Clean energy is getting a do-over with investors in 2020, nearly a decade after the nascent sector overheated and incinerated billions of dollars.
This time, spending on ways to produce less carbon is rapidly climbing the agenda of big governments, oil and gas giants, and financial institutions. As bullish as that may sound, some investors worry that surging demand for renewable assets could repeat history by pushing valuations into bubble territory.
Solar, wind and hydrogen investments have held up well throughout the COVID-19 pandemic. The iShares Global Clean Energy ETF (ICLN) has climbed 95.7 per cent year-to-date, outpacing the broader NASDAQ’s 37.4 per cent gain.
Politics have looked up for clean tech investment recently, whether it’s president-elect Joe Biden’s plans for sweeping climate reforms, U.K. Prime Minister Boris Johnson’s recently announced “green industrial revolution,” or Canada’s green infrastructure spending plans. There are more tangible tailwinds as well. Global renewable electricity installation will hit a record level in 2020, according to a report last month from the International Energy Agency. Data from Morningstar show global inflows into sustainable funds were up 14 per cent to US$80.5 billion in the third quarter of 2020.
I think this time is going to be different. I know many have regretted those words. Bryan Trudel, co-founder and chief financial officer of Avatar Innovations
“I think this time is going to be different. I know many have regretted those words,” said Bryan Trudel, co-founder and chief financial officer of Avatar Innovations, a new education, accelerator and venture capital firm focused on energy transition technologies for the oil and gas industry.
“Last year, you just weren’t seeing the BPs (BP), the Shells (RDS-B) and the Suncors (SU.TO)(SU) of the world putting a heavy push on energy transition. They were hiding. They were just hoping for the next great bull market. And I think this year dramatically shifted that.”
The former CIBC oil and gas equity trader also points to Blackrock (BLK) chairman and chief executive officer Larry Fink’s declaration that “climate risk is investment risk” in his closely-watched letter to CEOs in January, as a meaningful endorsement of the clean energy theme.
To avoid mistakes venture capital firms made in the past, Avatar is developing clean energy ideas from the ground up with entrepreneurs in partnership with Enbridge (ENB.TO)(ENB), TC Energy (TRP.TO)(TRP) and Suncor. The firm’s venture capital arm will invest in technologies developed in-house, but will also consider outside clean tech opportunities. The idea is to create industry-vetted companies that have a buyer for their product on day one.
Tom Rand, managing partner at the venture capital firm ArcTern Ventures, sees clean tech valuations rising as investor demand brushes up against a relative shortage of high-value startups.
“The risk of a bubble is real,” he said, noting the number of clean energy companies going public through reverse mergers with SPACs or so-called “blank cheque companies.”
“It’s imperative these companies deliver on their promises, or we risk a repeat of the VC failure of the late 2000s.”
Researchers at MIT found venture capital firms lost over half of the US$25 billion they spent funding clean energy startups from 2006 to 2011 as the sector fell out of favour with investors. Today, global energy majors threaten to “overheat the sector,” according to IHS Markit. The London-based research firm expects challenging commodity markets and environmental, social, and governance (ESG) targets will increase interest from oil and gas companies.
“Aggressive growth targets, competition from power utilities, and limited experience force oil and gas companies to meet their green commitments primarily through M&A,” Etienne Gabel, senior director of gas, power and energy futures at IHS, wrote in a Nov. 19 research note.
“This uptick comes at a time when many renewable markets globally are suffering from dampened power demand, low wholesale power prices, reduced government support, high competition, and low project margins. This incongruity creates concerns that oil and gas companies are pushing up renewable project valuations and overheating the sector.”
The valuations are through the roof. Bryan Trudel, co-founder and chief financial officer of Avatar Innovations.
Trudel co-founded Avatar with oil field services veteran Kevin Krausert after he resigned from the top job at Calgary-based Beaver Drilling. The pair of oil and gas transplants trust the market is correctly pricing in future returns for the clean energy sector this time.
“The growth here is immense. We’re literally talking about rewiring the way the world powers itself,” he said.
“There is certainly a chance that we are in a position where there’s a bubble forming for clean tech. I mean the valuations are through the roof. But if you remember five, six, seven years ago we were talking about some of these themes for Facebook and Netflix and Amazon, where these multiples were just massive. And it turns out the market did a pretty good job of pricing it in right.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.