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“The energy and digital transition will devastate the environment in untold ways. Ultimately, the environmental price of building this new civilization is so staggering that there is no guarantee 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 the Earth will always have the final say.” — Guillaume Pitron, The Rare Metals War
Renewable and green energy are all the rage. Fueled by climate change and other environmental concerns, environmental, social, and governance (ESG)-focused funds reached $3.9 trillion in assets under management (AUM) at the end of September 2021. The International Energy Agency (IEA)’s “World Energy Investment 2021” report anticipates that this AUM will only continue to expand in the years ahead.
Among the report’s keenest insights — and there are not many — is the following:
“Policies remain a crucial driver for many energy investments . . .”
Put another way, renewable and green energy investments are driven not by economics but by political policies.
So, what’s wrong with that? Governments sometimes must take the lead 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. The technological advances in green and renewable energy over the last 40 years are impressive.
- In 1981, the largest wind turbines had a 17-meter turning diameter and generated 75 kilowatts. In 2021, GE Renewable Energy’s giant Haliade-X wind turbine has a 220-meter turning diameter and a tower height of 250 meters and can generate 12 to 15 megawatts (MW).
- The price per kWh for lithium batteries has dropped from $7,650 in 1990 to around $160 per kWh in 2021. Concurrently, the energy density, or how much power is stored per cubic measurement, increased six-fold.
Why wouldn’t the momentum continue? Our world will meet the challenge and achieve lofty and laudable environmental goals. The future will be glorious.
Not so fast.
One MW of solar electricity requires five to 10 acres of land to generate. If New York City consumes around 53,500,000 MW of electricity, then 5,350,000 acres of solar panels might be needed to power the city. That’s an area about the size of the state of New Jersey.
A single 3-MW wind turbine may contain 335 tons of steel, 4.7 tons of copper, three tons of aluminum, and 700-plus pounds of rare-earth materials. This doesn’t include the aluminum and copper wires or the related towers and electrical infrastructure that deliver the power to the consumer.
As for the operational environment, most wind turbine blades are made of nonrecyclable composites. So, when they’re retired, they are cut up and sent to landfills.
Supply Woes: 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 about 82,000 metric tons (MT) in 2020. As the United Kingdom and particular US jurisdictions begin phasing out the sale of traditional gas-powered autos in 2025, their demand for lithium will increase seven-fold, from 200,000 MT to over 1,400,000 MT by 2030. And lithium demand will grow elsewhere as well, whether for EV batteries, for batteries for tools, computers, and homes, or for lubricants and glassmaking.
There won’t be enough lithium to meet the demand now or in the future. Lithium will be in short supply for at least a decade.
The rare-earth metals required for solar and wind energy are supply constrained. Neodymium, dysprosium, indium, selenium, etc., are only available in a handful of countries. Rare earths harbor a dark secret: To mine and refine them is an energy-intensive process and creates considerable pollution, among other environmental and social costs.
Energy Woes
What about coal energy? When will that 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 spike 9%, reaching an all-time annual high.
As Keisuke Sadamori, the IEA’s director of energy markets and security, observed, “The 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 near-term forecast, reflecting the major gap between ambitions and action.”
The United States and the EU have their own domestic production issues. Copper is an essential metal for green and renewable energy. While a significant source of copper, the United States is still a net importer. Copper mines in Arizona and a copper-nickel mine in Minnesota have run into difficulties as the Joseph Biden administration has exerted its influence in the permitting process. The administration also momentarily paused the sale of new oil and gas leases. Such choices will make the United States more sensitive to supply shocks.
Likewise, the EU’s decision to shut down coal plants, reduce the use of nuclear energy, and rely on green and renewable energy comes amid greater potential for disruptions. In late August and early September 2021, Europe endured a heat wave. The surge in energy demand coupled with a lack of wind caused natural gas prices to spike by 325% over the prior year. The drive for carbon neutrality by 2050 has rendered domestic power unreliable and increased European dependence on Russian natural gas.
Electric Vehicles Excess
Yet investment funds continue to flow into green and renewable energy. I participated in a four-month research program into one segment of the sector, the electric vehicle industry, as an advisor to the board of Unicus Research. My role was to keep asking, “Okay, and then what?” It was one revelation after another.
For example, the EV supply chain is hardly a paradigm of ESG considerations. Think illegal mines and child labor on top of mining-related environmental degradation. Such excesses are hard to square with the EV sector’s supposed ESG bona fides.
Another problem: The electrical infrastructure is not capable of handling the power requirements of a rapidly expanding fleet of EVs. Power grid failures in Europe, California, and Texas demonstrate the system’s fragility. When California’s grid buckled amid peak demand this summer, the state’s EV drivers were asked not to charge their vehicles.
What if the lithium battery technology is not yet ready for automobiles? Much smaller lithium batteries have earned bad reputations. Samsung’s Galaxy Note 7 phones were so notorious for exploding, they were banned from aircraft, and e-cigarettes and other lithium batteries from checked luggage. The Chevy Bolt EV has been recalled, creating a billion-dollar hit to 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 put out with water. Lithium battery fires are so hot they split water molecules into hydrogen and oxygen, creating a flammable hydrogen gas cloud. Their heat can damage or destroy the tendons that give prestressed concrete slabs their strength. These slabs are found in parking garages and apartments and on bridges. Where will EVs park if they aren’t safe in parking garages?
The counterpoint to these views, of course, is the carbon-neutral vision of renewable and green energy’s “True Believers.” I wish the True Believers were right, but we can’t ignore the problems of rare-earth scarcity and related pollution and peddle wishful thinking as investment advice. That is for the state-run lotteries.
Now What?
So, what does this mean for us advisers? Like it or not, the trends for the foreseeable future favor mining and refining in North America and Europe. Traditional energy companies may be undervalued. That’s a potential opportunity. Those companies that have begun the vertical integration process from mine to battery should survive.
Green and renewable companies are attracting too much investment. As a whole, they are overvalued. 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 those items are hard to find, their costs are soaring, and the current logistical bottlenecks will remain at least until summer 2022.
The companies or funds that proffer ESG compliance and adopt sustainability standards take on two risks: the high cost of adherence and of the potential litigation for claiming and failing to adhere.
Policies remain crucial. As long as governments and large pension plans favor ESG-labeled companies and green, renewable, and ESG funds receive tax incentives and tax breaks, the money will continue to flow their way. But eventually these tax breaks and incentives will sunset or no longer cover the difference between the returns on government policy-enhanced investment and more unrestrained market opportunities.
That’s when we will see which green and renewable energy firms can live up to the hype.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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