Green stimulus is here. It just wasn’t planned

We have to wait a few weeks to see just how green President Joe Biden’s stimulus plan turns out to be. But we’re already in the middle of an unplanned green investment boom. It will end both badly and usefully.
Energy of all varieties is a capital-intensive business, so the cost of that capital often makes or breaks a new project. This is especially so for renewable-energy projects where all the investment is up front and, unlike an oilfield for example, there is no option embedded in terms of volatile commodity prices. Similarly, the more cutting-edge technologies, such as vehicle electrification, are often at start-up stage or otherwise unprofitable, so access to capital is an existential issue.
Hence, when people talk about the “energy transition,” on some level what they’re describing is a transition of capital, or money being deployed into one type of energy infrastructure over another. Which makes this chart very important: The forward price/earnings multiple for the WilderHill Clean Energy Index was an already-lively 41x a year ago. Today, it’s a positively thirsty 123x. Express that as an earnings yield, all 0.8% of it, and you get a sense of how freely capital is flowing into the sector.
Within that, consider one of the index’s more famous members, Tesla Inc. Having surged almost eight-fold in the past year, the electric-car maker has announced no less than three equity-raisings totaling $12.3 billion, far more than in its prior decade combined. The stock has kept on going up. Meanwhile, well over a dozen cleantech or climate-related businesses have gone public via special purpose acquisition vehicles, and more green-tinged SPACs are out there hunting for cash or targets.
Like the stock market in general, this has all the hallmarks of a bubble: high multiples, rapid price increases, a big (and vocal) retail element and a cool story to justify it all. It feels like we’ve been here before. As we all know, bubbles aren’t good. On the other hand, that doesn’t mean their only legacy is
flyblown Florida subdivisions, pointless dotcoms and shredded egos. Economist Ruchir Sharma coined the phrase “good binge” to describe a frenzy of investment that, even though it might ultimately end with a crash, leaves behind some productive asset or advantage. That doesn’t apply to flyblown Florida subdivisions. But it does to useful things like railroads, the Internet, shale, fiber-optic networks and gas-fired power plants.
This will also most likely apply to cleantech. It already has. The stunning decline in the cost of solar power owes a great deal to subsidised Chinese capital building factories targeting panels at a subsidised German power market.
Optimal? No. Bankruptcies? Yes; anyone who bought Q-Cells SE stock at EUR81 in 2007 has only bitter experience to show for it. Transformation of zero-carbon energy economics? Absolutely.
Similarly, regular readers will know Tesla’s valuation is nuts raised to the power of three. But if Tesla disappeared tomorrow — or its stock just fell by a lot — would the electrification strategies of the world’s major automakers (along with multiple countries and cities) or the progress made on battery costs vanish with it? No.
Even SPACs may have their uses. Rob Day, partner at Spring Lane Capital, a sustainable investment fund, argues in a recent Forbes piece that one thing spurring the cleantech SPAC craze is that, unlike in the technology sector, incumbent energy companies have been slow to finance or acquire promising new ventures. This has created a “target-rich environment” for the blank-check crowd, he writes. At least some of those targets could have staying power.
We went through this cycle with the shale boom, which upended the US (and global) energy market and, by crushing coal demand with cheap gas, reduced carbon emissions (methane’s a different story).

—Bloomberg