The green boom might be a bubble

    5 March 2020

    It would have been great if you got in early. Over the past year shares in a small company called ITM Power have been one of the best performers on the London market. From 21p they ripped all the way up to 155p in mid-February — although they have slumped back since in the wake of coronavirus. How come they did so well? The company is in the booming business of green energy — in this case, hydrogen power.

    We all know that alternative energy is a huge and growing industry. You don’t need to go the ‘full Greta’ to realise that climate change is a genuine issue and that it won’t be acceptable for much longer to use fossil fuels, at least not without capturing carbon in some way. The trouble is, there may also be a bubble starting to develop in alternative energy. Sure, a few companies will do incredibly well, but many others will turn out to be just as flaky as some of the businesses that were floated during the dotcom bubble. The trick for investors will be to work out which is which.

    The case for investing in green energy seems watertight. Genuine worries about the environment, changes in legislation, and campaigns by activists mean the world is switching to renewable power. In the UK, the government is planning to ban sales of new petrol, diesel and even hybrid cars by 2035, and most developed countries have similar targets. Coal and oil-fuelled power stations are being phased out. From electric cars to solar, wind and tidal power, to batteries and hydrogen fuel cells, a whole range of new technologies are emerging. They are clean, efficient and increasingly cheap — before long, we may be switching simply because the alternatives are more economic.

    Investors are starting to take notice. There have been some spectacular gains. Tesla, the world’s leading electric car brand, has seen its shares triple in the past year. It is now the second most valuable auto company in the world, easily overtaking BMW and Volkswagen, and closing in on Toyota. Enphase Energy, which develops battery storage solutions, was up by 466 per cent last year, making it the best-performing renewable energy stock in the Nasdaq. Ballard Power, which makes fuel cells, was up by 190 per cent, and SolarEdge Technologies, which makes power optimisers and solar inverters, by 169 per cent. In Denmark, Orsted has jettisoned its oil and gas business to refocus on wind power and been rewarded with a 70 per cent rise in its share price this year, while in Britain shares in Good Energy Group (the clue’s in the name) have almost doubled in the past year. Those were the standout stars, but lots of companies have been doing really well. Broad-based funds such as the ALPS Clean Energy ETF made gains of more than 50 per cent last year.

    Fossil fuels might seem doomed at the moment, but what if a better carbon-storing technology emerged?

    But it is also starting to look like a classic bubble. Aside from tulips, most investment manias are not completely crazy. There is, typically, a significant new technology that starts to attract entrepreneurs and then investors. A bandwagon gets going. Companies pile into the sector, and a lot of money starts to be made. But then, like a teenage party, it all starts to get out of hand. Then it goes bonkers. In the 1990s dotcom bubble investors were not wrong to spot that the internet was a revolutionary technology, but a lot of flimsy, rubbish companies were bid up on the back of it. The same was true of the space boom in the 1960s, the radio boom that fuelled the epic bull market of the 1920s before crashing in 1929 and the 19th century railway. There was important technology behind them all, yet that didn’t prevent fortunes being lost.

    As with dotcom companies, many of the alternative energy companies which have soared in value have yet to make a profit and many never will. There is still a lot of uncertainty about which technologies will succeed in the long term. Wind, solar or hydrogen power may all have a future, but we don’t know which will be dominant. Nor will we know which techniques for harvesting that power will be most widely used — today’s solar panels could easily be blown away by some superior technology. Electric cars may take longer than anyone expects to be rolled out, and may be overhauled by hydrogen-powered vehicles. Fossil fuels may seem to be doomed at the moment, but all the talk of stranded assets could disappear if a better technology for capturing and storing carbon emerges. In short, while the general direction will be towards zero carbon, there will be lots of twists and turns along the way.

    There is no question that investors can make plenty of money in alternative energy. It is just a matter of picking out the handful of genuine winners among the hundreds of companies being launched into the sector. What should they look for? Genuinely novel technologies that can be legally defended. Niches such as the parts for solar power, or the software systems that control energy supplies. Or great brands. Tesla already has one in cars, which helps explain its soaring share price, but others will be along very soon. In truth, however, it is going to be harder than it looks —and as many fortunes will be lost as are made.