Can we make money out of renewables?

Thanks to action on climate change at international level, renewable energy (electricity generation by means of solar panels, wind power, heat pumps and so on) is the most rapidly growing industry on the planet.

That doesn’t necessarily make it investible. Renewable energy is much more expensive than conventional power generation from hydrocarbons – and much less reliable. It is being propelled by generous government subsidy regimes which have distorted the energy markets in order to reduce carbon emissions. Most people think that that is good policy.

The real questions are then: Will renewables ever compete with conventional generation without subsidy? And are we ever going to be able to get all our energy from renewables? It turns out that even the most respected stalwart supporters of the “standard” model of climate change doubt it.

The energy problem

Energy accounts for 75 percent of total global greenhouse gas emissions. The sector includes electric power generation, transport (including aviation), fossil fuel processing and the heating and lighting of buildings. That figure has probably been reducing somewhat over the last 15 years thanks to the rise of renewables but energy is still the main cause of emissions by far – much greater than agriculture, land use and waste management.


David JC MacKay, Professor of Engineering at Cambridge and Chief Scientific Advisor to the UK Department of Energy and Climate Change 2009-14, wrote: The climate change problem is principally an energy problem[i]. This was in his book Sustainable Energy without the Hot Air which Bill Gates described as one of the best books on energy ever written. Sadly, Professor MacKay died of cancer aged just 48 in April 2016, but his work on the technical realities of renewables is still seminal.

Could we live on solar energy and wind power alone?

There are two contradictory responses to this question. “Every 40 minutes, enough solar energy reaches the Earth’s surface to power the entire planet for a year.” And then: “There simply isn’t enough renewable energy to replace fossil fuels.” Which statement is correct? Could they both be true?

Theoretically, if you could cover an area the size of Germany with solar panels you could generate enough electricity to sustain the entire European Union going forward. Some advocates have actually proposed that a gargantuan solar array be built in the Sahara – in Algeria or Libya. Of course, there would be massive technical challenges as well as political ones – in present circumstances it would probably be blown up by Islamist extremists…

One might also ask if there is enough wind power to power a modern economy. In his book, Professor MacKay gives a thorough and critical analysis of the feasibility of a post-fossil fuel world from the perspective, not of an economist, but that of a physicist and engineer and tries to answer the question: Is there, using today’s technology, enough renewable energy available to eliminate fossil fuels altogether?

His book is crammed with fascinating calculations, tables and graphics. If you don’t fancy working your way through 350 pages of rigorous analysis, and if you have an hour to spare, there is a video of Professor MacKay summarising his findings to an American academic audience in Harvard on YouTube. Engineers amongst my readers should find this fascinating.

If you wanted to power the whole of the UK by solar power alone, about 20-25 percent of the entire land mass would have to be covered by PV panels

Professor MacKay shows that if you wanted to power the UK with wind alone, assuming current levels of consumption, you would need effectively an averagely sized 2MW wind turbine for every 700 people. Given the population density of the UK (250 persons per square kilometre) that would require one large wind turbine per 1,000 square metres, or roughly two per football pitch-sized patch of land. So quite apart from the little issue of installation costs and payback periods, there would be quite a lot of very unhappy members of the not-in-my-backyard brigade.

By comparison, the Sizewell B nuclear power plant in Suffolk has a power output of 400 times that of a typical wind turbine array in terms of kilowatt hours (kWh) generated per square metre occupied. And it is much more reliable.

Solar panels produce about twice as much electricity per square metre occupied as wind turbines. But by similar calculations Professor MacKay showed that if you wanted to power the whole of the UK by solar power alone, about 20-25 percent of the entire land mass would have to be covered by PV panels. Which is, of course, impracticable.

The maximum theoretical efficiency of a photo-voltaic (PV) fuel cell is 31 percent. We are currently already operating at over 20 percent. So we should not imagine that further improvements in technology will help us very much. That doesn’t mean that, in economic terms, as a result of economies of scale and better production technology PV panels will not become much cheaper in the future. Batteries will get lighter and heat pumps (which are reverse refrigerators) have some way to go in efficiency.

