“The energy and digital transition will devastate the environment in inexplicable ways. Ultimately, the environmental price of building this new civilization is so staggering that there is no guarantee that you will succeed. Your power has blinded you to the point that you have lost the humility of the sailor before the ocean, the climber before the mountain. You forget that the Earth will always have the last word.” — Guillaume Pitron, The war of rare metals
Renewable and green energies are in vogue. Driven by climate change and other environmental concerns, funds focused on environmental, social and governance (ESG) reached $3.9 trillion in assets under management (AUM) at the end of September 2021. The International Agency of Energy (IEA) ‘World Energy’ The report “Investment 2021” predicts that this AUM will only continue to expand in the coming years.
Among the report’s clearest insights, and there aren’t many, are the following:
“Policy remains a crucial driver for many energy investments. . .”
In other words, investments in renewable and green energy are not driven by economics but by political policies.
So what’s wrong with that? Sometimes governments have to take the initiative and offer tax credits, grants and other carrots as well as sticks in the form of legislative and legal action to bring about the necessary change. Technological advances in green and renewable energy over the last 40 years they are impressive
- In 1981, the largest wind turbines had a turning diameter of 17 meters and generated 75 kilowatts. In 2021, GE Renewable Energy’s giant Haliade-X wind turbine has a turning diameter of 220 meters and a tower height of 250 meters and can generate between 12 and 15 megawatts (MW).
- The price per kWh of lithium batteries has dropped from $7,650 in 1990 to about $160 per kWh in 2021. At the same time, energy density, or how much power is stored per cubic meter, has increased sixfold .
Why wouldn’t the momentum continue? Our world will rise to the challenge and achieve lofty and laudable environmental goals. The future will be glorious.
Not too fast.
One MW of solar electricity requires between 5 and 10 hectares of land to generate. If New York City consumes about 53,500,000 MW of electricity, then 5,350,000 acres of solar panels might be needed to power the city. This is an area the size of the state of New Jersey.
A single 3 MW wind turbine can contain 335 tons of steel, 4.7 tons of copper, three tons of aluminum, and more than 700 pounds of rare earth materials. This does not include the aluminum and copper cables and related towers and electrical infrastructure that deliver the power to the consumer.
Regarding the operating environment, most wind turbine blades are made of non-recyclable composites. So when they retire, they are cut up and sent to landfills.
Supply Issues: Lithium and Rare Earths
Lithium is the key ingredient in the rechargeable batteries that power Teslas and other electric vehicles (EVs). Global lithium metal production stood at around 82,000 metric tonnes (MT) in 2020. As the UK and particular jurisdictions in the US begin to phase out the sale of traditional petrol cars by 2025, the its demand for lithium will increase sevenfold, from 200,000. MT to more than 1,400,000 MT by 2030. And demand for lithium will also grow elsewhere, whether for electric vehicle batteries, batteries for tools, computers and homes, or for lubricants and glassmaking .
There will not be enough lithium to meet demand now or in the future. Lithium will be in short supply for at least a decade.
The rare earth metals needed for solar and wind power are in limited supply. Neodymium, dysprosium, indium, selenium, etc. are only available in a handful of countries. Rare earths harbor a dark secret: extracting and refining them is a process that consumes a lot of energy and generates considerable pollution, among other environmental and social costs.
What about coal power? When will it be phased out? Probably not too soon. In the United States, coal-fired electricity generation is expected to increase by 22% in 2021. Worldwide, it is expected to increase by 9%, reaching an all-time high.
As Keisuke Sadamori, director of energy markets and security at the IEA, observed, “Pledges to reach net zero emissions made by many countries . . . should have very strong implications for coal, but these are not yet visible in our short-term forecast, reflecting the wide gap between ambitions and action.”
The US and the EU have their own domestic production problems. Copper is an essential metal for green and renewable energy. Although a major source of copper, the United States remains a net importer. Copper mines in Arizona and a copper-nickel mine in Minnesota have struggled as the Joseph Biden administration has exerted its influence on the permitting process. The administration also temporarily halted the sale of new oil and gas leases. These decisions will make the United States more sensitive to supply shocks.
Similarly, the EU’s decision to close coal plants, reduce the use of nuclear power and rely on green and renewable energy comes amid increased potential for disruptions. In late August and early September 2021, Europe experienced a heat wave. Increased energy demand, coupled with a lack of wind, caused natural gas prices to increase 325% over the previous year. The push for carbon neutrality by 2050 has made domestic energy unreliable and increased Europe’s dependence on Russian natural gas.
Excess of electric vehicles
However, investment funds continue to flow into green and renewable energy. I participated in a four-month research program in one segment of the industry, the electric vehicle industry, as an advisor to the board of Unicus Research. My role was to keep asking, “Okay, so what?” It was one revelation after another.
For example, the electric vehicle supply chain is not a paradigm of ESG considerations. Consider illegal mines and child labor in addition to mining-related environmental degradation. These excesses are difficult to reconcile with the supposed ESG good faith of the electric vehicle sector.
Another problem: the electrical infrastructure is not capable of handling the energy requirements of a rapidly expanding fleet of electric vehicles. Power grid failures in Europe, California and Texas demonstrate the fragility of the system. When California’s grid went down amid peak demand this summer, EV drivers in the state were told not to charge their vehicles.
What if lithium battery technology isn’t ready for cars yet? Much smaller lithium batteries have gotten a bad rap. Samsung’s Galaxy Note 7 phones were so notorious for exploding, they were banned from airplanes and e-cigarettes and other lithium batteries were banned from checked baggage. The Chevy Bolt EV has been retired, creating a billion-dollar hit on GM’s balance sheet, and even Boeing had problems with its 787 lithium batteries.
Lithium battery fires burn at over 3,500 degrees Fahrenheit. They cannot be removed with water. Lithium battery fires are so hot that they split water molecules into hydrogen and oxygen, creating a cloud of flammable hydrogen gas. Its heat can damage or destroy the tendons that give prestressed concrete slabs their strength. These slabs are found in garages and apartments and on bridges. Where will electric vehicles be parked if they are not secured in garages?
The counterpoint to these views, of course, is the carbon-neutral view of the “true believers” in renewable and green energy. I wish the True Believers were right, but we can’t ignore the problems of rare earth scarcity and related pollution and place wishful thinking as investment advice. This is for state lotteries.
So what does this mean for our advisors? Like it or not, trends for the foreseeable future favor mining and refining in North America and Europe. Traditional energy companies may be undervalued. This is a potential opportunity. Those companies that have started the process of vertical integration from mine to battery should survive.
Green and renewable companies attract too much investment. As a whole, they are overrated. Many pension plans invest in ESG funds. These funds have too much money chasing too few quality opportunities. Many EV, renewable and green energy companies will fail.
Companies that rely on long supply chains and third parties for batteries, chips and rare earths face a difficult outlook. All of these items are hard to find, their costs are skyrocketing, and the current logistical bottlenecks will remain until at least the summer of 2022.
Companies or funds that offer ESG compliance and adopt sustainability standards assume two risks: the high cost of joining and potential litigation for claiming and not complying.
Policies remain crucial. As long as governments and large pension plans favor companies with the ESG label and green, renewable and ESG funds receive tax incentives and tax breaks, the money will continue to flow. But ultimately, these tax breaks and incentives will or will not cover the difference between the investment returns enhanced by government policies and freer market opportunities.
That’s when we’ll see which green and renewable energy companies can live up to the hype.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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