11 January 2021

Will the green economy trigger the next crash?


Back in the last century, I spent a large part of my investment career packaging up financial assets, like mortgages, into bonds – securitisation. I was heavily involved with the acquisition financing of a US home lender which went spectacularly wrong a few years later when we discovered to our shock and absolute horror – about the same time everyone else did – that all assumptions behind sub-prime mortgage lending were pants. Pretty much ended my career in big banks.

Sub-prime was a small, but very significant part of the asset-backed securities (ABS) market. When it tumbled it shook markets to the core. Everyone believed securitisation worked because it did. The arbitrage for smart players was that very few people actually bothered to check or do the due diligence on the piles of ABS cack they had bought. The book, the film (and I am sure there is a probably also a pie), The Big Short, summed up the delusional madness of believing complex investment instruments don’t go wrong because they have been so carefully planned and constructed. They don’t ever go wrong…right up to the moment they do. And once you realise it, you also realise it was blindingly obvious from the get-go just how flawed they were.

I suspect it’s all about to happen again. All it takes for a financial crash is a couple of snowflakes to roll down the hill and trigger an avalanche. One sector it might start is in renewables.  

I absolutely believe climate change is the biggest challenge humanity faces, and if we address it badly we really are rubber-ducked. But, if you we’re trying to get to a truly green, sustainable global economy – you would not start from here!

Let’s consider wind power. We’re all familiar with modern wind turbines. They have proven popular investments, and the spreads are so tight no one is particularly minded to regard them as high-risk. Investors believe they are licences to print money. The Government tells us the UK is blessed by near costless wind-power, and in a few years’ time we’ll be getting most of our energy for free from UK’s abundant wind. 

It’s a great and compelling message. We desperately want to believe that wind is the solution because we are, deep down, all green. Windpower, lithium batteries and solar farms in the Arctic circle all make perfect sense… (You can probably sense a sarcasm warning looms.) 

If you believe in wind  power then don’t, whatever you do, read ‘The Costs of Offshore Wind Power: Blindness and Insight’.  Written back in September, the report might make you quite unhappy about the current direction and prospects for the Green Economy. The authors describe how costs are escalating, rather than declining as promised. Operating and maintenance costs have risen even faster than they were anticipated to fall! Gas prices will look impossibly cheap compared to renewables if the true facts are ever revealed.

How about this for a quote from the report: “This leads to the prospect of what is not so much a car crash as a motorway pile up in the fog of ignorance.”

The report suggests the narrative that “wind power is getting cheaper and more efficient all the time” is complete nonsense.  The majority of the 350-odd UK wind farms will need a bail out. The Government’s approach to green power completely underestimates the long-term operating and maintenance costs and drop-off which means most wind projects are massively overpriced, and we’re still years away from carbon neutral.

If author Professor Gordon Hughes is correct – and I see no reason not to believe him – then the UK will be in serious crisis over its carbon-neutral green energy costs. The knock-on in terms of future decarbonisation efforts will be huge, it will change the maths for a ‘green hydrogen’ powered future, and change the pricing and timing outlook for gas and even coal-fired power.

I’ve done my own digging, and wind investments just don’t perform like promised in the fancy brochures.  

If you maintain a very traditional windmill very, very carefully it might last a couple of hundred years. If you build them quick out of plastics, keep them light and pump them out vast numbers, then you are going to spend lots of time and money maintaining them. Checking and replacing bearings gets more and more difficult the bigger they get. You need to check for hairline stress fractures on the blades. Because of the rotational movement, they put additional pressure on the foundations and sink into the bottom. And all these things get much, much more difficult if you stick the thing in the middle of the English Channel, North Sea or Atlantic approaches where salt-water literally eats them. 

The brutal reality is offshore wind is far less efficient than promised and requires much more expensive maintenance. They break down, sink into their foundations and don’t generate anything like the power expected. For all the due diligence, they simply won’t ever make any money unless the price at which they sell energy is dramatically increased – at which point they make zero sense.

This will feel very familiar to many investors who have seen all the blithe assumption about operating and maintenance costs on all kinds of technological green marvels fail to meet expectations. Biowaste generators, biomass, thermal pellets – you name it, and the rosy assumptions failed to materialise because the difficulties in making them work and keeping them working were glossed over by the promoters.

Most of the smart money already knew that about renewables and is deeply sceptical. The not-so-smart money still laps the deals up. Sadly, renewables is likely to become another charming but flawed investment thesis. I am no stranger to investment madness – three times I’ve invested in airships and lost my dosh every time.

The big problem is we really do need to address climate change, which means energy prices have to rise to keep the inefficient windfarms working, meaning a less efficient economy.

And it’s not just renewables that are attracting big bids because someone else is assumed to have checked that they actually work. There are a host of other green assumptions that are unlikely to stand up to rigorous testing. Whatever you believe about recycling lithium batteries, it’s challenging. They are toxic to mine, toxic to process and toxic to dispose of. As the surveys now show, if you diligently use your electric car for 300,000 miles it will achieve carbon neutrality – as long as you don’t worry about how the electricity is made or how the batteries will be recycled.

Let me stress again, I absolutely believe in climate change and the imperative to improve the global environment, but I suspect our current approaches will prove about as resilient as chocolate teapots to the reality. Let’s have a rethink before it’s too late.

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Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge (www.morningporridge.com).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.