MindBullets 20 Years

Energy glut triggers crash

Renewable energy supplies exceed traditional demand

Investors are still shell-shocked after two days of panic selling that has wiped 27% off the Dow Jones, 32% off the London Stock Exchange and a terrifying 40% off China’s main bourse. All told, investors have lost some US$ 85 trillion.

The incredible boom of the last nine years has come to a spectacular and catastrophic conclusion. The renewable energy bubble started in 2011 when Advanced Turbine Devices (ATD) went public. Those shares doubled in the first week of trading.

Other companies followed, producing energy from a wide range of sources: solar panels, wind turbines, biofuel stocks.

By 2018, almost 55% of the world’s energy was produced from renewable and non-carbon-based sources and the availability of so much guilt-free energy triggered innovations in new high-energy consumer goods. Energy consumption rose at 5% annually, but energy production was rising by 9%. It was a virtuous circle.

In 2020, Volta Hughs of the Intergovernmental Panel on Climate Change at the UN declared: “We have crossed the threshold. Climate change has stabilized and appears to be reverting back to safe levels.” The relief of having solved mankind’s greatest challenge caused energy stocks to rise by 80% in only a matter of months.

However, cycles will end. With energy production two-thirds greater than demand, sales could never cover costs. Companies cut prices to attract customers and, inevitably, many bankrupted themselves. Last week’s collapse of 1366 Technologies, which specializes in solar panels, triggered the stampede.

ANALYSIS >> SYNTHESIS: How this scenario came to be

In 1999, 457 Internet-based companies listed on US stock exchanges. Over 100 doubled in value on the first day. Within a year, most of them had collapsed. The DotCom boom and bust of 2000 to 2002 was treading on familiar ground.

On 27 September 1825, Robert Stephenson’s Locomotive No. 1 became the first permanent steam locomotive hauled public railway. The line ran 26 miles (40kms) between Darlington and Stockton-on-Tees, then important as a conduit for coal transport from the mines along the route to ships waiting in Stockton.

In 1830, the first modern inter-city railway between Liverpool and Manchester opened. The British economy was still in a slump, with high interest rates and a weak economy, but the gradually expanding railway lines introduced the industrial age as coal-fired factories opened up on cheap land around major cities. Suddenly, a lot of railway lines were needed to transport coal to the booming factories.

By 1846, 1,035 companies had listed and most were simply financing their capital costs by issuing new shares. Everyone believed that there was no way to lose money on this most exciting of new technologies. Eventually, though, the accounting trick of pushing losses forward as capital expenditure caught up with investors.

In 1859, Eastern Railway, belonging to George Hudson, was investigated for accounting irregularities. He fled and the subsequent uproar resulted in the vaporization of railway stocks.

However, a total of 6,220 miles of track was laid between 1844 and 1846 (more than half of today’s 11,000 mile UK rail network) and this infrastructure paved the way for the miracle of the Industrial Revolution.

A revolution which would, 150 years later, give rise to Climate Change.

2001-2003: Climate Change and its Discontents
Climate Change research began in earnest in the early 1970s. At the time, scientists noted that increasing carbon dioxide (CO2) in the atmosphere could lead to a green-house, or warming, effect. Other scientists noted that increased particulates (from smog) and sulfur dioxide (SO2) could result in global cooling. Temperature records from the 1940s did indicate cooling and the public and press suffered through decades of confusion as scientists battled it out.

In 2001, the UN Intergovernmental Panel on Climate Change (IPCC) issues the first consensus agreement that global warming and climate change is a reality. Ironically, it is also discovered that early particulate pollution has protected the earth from the warming impact of CO2. As stronger environmental regulations relating to this pollution – and especially cap-and-trade systems related to SO2 emissions – result in cleaner air, global warming begins to accelerate.

In 2003, a deadly heat wave causes thousands of fatalities across Europe. The French Director General for Health, Dr Lucien Abehaim, resigns after some 5,000 deaths are attributed to the heat wave and as a result of the poor handling of the tragedy by his department. Opinions on climate change begin to diverge between the US and Europe over this experience.

At the end of 2003, the US invades Iraq and topples Saddam Hussein. Iraq’s northern export pipeline is sabotaged and insurgents blow up the UN Baghdad headquarters. The price of oil goes up and hovers above US$ 30 per barrel.

