Sample: Is The Energy Transition Creating A Major Investment Bubble?

Green energy is not a buzzword from this decade. Since the start of the twenty-first century, renewable technologies have been the purported next big thing, always just about to burst on to the global stage. 

Yet, two decades into the century, we seem to be nowhere near what was promised at its beginning. Masterplan after masterplan in countries across the world has been pushing forward the date when the transition to renewables will happen. Such a transition still seems unlikely; the share of renewables among the total energy consumption of the world remains in single digits.

But this is hardly evident if one looks at the investment landscape. Investment into renewable energy and green energy firms rose steadily during the 2010s, and broke through the roof in 2020. The iShares Global Clean Energy ETF almost doubled in value between the start of the year and its end, as compared to a NASDAQ increase of just under 40%. In India, the stock prices of Adani Green Energy rose by more than 11 times during the same years. Tesla stock is currently trading at over eight times its January 2020 value.

These numbers raise the question, are we going through a Green Bubble?

The Green Bubble

The Green Bubble theory was first proposed in an article by Ted Nordhaus and Michael Shellenberger in 2009, and later in a book by Danish investor Per Wimmer in 2014. The theory claims that the current levels of debt held by a number of green energy companies are unsustainable, forming an economic bubble always on the verge of imploding. One claim of the theory is that a Green Bubble existed between 2005 and 2007, and went bust along with the financial crisis before it could get too big. The above statistics seem to suggest all the makings of a Green Bubble, with high levels of investment coupled with underwhelming returns.

Arguments against a Green Bubble

However, the encouragement to invest has also remained high. Most developed economies seem to have settled on plans to transition either completely to renewable energy or to make renewable energy the lion’s share of energy consumed by some time in the near future. 

The Joe Biden administration seems to have a very particular bend towards renewable energy, and the prime minister of the United Kingdom recently announced plans for a “Green Industrial Revolution”.

As per the Energy Transitions Commission, an international think-tank, at least 31000 GW of energy in wind and solar form would be required by 2050, if we are to come close to decarbonizing the planet. The currently installed capacity of the entire world is just 1400 GW, and a year-on-year increase of at least 11% compounded over 30 years will be necessary to achieve the aforementioned goal. This requires an annual investment of over USD 1 trillion. The current levels of investment in green energy, as high and inflated as they might seem, do not come close to this number.

Arguments in favour of a Green Bubble

A factor that could contribute to the development of a bubble is the influx of bad money that this sector is witnessing. During the early days of renewable energy, research and commercial technologies in the sector were generally restricted to a fringe of startups and small, single-product companies. This changed early this century. 

Over the past few years, even oil and gas giants, with enormous treasury chests, have decided that they want in. A significant issue with this is that these oil majors do not have the experience or the knowledge to do well in this sector, even when they do have the money to put in. As a result, they have been relying heavily on a strategy of mergers and acquisitions, in an attempt to rack up their market share, even at the cost of new innovation.

The Green Bubble is a detrimental prospect for renewables and decarbonization. Market, industry and government forces should work together to guard against this. A strategy of cautious optimism is best, given the current price levels. One wrong step can push the entire industry, and the planet, back by decades.