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Alternative Energy Is Growing Fast, Just Not Fast Enough

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The renewables revolution looks like much too little much too late to actually fend off significant climate change and all the dire risks it entails.

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Forget about natural gas. Well don't forget about it, but put it off to one side for a minute. While the shale gas revolution captures headlines and investors' imaginations, the most explosive growth in the energy sector will come from renewables – solar, wind, biomass, and other technologies Wall Street realists love to deride as well-intentioned but hopelessly impracticable.

That prediction comes not from any wishful-thinking conclave of liberal arts tree-huggers, but from BP (NYSE:BP), the fossil fuels supermajor whose annual global energy outlook is scrutinized by hard-nosed oil and utility types with near-biblical intensity. In the freshly released 2014 edition, BP through some unexplained statistical wizardry extends the range of its crystal ball by five years to 2035. It shows that natural gas will indeed be the fastest growing fossil fuel from now till then, with demand rising at an average annual rate of 1.9%. But that is a tortoise pace compared to renewables, which will sprint ahead by 6.4% per year. Renewables' share of world electricity output will nearly triple over the next two decades-plus, from 5% to 14%, BP foresees.

Renewables may be starting from a small base, but any legal industry that can grow more than 6% per year for more than the next 20 years is one investors should not overlook. Some are starting to get the point. Alternative energy companies had a horrific spell on the markets from mid-2011 to mid-2012. The relatively widely held Powershares WilderHill Clean Energy Portfolio ETF (NYSEARCA:PBW) – whose lead holdings are less than household names like Yingli Green Energy Holding (NYSE:YGE), Enphase Energy (NASDAQ:ENPH) and Canadian Solar (NASDAQ:CSIQ) – lost more than half its value in the course of 16 months. But it rebounded smartly last year as solar panels dropped steadily in price and increasingly became a status symbol for the US homeowner. The ETF is now up 62% for the past 12 months. Pure-play solar funds like the Guggenheim Solar ETF (NYSEARCA:TAN) have more than doubled in the past year.

It sounds like an encouraging story, the interests of profit and future viability of life on Earth being aligned for a change. BP CEO Bob Dudley sounded a triumphant note. The energy outlook "highlights the power of competition and market forces in unlocking technology and innovation," he declared in an accompanying press release. Except for one thing: The renewables revolution looks like much too little much too late to actually fend off significant climate change and all the dire risks it entails.

Trends, to be sure, are in the right direction. The growth in world energy consumption slows to 41% between 2012 and 2035 from 55% in the previous 23 years, according to BP. The energy mix becomes significantly healthier, as both green energy and gas grab market share from coal, the fuel source richest in carbon dioxide, whose excess concentrations in the atmosphere are thought to be driving climate change. But the gains are relative, not absolute. The world will still belch out 29% more CO2 in 2035 than it does today, if BP's prognostications are correct. Coal output keeps going up by more than 1% per year despite the shift to cleaner fuels.

The politics of climate also shifts decisively to emerging markets, which have so far taken a clear line that developed countries created atmospheric imbalances over the past 200 years, so they should solve them now. We Americans remain the world's energy hogs, accounting for some 20% of global consumption with about 4.5% of the population. But climate issues cannot be feasibly addressed any more without China and India, which between them will drive more than half the global increase in energy use, and virtually the entire increase in coal burning, going forward.

While Dudley applauded the market for solving the world's energy problems, ranking climate scientists were sounding the alarm once more that the current pace of gradual reforms is dangerously insufficient. If CO2 emissions continue on their current trajectory, the world will cross a perilous threshold by 2030. We will be unable to hold atmospheric CO2 concentrations below a red line of 500 parts per million without massively deploying untried technologies to suck the gas back out of the air and bury it beneath the Earth. That was the prediction of the Intergovernmental Panel on Climate Change, the U.N.-sponsored body that has driven scientific consensus on the issue, in portions of a forthcoming report leaked to the New York Times and Reuters.

By coincidence, 2030 is the happy date when BP expects the richest countries will finally be able to grow economically while reducing energy consumption. Looks like that will be a limited victory for our species. But meanwhile there should be good money to be made in solar panels, and life boats.
No positions in stocks mentioned.

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