So we have a consensus that there has to be a global transition to net zero carbon emissions by 2050, if not sooner. Supranational bodies, national governments, major corporations, NGOs and financial institutions have their differences in timing or the mix of solutions.
But particularly with the departure of the Trump administration, we largely agree on the requirement to shift away from fossil fuel.
So why have fossil fuel equities prices, broadly, been rising since the beginning of the year, and why are many clean energy equities performing weakly, or even declining in price?
Let’s take a few examples. The ICLN i-Shares Global Clean Energy ETF is down by 14 per cent since the beginning of 2021. TAN, Invesco’s solar ETF, has declined by 10.7 per cent from the start of trading in January. On the other side, XLE, an ETF representing major oil companies, has risen 29.4 per cent in the year to date.
As for individual companies’ share prices, we have Oersted, the Danish wind energy developer, down by 24 per cent in 2021. Vestas Wind Systems, its compatriot company, which designs and manufactures wind turbine systems, has seen its shares fall 15.7 per cent since the start of the year.
Vestas’ competitor in the wind turbine space, Siemens Gamesa Renewable Energy, has enjoyed a bit of a bump in investor interest lately, but its equity is still down 0.3 per cent this year.
On the other side of the virtue divide we have the US fracking-oriented exploration and production companies. Consider EOG Resources. It is the reincarnation of Enron Oil and Gas, which was probably the most carbon-intensive part of the Enron, the scandal magnet energy giant bankrupted in 2001.
These days, though, EOG has an A-minus bond rating and a reputation for having one of the most skilful E&P management groups. Its shares have risen by 45.4 per cent since the beginning of 2021.
Or consider Cabot Oil and Gas Corporation of Houston. It has concentrated on drilling the gas-rich Marcellus Basin in the Eastern US and has seen its share price go up by 15.4 per cent.
Of all the oil majors, ExxonMobil might be considered the least likely to have put solar panels or wind turbines in green meadows on the cover of the annual report. And yes, its share price is up 35.4 per cent since the start of the year.
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This is all so strange. BlackRock just wrote to its clients about “Net Zero, a fiduciary approach”. In that note, it told us that “In 2020 we completed our goal of having 100 per cent of our active and advisory portfolios ESG-integrated”.
If that really represents “best practices” for investment managers, why are previous high returns for clean energy companies not being continued in 2021? Reasons might include overcrowded auctions for clean energy development rights and green-power contracts, rising interest rates and Opec oil supply cuts.
I believe all of those conditions are reflected in the share prices. There has been a lot of capital thrown at clean energy development in recent years, at least relative to portfolio investors’ interest in fossil fuels.
This was reflected in the recent auction for seabed sites for offshore wind by the UK’s Crown Estates. These went for 10 times to 20 times the prices paid at the last such auction in 2010. As the investment company Bernstein wrote in March, the results are “feeding already existing market worries about overheating competition in offshore wind and pressures on returns”.
And that is before the wind projects are built. The prices and terms for clean energy generation are becoming less favourable as more developers bid against each other for power offtake contracts. In places such as California, consumers’ rooftop solar power has sharply cut the peak load commercial developers (and their lenders) were counting on to pay the bills.
Meanwhile, the remaining shale E&P companies have survived past price declines and debt service burdens. As a group, they no longer spend every dollar of earned or borrowed cash to drill more wells. Opec is still producing oil below its collective capacity.
The green vs fossil reversal of fortune might not last. Or the political economy of energy would have to change much more dramatically than we have seen so far.