But there will never be enough solar panels or wind turbines to meet our needs: unless we drop out and live in yurts, go around on bicycles and sustain ourselves on a diet of cold porridge.

Types of renewables

As we know, there are solar panels – or more correctly photovoltaic (PV) arrays and wind turbines, which can be on-shore, off-shore or located way out in the oceans in deep water. Both of these are now very familiar in the UK and indeed worldwide, having been rolled out in massive capacity in the last ten years. And they are creating huge numbers of jobs. According to the Environmental Defence Fund, solar and wind power generators are creating 112 jobs in the USA for every one new coal worker. (President Trump might want to reflect on that.)

Then there is hydroelectricity, which has actually been around since the 1920s and may be considered a mature technology. And then there is a host of renewable technologies which, thus far, has been marginal in contribution: geothermal, heat pumps, wave-power, tidal, underwater “windmills” – the economics of which are still highly questionable. By the way, all of the latter marginal technologies rely ultimately on the power of the sun. That gives engineers the notion that they may never be as efficient as PV panels.

As for biofuels, Professor MacKay worked out that if you planted the entire UK with biofuels that would still not produce enough energy to power the country at current consumption levels.

What is fascinating about Professor MacKay’s work – and I am amazed that this is not better known – he worked out that the “optimistic but realistic” or actionable amounts of energy that could be harnessed from all these various forms of renewable energy all had approximately the same value. The figure was 2 kWh per person per day. Our current consumption in the UK is about 125 kWh per person to day; and in the good old USA it is double that at 250 kWh per person per day.


Professor MacKay, who was, let us recall, a strict adherent of the “standard” model of climate change, and who defended even some of the most catastrophist climate models as mathematically sound, concluded in his final interview with green guru Mark Lynas that the idea that we can simply live as we are and be powered entirely by renewables was “delusional”.

I wouldn’t want Professor MacKay’s legacy to be tainted with desperation. He did offer some positive concrete themes that we should pursue. He argues that all environmental policy should be “country-specific”. (Britain is one of the darkest countries in the world; Australia is one of the sunniest: the economics of PV as between the two countries differ.)

You can have better storage solutions; you can focus on inter-connectors to other countries (meaning we can still import solar energy from North Africa). But, ultimately, we have to focus on carbon capture and storage (CCS), nuclear and low-carbon, low-cost solutions – which might include the kind of ultra-fuel-efficient aero engines that I talked about in my article in last month’s MI magazine. And don’t forget smart metres which force people to change their consumption patterns.

Professor MacKay’s final message was that we should plan for a diversified energy mix but that we should concentrate most of our resources on carbon capture and storage. I wonder how many politicians anywhere have understood that.

Are there any investment opportunities in renewables?

For my upcoming article in next month’s magazine, I’ve been looking at the share price performance of the world’s leading manufacturers of solar PV panel systems and wind turbines. Given the explosion in growth they have experienced, you might have expected that these hardware manufacturers, the products of which are in huge international demand, have had flourishing share prices.

Not so. With a few noble exceptions such as Denmark’s Vestas Wind Systems A/S (CPH:VWS), the wind power turbine and solar panel manufacturers have had miserable share price performances over one and even two years. Their share prices spiked around 2014-15. Why? I strongly suspect that the markets have worked out that the future of renewables is not all that it has been cracked up to be.

I strongly suspect that the markets have worked out that the future of renewables is not all that it has been cracked up to be

Solar only works when the sun shines: the sun doesn’t shine in Britain in the winter when electricity demand is at its peak. The wind does blow in winter in the Hebrides; but there are calm days as well: wind is intermittent (an ecologist’s term for unreliable).