2005-2007: Kyoto’s Children
In 2005, the Kyoto Treaty is signed into effect by many major industrial nations, but excluding the US. Europe may have gained the political high ground, but they do little to introduce meaningful change. The most positive result is a global carbon trading market.

Hurricane Katrina is the sixth-strongest Atlantic hurricane ever recorded when it strikes the US Gulf Coast on 23 August 2005. It results in the death of 1,836 people and causes US$ 81 billion in damage, making it the most expensive natural disaster of all time. Some American commentators start to discuss the potential for responding to Climate Change.

In April 2006, oil futures rise to more than US$ 70 a barrel, after reports from the US that fuel inventories are down more than expected. Unrest in Nigeria and uncertainty about the international reaction to Iran’s nuclear program also affect prices.

On 9 February 2007, Sir Richard Branson, of the Virgin Group, and Al Gore, ex-US vice president, announce the creation of a new prize: the Virgin Earth Challenge. They are offering US$ 25 million “for whoever can demonstrate to the judges’ satisfaction a commercially viable design which results in the removal of anthropogenic, atmospheric greenhouse gases so as to contribute materially to the stability of Earth’s climate.”

“We are 90% certain that human intervention has caused global warming,” say the scientists at the IPCC in November 2007. “Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea levels.”

Goldman Sachs, an investment bank, declares in late 2007, that oil is likely to exceed US$ 100 per barrel by 2009. They are too conservative.

2008: Oil at US$ 200 a barrel
On 22 May 2008, the oil price rises to US$ 135 a barrel. Traders start speculating that oil will soon touch US$ 200.

The price of oil has reached a watershed.

Researchers at Stanford University publish a worldwide wind map and identify locations with winds suitable for efficient wind energy generation, mainly in Northern and South America, Northern Europe, North-West Africa and Australia, while Asia is less suitable for wind energy generation. The authors conclude: “As such, the amount of wind energy over land could potentially cover over five times the current global energy and about 40 times the current electricity uses with little incremental pollution.”

Investment into alternative energy sources reaches US$ 70.9 billion in 2006, an increase of 43% over 2005. In 2007, it rises 60% again, to US$ 148 billion. Wind energy is attracting the most (at US$ 50.2 billion in 2007) but solar energy investment grows a staggering 254% to US$ 28.6 billion in only three years.

Alternative energy is becoming so mainstream that an alliance between T Boone Pickens, a famous US billionaire oilman and Republic Party financier, and Al Gore is considered expected.

Pickens insists his US$ 58 million marketing campaign to push the US off imported oil toward domestic energy sources and his investment in a US$ 10 billion wind farm in Texas isn’t about making money. “What I’m doing now I’m trying to do for the country,” he says.

Some analysts think that alternative energy stocks are already becoming over-valued.

Beacon Power, a maker of energy storage devices, is valued at US$ 117 million, but only has revenues of US$ 1 million. Valence Technology, a lithium battery maker, is valued at US$ 503 million with revenues of less than US$ 2 million. Capstone Turbine produces micro turbines. Their CEO, Darren R Jamison, says: “US$ 50 million in sales is very obtainable and reasonable this fiscal year.” The company makes a loss of US$ 9.2 million.

Despite this cloud, the future for renewables is promising. A study by America’s Departments of Energy and Agriculture suggests that even with only small changes to existing practice, 1.3 billion tons of plant matter could be collected from American soil without affecting food production. If this were converted into ethanol using the best technology available, it would add up to the equivalent of 350 billion liters of gasoline, or 65% of the country’s current consumption.

In 2008, oil-based petrol costs 35 to 60 US cents per liter to produce. With oil prices continuing to rise they are now easily comparable with alternatives. Ethanol from sugarcane is 25 to 50 US cents per liter, and 60 to 80 US cents from maize. Fuel produced from lignocelluloses left over as agricultural waste, and the new C4 grasses – switch grass, miscanthus and sorghum – is still expensive at 80 to 110 US cents per liter, but there are high hopes for reducing this price.

And this is even before considering that, the cost of producing an amount of electricity equivalent to a liter of petrol costs about 25 US cents.

