Market Euphoria Helps Fuel Green Energy

“The bubble in renewables is probably the stupidest that I have seen in my career,” Charles Gave, chairman of money manager and research firm Gavekal, wrote last month.

Stupid, however, isn’t the same as useless. Some bubbles can be hugely destructive, as we saw with housing 13 years ago. Others are socially useful. Private markets generally provide too little incentive for risky innovation because shareholders only capture a small part of an innovation’s benefit; most goes to consumers (think of a life-saving drug). A bubble can overcome that market failure as investors shower capital on countless new ventures they hope will be the next Microsoft Corp. or Amgen Inc. Even as most of those ventures fail, they extend the technological frontier.

In the late 1990s and early 2000s, investors snapped up the stocks and bonds of money-losing technology, media and telecom companies. The mania financed a glut of fiber optic that drove the price of bandwidth down enough to bankrupt many telecom companies while allowing countless new businesses to emerge. It also enabled Amazon.com Inc. to raise enough money to keep growing until it had proven its business model could work.

Green energy faces obstacles the dot-com boom didn’t. It mostly does what fossil fuels already do—just with less carbon dioxide emissions, a benefit that accrues to the entire world rather than producers or consumers.

Yet renewable energy resembles high technology in one important respect. “The key technologies of renewable energy systems—solar, wind, and batteries—… follow a learning curve: each doubling of their installed capacity leads to the same decline of costs,” wrote Max Roser, founder of Our World in Data, a data aggregation website. Between 2009 and 2019, the cost of photovoltaic solar power fell 89%, of onshore wind by 70%, he said. The cost of gas- and coal-generated power, which depend mostly on the price of the fuel, fell by a third and 2%, respectively.

That means some green technologies that aren’t commercially viable today may be in the future if they can secure the funding needed to scale up. Tesla was perennially at risk of running out of cash as it transitioned from niche to mass manufacturer. As with Amazon two decades ago, an irrepressible share price bailed Tesla out. Last year, it sold $7.3 billion worth of stock. With cash of more than $19 billion and net debt of about zero, “the company appears easily able to fund its global expansion,” S&P Global Inc. wrote last month, upgrading the company’s debt rating.

Green company shares more broadly are on a tear as institutional investors direct funds to companies that meet environmental, social and governance, or ESG, criteria. About $80 billion flowed into sustainable or ESG funds world-wide in the third quarter of last year, up fivefold from the quarterly rate in 2018, according to Morningstar. Not coincidentally, the companies in the Nasdaq clean energy index raised about $30 billion last year, according to Dealogic.

One of them is Plug Power Inc., a longtime supplier of hydrogen fuel cell power systems for forklifts that is expanding into road trucks, backup power generators for data centers, electrolyzer systems to make hydrogen from water, and hydrogen plants powered by renewables. Funding such plans would ordinarily be tough for a company that has never turned a profit. But as its shares skyrocketed from around $4 to over $30 last year, it issued $1.2 billion of stock and $200 million of debt convertible to shares. With that cash the company can make electrolyzers at “high scale, low cost,” and expand into markets potentially worth $2.5 trillion, according to Morgan Stanley, which underwrote the stock offerings.

Still, when so much capital chases so few companies, valuations can become illogical. Utility NextEra Energy Inc. generates less cash flow than Duke Energy Corp. yet garners twice the market value thanks to its extensive portfolio of renewable power assets. By contrast, BP PLC hasn’t earned any discernible premium for its plans to shift investment from oil and gas to renewable power.

Ultimately, most of the capital needed to transition away from fossil fuels will come not from glamorous green companies such as Tesla but all the others, who produce and consume most energy. More public research and development, a carbon tax or tradable emissions permits would redirect their investments far more effectively. Until and unless those come along, bubbles can help—if they last long enough.

Write to Greg Ip at [email protected]