It was nice while it lasted. More than nice. The age of cheap energy,
free water, and abundant food was the smoothest stretch of highway that
humanity has ever traveled. But now that road has developed some very
big potholes. Oil, as this is written in early 2008, is $110 a barrel.
Fresh water has become scarce and/or poisonous in many places.
Food prices are soaring at double-digit rates. Sea levels are rising
while deserts are spreading. Commercial fish stocks are collapsing.
International tensions are growing over the remaining cheap oil, and
civil wars are being fought over water. And industrial chemicals are
saturating our kids’ bodies. Whew!
The consequences of the past century’s mistakes range
from inconvenient to disastrous. But focusing solely on the bad news
ignores the other side of the coin: Problems create opportunities, and
big, complex problems create vast opportunities. Solving any of the
looming environmental crises is worth literally trillions of dollars, so
extraordinary amounts of capital are flowing into “clean” technologies,
with completely predictable results: New energy sources, benign
techniques for managing various waste streams, even new ways of fishing
and farming are being developed that have the potential to put us on a
path to sustainable abundance—or at least to avert disaster. The rise of
clean tech is, in other words, an investment theme with long, long legs.
Third Time’s the Charm
Now, readers of a certain age may find this talk of a green boom
familiar. That’s because we’ve been here before—twice. The first time
was in the late 1970s, when oil shocks and gas lines led the Carter
administration to boost funding for things like coal gasification and
shale oil. But before the private sector had a chance to jump on board,
oil prices receded, government funding evaporated, and alternative
energy was largely forgotten. The next clean-tech mini-boom came at the
tail end of the 1990s tech bubble, when hot money sloshed over into
solar and fuel cell stocks, sending some of them through the roof. But
that was just the dot-coms’ irrational exuberance
rubbing off on other flashy stories. When the bubble burst, clean-tech
stocks plunged along with Pets.com and Nortel Networks, and investors
left in search of greener pastures (so many clean-tech puns, so little
time).
The current revival of interest began a few years ago, as rising oil
prices and ominous climate data put energy efficiency back on investors’
radar screens. But this time it’s for real, for the following reasons:
* Peak Oil. The oil shocks of the 1970s were primarily political and
structural: Saudi Arabia halted oil exports in response to the
Arab-Israeli conflict, and the United States failed to secure
adequate new supplies. But there was plenty of cheap oil in the ground,
and when the political turmoil subsided, the flow resumed and prices
fell. Today, as you’ll read in the Chapter 3, there is emphatically not
plenty of cheap crude. The world’s great oil fields are in decline, and
replacements are scarce. As a result, global oil production has plateaued (hence the proliferation of books with “peak oil” in their
titles) while the growing number of cars on Chinese and Indian roads is
sending demand inexorably higher. Oil prices, as a result, are likely to
rise for years to come.
* Surging Electricity Demand. Remember those quaint 1990s predictions
that the Internet would cut energy use by letting people telecommute and
shop and play without leaving home? As it turned out, this forecast
ignored the fact that our new electronic toys are energy hogs. A flat-
panel television, for instance, might pull a third of the power that
an average home uses at any given time. U.S. electricity demand is now
projected to rise by 18% percent in the coming decade.
* Clean-Tech Progress. In the 1970s—and even the late 1990s—most clean
technologies were nice-sounding pipedreams, far too expensive and
inefficient to compete with cheap, simple incumbents like coal and
internal combustion engines. But thanks to steady progress on cost and
efficiency, many clean technologies either are or will soon be
economically viable. So a utility, business, or homeowner can adopt them
with the hope of actually saving money.
* Climate Change Consensus. The realization that the world is indeed
warming, with potentially disastrous consequences, is now driving
virtually every major country—including the previously skeptical United States—to pass laws and sign treaties aimed at limiting the
damage. The result is a mosaic of subsidies and mandates designed to
speed the transition from dirty and unsustainable to clean and
renewable.
Capital Loves a Winner
Add it all up: a burning, multi-faceted need for clean tech, new
technologies that really work, and enthusiastic support from every major
government, and you’ve got the financial world’s dream market.
According to the National Venture Capital Association, venture
capitalists poured $2.6 billion into clean tech in 2007, up about 400%
percent from 2005 levels. Silicon Valley legends have shifted seamlessly
from info tech to clean tech, with names like Vinod Khosla, Elon Musk,
John Doerr, and Paul Allen now cropping up constantly in deal
announcements. And companies of all types have discovered that green
technologies are both good business and good PR. Google, for example,
has promised to pour hundreds of millions of dollars into alternative
energy research in an attempt to become a leader in that field, and
Wal-Mart is putting solar panels on the roofs of hundreds of
supercenters. Meanwhile, virtually every major investment bank and
mutual fund is building a presence in clean tech. Goldman Sachs, for
instance, has stakes in a wide range of wind and solar power firms and
Citigroup recently promised $50 billion for green investments and
financings in the coming decade. As an analyst at one of the new green
research boutiques told me recently, “Interest is significant to
tremendous. Some clients have funds with dedicated investment categories
for clean tech and other funds have an interest in high-growth
technology, but there isn’t a major account that I visit that doesn’t
understand the political, societal, economic, scientific, and business
argument of clean tech. Everyone is aware of it.”
