Ask yourself three simple questions.
Do you think there will be more solar and wind powering the grid in ten years’ time, or less?
Do you think there will be more electric vehicles (EVs) on the road in ten years’ time, or fewer?
What will grow faster over the next ten years, clean energy or fossil fuels?
I mean… I could just end the piece there really, and try and convince you to see what one of our editors is tipping to benefit from this one-way shift.
Because you know the direction just as well as I do.
Starting a couple of years ago, the answers to these questions were put beyond doubt.
But some people still object to investing in this great transition, for one reason or another.
I’d like to tackle a couple today.
1 – “It’ll take longer than people think”
I think it’s important to follow this through to a sensible investing conclusion.
Does this mean that it’s a bad idea to stay away from renewables, electrification, clean technologies and the rest?
No – they are going to be the sectors offering that magical money multiplier: growth.
In the low-growth environment in which we find ourselves – this is a rare commodity indeed.
While share prices are rising fast, sales are often keeping pace, growing by a 100% or more year on year.
For oil and coal meanwhile, there is a different story.
The fact that the energy transition won’t happen overnight does open up some trading opportunities.
I myself believed oil stocks to be oversold around this time last year. Oil was negative and many stocks in the space were offering incredibly high dividend yields, and trading on price-to-earnings ratios lower than I’d ever seen – just 2x or 3x sometimes.
So yes, I would say that if fossil fuel assets are ever extremely oversold, there might be some short-term trading opportunities along the way. And maybe with inflation, higher oil prices can offer some protection. And maybe they have a role to play in a rotation to value, or in a diversified portfolio.
But I really dislike the way that very broad brush of “the transition will take time” is somehow used as shorthand for “clever people should steer clear”.
Sometimes, Occam’s razor would have it – the simplest answer is the correct one. The direction of travel is clear. Keep it simple.
2 – “Solar and wind are less energy efficient than oil and coal, and don’t run all the time so you’ll get blackouts”
This is true in some ways, and yes, that is why we currently use fossil fuels. They were more efficient than wood, their predecessor. And sure, if that were the only consideration, maybe we’d keep using oil until we ran out.
But we can’t because the world is going up in semi-literal flames, at some speed. We have to invest in and roll out the alternatives. It’s not a question of whether they will work or anything like that. It’s simply a question of how we will make it work. And fortunately, they work very well – though in slightly different ways to fossil fuels.
We are now factoring in more than just monetary costs – or at least starting to realise that environmental damage leads to much higher monetary costs down the line.
US President Joe Biden’s line in support of his huge stimulus bills is that the costs of inaction are in fact higher. Even though the trillions he is spending seem large, it’s smaller than the costs of coping with climate change if we do nothing. Is this true? There are arguments on both sides, but I still get annoyed by people who point out the imperfections with solar and wind, or EVs.
No – they are not perfect. But one in ten premature deaths globally are from air pollution, and fossil fuels are taking us down a path of natural and environmental disaster.
Efficiency is often used as an argument for nuclear, which is “clean” in that it does not emit harmful greenhouse gases. But this again misses the point.
Energy efficiency is not the most relevant factor. Maybe it should be, but tell that to someone who lives in north-east Japan, or who is going to have to pay massively over the odds for their nuclear power from Hinkley Point.
Nuclear faces political and social opposition. It’s been true for decades.
I was once told that 50 years ago, a famous scientist was quoted saying that nuclear was so powerful that it would meet all the world’s energy needs by the end of the century.
Why didn’t that happen? Because humans make mistakes and because one Chernobyl outweighs a thousand facts about safety, energy density and the energy return on energy.
Because in the human mind, fear of nuclear meltdown is a much more powerful emotion than the fact that more people die from coal mining than nuclear disasters – hundreds of times more in fact.
So when you hear people criticising solar and wind, and other clean technologies which are helping us fight climate change, remember that it’s a classic case of the “very good not perfect” attack. Just because they are not the perfect solution, doesn’t mean they aren’t very good and, above all, necessary.
3 – “It’s a bubble”
This one I have some sympathy with – as a conservative, cautious, protect-your-wealth kind of investor myself.
But it’s often said in a very dismissive and thoughtless way. The implicit conclusion is “so stay well away”.
But I refer you to my first three questions.
The direction is clear, after all. So how can it be a bubble, if it’s only the beginning of a multi-decade trend?
Well, I think it’s important here to distinguish between speed and direction.
If there is an error – and yes there is probably some overexcitement – then it’s one only of speed, not direction.
This is the very beginning of a 20-year trend and this sector is going to become a cornerstone of so many investment portfolios in the future.
Secondly, and slightly snidely, if the people who are calling it a bubble were so clever, they’d have bought in two years ago when James Allen and Sam Volkering were shouting from the rooftops about it. Being early was crucial, and many people who are now critical of the space were not.
Remember Dominic Frisby’s excellent definition of a bubble, “a bull market in which you are not invested…”
I.e., the reason it looks so crazy is because it was so wildly underappreciated a couple years back.
So when you hear people saying green energy is a bubble, remember that.
If they were such experts on the transition, they’d have been there from the start, like James and his subscribers.
And when they say it’s a bubble, don’t think that means you should run away, or steer clear.
But stock prices have come a long way quite quickly, and that is a sign that we should be getting more cautious, and careful, rather than greedier.
But not a sign that renewables are somehow terrible, or a bubble, or that we should ignore them in favour of dirty, declining “alternatives”.
That’s why, even now after the amazing run they’ve had, I still think that for investors who prefer the growth strategy, or who are patient and have a solid long-term time horizon, that clean energy is a great thing to have in a well-diversified portfolio.
And why I still highly recommend you see where Sam’s brilliant mind is going next.
To do so…
All the best,
Editor, UK Uncensored