However, as food riots across the world spread, governments are mindful that poorly thought-out legislation can have unintended consequences. The US subsidies for corn-based ethanol have resulted in global food prices rising to US$ 7.79 per bushel in June, from US$ 5.00 at the end of 2007. In August, the Environmental Protection Agency reiterates their demand that corn-based biofuels supply 36 billion gallons to US fuel needs by 2022, triggering further protests and price rises.

Legislative support for alternative energy is important, but will have to be neutral and subtle if it is not to cause future market distortions.

2009 – 2011: Alternative Energy’s Surge
A report commissioned on behalf of OPEC declares: Regarding renewable energies as the uneconomical hobby of esoteric “tree huggers” in Europe and the US would be a mistake; this point was passed a long time ago. Otherwise, the GCC countries may face the same fate as the Michigan Savings Bank, which denied Henry Ford an initial credit arguing that “the horse is here to stay, but the automobile is only a novelty – a fad.”

The Gulf States have the money to invest in alternative energy, and their sovereign funds certainly turn to invest in these stocks, but the lack of economic and social freedom at home limits investment in infrastructure. Oil, in any case, is the easy product to replace. Coal is still extremely cheap, abundant, and widely spread.

South African-based Sasol, which perfected an oil-from-coal technique in the 1980s during sanctions against their country’s then Apartheid government, becomes among the most valuable energy companies in the world. Coal provides 25% of global primary energy needs and generates 40% of the world’s electricity. By comparison, oil only supplies 7% of the world’s electricity. “And, at current prices for oil, we can replace it with coal,” grins Greg Boyce, Peabody Energy’s CEO. His coal company in the US is growing revenues at 12% annually.

The world’s oil producers aren’t smiling as new production capacity comes on stream throughout 2010 to convert sugarcane, starch and agricultural waste into alcohol, and smart coal-to-oil plants combine with biofuel to run turbines. By 2011, motor fuel is being diluted 40% with alternatives.

And the barrage of alternative energy sources just keeps coming. In 2011, wind power produces 8% of the world’s electricity; solar produces 2%, nuclear energy – which in 2008 had supplied 15% of the world’s energy – now supplies 20% after many governments overcome their reservations about further investment. Other types of renewables – including ethanol, hydro-electricity, and geothermal energy – make up a further 15%. Coal has risen to 30% of the world’s energy supply, but oil has retreated to 25%.

“And that’s before I flick this switch,” says an 84-year-old T Boone Pickens. His now US$ 15 billion investment in wind farms in the Texas pan-handle is ready to enter the US power grid. As the grinning billionaire octogenarian turns on his creation, 20% of the US’s electricity will come from his field.

2012 – 2015: The Mini-Bubble
In 2008, Synthetic Genomics, owned by Craig Venter (the man who led the privately funded version of the Human Genome Project), released the DNA sequence of the African oil palm. In 2012, Synthetic Genomics opens a large pond-driven plant, growing algae. The water at the top of the ponds is regularly scooped to collect, not oil, but synthetic diesel. The palm oil genes were spliced into algae, along with a few proprietary genetic pathways to allow the production, and immediate secretion, of biodiesel.

“We are able to produce around 500,000 barrels per day in this plant, but we’re setting up one five times the size in Mexico which should open by 2014,” says Dr Venter.

The price of oil, already trading at US$ 80 per barrel, plunges to US$ 30; levels last seen in 2001.

“Oh,” says Dr Venter, almost as an after-thought, “we’ve finally got that bacterium that absorbs CO2 and releases H2 right. We’re producing scrubbers for coal power plants that can capture CO2 and release H2 for fuel cells. That should be out soon too.”

Central bankers around the world have been waiting for something like this. They want no replays of the 2001 DotCom inflation; not when they have only now started recovering from the credit crunch of 2008. In a coordinated move, interest rates are raised by 500 basis points by the EU and the US central banks.

Speculators still leap into the market, but it is more restrained than in previous booms. Even so, by 2015, the NASDAQ composite index has returned to 5100; levels last seen in 2000 at the absolute apex of the DotCom bubble.