In an influential February 2008 Harper’s Magazine cover story, venture
capitalist Eric Janszen makes a couple of other points that are crucial
to the clean- tech argument. First, the global economy has evolved (or
devolved) to the point where continued growth requires the
inflation of one bubble after another. Second, for a sector to really
boom, it requires both extraordinary growth prospects and the
enthusiastic support of government. His conclusion is that
alternative energy—the major subset of clean tech—is next in line:
“There are a number of plausible candidates for the next bubble, but
only a few meet all the criteria. Health care must expand to meet the
needs of the aging baby boomers, but there is as yet no enabling
government legislation to make way for a health-care bubble; the same
holds true of the pharmaceutical industry, which could hyperinflate only
if the Food and Drug Administration was gutted of its power. A second
technology boom—under the rubric ‘Web 2.0’—is based on
improvements to existing technology rather than any new discovery. The
capital intensive biotechnology industry will not inflate, as it
requires too much specialized intelligence. There is one industry that
fits the bill: alternative energy.”
So Why Are You Reading This?
If clean tech is so inevitable, why bother reading another word? Why not
just access your brokerage account and move your life savings into a
random list of solar, wind, and biofuel stocks? Because, to put it
bluntly, hot markets are dangerous markets. When the reasons for
investing in a given sector are this compelling, con artists and delusionals come out of the woodwork. In the coming decade, we’ll be
inundated with breathless accounts of new clean technologies that are
sure to save the planet and make their early investors rich beyond
imagining. And the financial community—which, in a perfect world, would
act as gatekeeper to protect investors from the untried and unwise—will
become the main facilitator of the boom. Venture capitalists will feed
these sure-things to investment bankers, who will sell them to stock
brokers, who will sell them to us.
Think back to the dot.com era for a sense of green tech’s future. During
the second half of the 1990s, virtually any company with even the
vaguest relationship to e-commerce got venture funding and then was
taken public by unscrupulous investment bankers, and then sold to
credulous investors seduced by the promise of easy money. As it turned
out, the Internet has worked as advertised, changing the worlds of
entertainment, shopping, and communication almost beyond recognition.
But the vast majority of people who loaded up on late-1990s tech stocks
had lost most of their money by the end of 2001. Clean tech differs from
the dot.coms in ways that will be explained in later chapters. But human
nature is what it is. When something seems to have unlimited potential,
it becomes, by definition, becomes hard to measure, and therefore hard
to value. Tools for distinguishing fantasy from reality are crucial, and
that’s what this book attempts to provide.
The other reason to approach clean tech with caution is that, unlike
information technology, it encompasses many different markets
and technologies, each with its own strengths and challenges. Wind and
solar power, for instance, have vastly different technical attributes
and constraints: wind speed and consistency versus hours of daylight,
turbine durability versus solar cell efficiency, and scalability versus
flexibility. Fuel cells are chemistry, biofuels biology, batteries both
physics and chemistry—and soon also biology. Some of these technologies
work today, some will work in a few years, and some will never work.
And frequently, the viable clean technologies are competitors; if one
succeeds, it may be at the expense of another. So understanding one
means understanding all.
Then there’s the army of “pick and shovel” makers, including the firms
that make solar cell production equipment, the miners that produce raw
materials like platinum and palladium, the info-tech companies that help
utilities manage their grids, and the banks and venture capitalists that
finance start-up firms and create and trade carbon credits. The “green
building” field alone includes makers of everything from light
management systems to low-carbon building blocks to high-efficiency
appliances. And because lifestyle choices figure prominently in
most visions of a green future, the makers of busses, light rail, and
bicycles also count as clean-tech players.
Last but not least, clean tech is global. Because of history, geography,
and more far-sighted leadership, Europe, Asia, and to an extent Latin
America have grabbed the lead in this race. Brazil, for instance, has
already converted its transportation system to run on ethanol derived
from locally-grown sugar cane, and now it has little to fear from
peak oil. China is pouring resources into clean technologies that (it
hopes) will prevent it from choking on its own exhaust. Japan’s chip
makers have become the world’s biggest solar panel producers. And
Europe, besides offering an array of generous incentives for renewable
energy, began tightening environmental rules years ago, forcing local
companies to reduce their carbon footprints and remove pollutants like
lead solder from electronics. Today, as a result, many of the biggest
players in wind and solar power are European or Asian. Given the amount
of money and energy now flowing into American labs and start-up
companies, the United States will no doubt catch up. But clean-tech
money management will remain a global affair, with fund managers and
private investors in any given country investing in green companies from
many others.
Improving Your Odds
A growing number of web sites and books offer investors a sense of clean
tech’s potential. But few explain how to safely choose among all
the possibilities in this complex, fast-moving bull market. Clean Money
is designed to fill that void by presenting a wide range of strategies
based on common sense, the history of previous booms, and the ideas of
some of the money managers who are now grappling with the same issues.
There is no one-size-fits-all answer, but for each investor, there are
strategies that both feel right and increase the odds of ending up a
rich person in a clean world..
