. Constructions are needed, compatibility issues need to be solved, and price is a very sensitive issue. Wind farm can be destroyed by hurricane, solar panel could suffer from unpredictable material price change and waste recycling overheads, and even the most mature hydropower has been proved to be a not-so-clean energy and has adverse environmental impacts. Confidences take longer time to establish, and is far more than psychological issues. But enthusiastic, if not greedy, investors could be squeezed long before the potential turns into cash flow. A recent collapse in Spain has proved this. Although solar panel will be a viable technology eventually, the over-generous subsidy from Spain before 2008 has taken its toll, halting this industry, after subsidy scale-back and capping financial incentives. It is still not the time for dramatic change.

Last but not least, if we take a close peek into a new technology, you will find dark spots on the bright prospective. E-commerce is handicapped by lack of in-store experiences and will co-exist with department stores as compliments to each other in the foreseeable future, rather than replacing it completely. It is almost the same for clean energy. Digging deeper into this sector, we will find the boundary between ‘clean’ energy and ‘unclean’ traditional energy are not sharply clear. Solar panel manufacture is notorious for high energy consumption and related pollution during production and waste recycles. Biofuels may cause food shortage, increased plantation of transgenetic corps and elevated demands for pesticides. New technologies are usually anything but perfect and will co-exist with the old for longer time than investors idealistically predict.

To sum up, it might be better to maintain a cautious optimism to the development of clean energy sector. A recent failed (or in its official announcement, “postponed”) IPO from one of the China’s largest wind power companies, Huaneng Renewables, and a fair IPO result from another big player in wind energy, Datang International Power Generation, again underlined the potential risk of even the most matured subsector in renewable energy industry. It is exciting to ride a great surge, but it is safer to wear a parachute.