2016 – 2020: Business has changed forever. Again.
In 2016 Time magazine chooses as its Person of the Year – The Consumer – and, as in 2006, places a mirror on its front cover. Oil has plunged to US$ 20 per barrel, but it is too late. Investments in other energy forms have seen efficiencies increase, and prices drop.

Coal is now only 22% of global energy supplies (down from 35% in 2005), largely off the back of increasing energy supplies. But oil is less than 11%, down from 25% in 2005. More than 50% of energy is now provided from renewable or non-carbon-based resources.

When the members of the UN formally sign an agreement on Climate Change and Carbon Trading in July 2017, it is almost superfluous to events. “Politically, we had to do this,” says Carrie Andropolous, a spokesman for the IPCC, “but, yes, we do recognize that market mechanisms have responded to the risk faster than politicians could reach agreement.”

China and India are still the world’s largest carbon emitters, but they have benefited from sophisticated modern manufacturing plants and now release less pollution than did the US in 2008. The most widely respected wind-turbine manufacturer is India’s Suzlon Energy. In 2017 they form an alliance with their Chinese rival, Xiamen Seashine, to build the Antarctic Circumpolar Current Turbine Plant. “Our intention is to tap into this astonishing source of energy,” says Shuaib Gopinathan, chief engineer at Suzlon Energy.

“It transports 130 million cubic meters of water every second and is a key part of the Southern Ocean that encircles Antarctica: it measures twice the area of mainland Australia, or 20 million square kilometers,” says Professor Matthew England, a UNSW oceanographer.

This is unproven technology and no one has any idea how the engineering problems of tethering the turbines and then transporting the energy will even be solved.

“The most worrying part is that their first share issue was 10 times oversubscribed,” says Harold First, an analyst at JP Morgan. “I mean, they’ve listed the new joint venture, haven’t even started building yet, and shares are worth US$ 276 each! It’s insane.”

Central bankers try to contain the enthusiasm, but – by the end of 2019 – some 1,071 new energy companies have announced their business plans, had seed-funding approved, and are building new energy infrastructure.

Says Volta Hughs of the IPCC: “We have crossed the threshold. Climate change has stabilized and appears to be reverting back to safe levels.” The eagerly anticipated IPCC report is carefully analyzed but scientists are in agreement.

“We ducked a bullet. Now we’ve just got the regular problems of flooding in Bangladesh, civil war, corruption and poverty in Africa and inequality everywhere else, to deal with,” says Foster Thoms, of Greenpeace. Even Russia is less belligerent after watching their economy contract by 80% off the basis of plunging oil and gas prices.

The pace of energy production is spurring other industries as well. Electric paint, which can change the color of a house to better absorb or reflect sunlight for temperature maintenance, is released. Vehicle sizes are rising again and the new Hummer IX has the equivalent of an 8-liter engine. Clothing designers release electric clothes which change shape and color. Indoor electrification becomes the new way to accessorize a house, with electric windows, curtains, robotic cleaners and entertainment systems.

“As fast as they can create the energy, we can use it,” laughs Carol Boyes, production manager at Philips Electronics. She is wrong.

2021 – 2023: Even renewables are cyclical
In August 2021, the German government – long a provider of hefty subsidies to their solar panel market – decides that it no longer needs to spend so much. The first victim is 1366 Technologies, suppliers of over 60% of Germany’s solar panels. The company struggles on, hiding their losses in creative accounting.

Consumers are running out of steam as well. It’s not that they’re poor or can’t afford the products, it’s that they’re suffering from over-consumption. They don’t want anymore. “I’ve got the Playstation 6, the Xbox 5, the Nintendo WiiMAX, and the Apple Advantage. I’ve got two color electric ink book readers, three power-phones, several wardrobes of clothes, an electric hockey stick, two dyno-cars and a house that changes shape to anything I can imagine. I haven’t any idea what else to buy,” says one typical young city dweller.

Central bankers tentatively lower interest rates. It is the wrong move.

1366, at a subdued press conference, announces that they are insolvent. The market response is immediate, and punishing.

“On the plus side,” says Dr Craig Venter, “we have got this astonishing new infrastructure that is now extremely cheap. And you won’t believe what advances in biotech we’ll be introducing early next year.”

Warning: Hazardous thinking at work

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