Furthermore, savvy investors know that generous government subsidy regimes are even more unreliable than the wind. In December 2015, George Osborne, then Chancellor, decided to slash the so-called solar feed-in tariff paid per solar panel fitted in the UK to hospital roofs and so on. (The feed-in tariff was originally devised by one Ed Miliband, who, as Professor MacKay implies in the video, overruled the civil servants who advised against it.) I recently found out that at least one market participant is going to sue the UK government for an eye-watering sum of money to cover their losses further to Mr Osborne’s bonfire of the vanities. They are surely not the only ones.

In my native Kent solar arrays are displacing excellent agricultural land which could be given over to food production or indeed to vines – even though they (PV panels) are only optimal in July, and produce virtually no power at all in December. English wineries like Chapel Down are already producing effervescent wines which are beating those of Champagne. I know which one I’d vote for.

Left-field movers and shakers

I am increasingly persuaded that it will not be the renewable power companies themselves that generate fortunes but the supply chains that make green power work. A good example is that mass electrification of vehicular transport will not be possible until there is an adequate network of charging stations.

Ecotricity (private), founded and owned by self-made rich hippy Dale Vince, has a virtual monopoly on UK motorway service station electric charging points. And it recently introduced a new charging scheme for electric cars[ii]. Critics claim that the new charge structure will make it as expensive to charge an electric car as for a conventional car owner to fill the tank. Motorists will have to pay a £3 connection fee and then a further 17 pence for every kilowatt hour (kWh) used.


Mr Vince’s company bought a controlling interest in Forest Green Rovers – the world’s first vegan football club – for nearly £5 million last year. I think that was brilliant almost Bransonesque PR – but others will disagree. This season Forest Green Rovers was promoted to the Football League.

Mr Vince was a drop-out living in his car when he started out in wind power. He is famous as a people’s entrepreneur who makes Mark Zuckerberg look fussily over-dressed. The oil majors like Royal Dutch Shell (LON:RDSA) are struggling to catch his start-up in the league of charging stations currently available in the UK.

Ecotricity surely should have held its AGM at the Glastonbury Festival. Watch out for an inevitable floatation down the line – though the vegan football club may have to be divested first. But, come to think of it, vegan is cool…

Conclusion

In my longer article for the August edition of the Master Investor magazine I probe deeper into the vexed issue of Climate Change. I ask whether this inconvenient truth could actually turn out be an opportunity for the human race to re-engineer our technology in a way that could accelerate human well-being even further.

Controversially, some commentators speculate as to whether there could even be some advantages to a warmer, and greener, world. (I do admit: rising sea-levels are a worry – but there is huge progress in the field of flood defences). I suspect that mankind will have to embrace some sophisticated adaptation strategies for living in a warmer world – and there are people already working on this.

The most effective response to global warming would be to reduce the human population over a couple of generations by systematic birth control – which would mean the global economy reduces too. I’ll be explaining soon why the politicians have focused mindlessly on absolute GDP when they should have been focussing on GDP per capita.

Can we make money out of renewables? I stick by what I argued in the March edition of the MI magazine. If you want exposure to renewable energy, don’t target PV panels or tilt at windmills. Rather, buy the shares of those oil majors which are diversifying away from hydrocarbons into renewables to become global diversified energy companies. To the extent that the economics of renewables improve, the intelligent oil majors will rebalance out of hydrocarbons and into alternative energy.

All of the oil majors seem to have lost value of late – but not because of their exposure to renewables. The shares of oil companies correlate with the oil price; though as they become more diversified that may be about to change in a significant way.

In the meantime: when it gets very hot, find a nice swimming pool, preferably in the Languedoc. That’s what I’m going to do. But don’t worry – I’ll be taking my laptop.

[i] Sustainable Energy without the Hot Air, David JC MacKay, UIT Cambridge, 2009, page 16.

[ii] Green tycoon in eye of the storm over electric car charging prices, by Robert Mendick, The Sunday Telegraph, 25 June 2017.