Why Is Smart Money Betting Against Renewable Energy

However, a recent Bloomberg analysis has revealed a more surprising finding: smart money is betting heavily against clean energy while going long fossil fuels. To wit, the $5 trillion hedge fund industry is net long oil, gas and coal but net short batteries, solar, electric vehicles and hydrogen. According to Bloomberg, money managers have concluded that many green investments will not yield returns as quick or as high as they had hoped.

The hedge funds’ bets have been driving a wave of momentum against renewable energy, with the S&P Global Clean Energy Index having lost almost 60% of its value since its 2021 peak, while the S&P Global Oil Index as well as the broad market S&P 500 Index have soared more than 50%.

In the pivotal solar sector, in the third quarter, net shorts outnumbered net longs for 77% of companies, a massive increase compared with just 33% in the first quarter of 2021. Hedge funds are mainly concerned that China's sheer dominance makes it hard for western rivals to gain traction. The biggest solar panel manufacturers consisting of Tongwei, GCL Technology Holdings (OTCPK:GCPEF), Xinte Energy, Longi Green Energy Technology, Trina Solar, JA Solar Technology, and Jinko Solar (NYSE:JKS) are all Chinese.

To illustrate their dominance, consider they jointly produce enough panels to generate 5 exajoules of electricity every year. In comparison, the seven oil giants including Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX), Shell Plc (NYSE:SHEL), TotalEnergies (NYSE:TTE), BP Plc (NYSE:BP), ConocoPhillips (NYSE:COP), and Eni S.p.A (NYSE:E) extract around 40 exajoules of petroleum energy from the ground per year, or just shy of 18 million barrels per day. However, Big Solar beats Big Oil when you take several factors into account the fact that only a quarter of the energy coming out of an oil company’s wells gets turned into useful power with the vast majority lost as heat. Electric motors convert over 85 percent of electrical energy into mechanical energy compared to less than 40 percent for a gas combustion engine.

US-listed First Solar Inc. (NASDAQ:FSLR) is an outlier here, with FSLR up 17.2% in the year-to-date. Unlike many peers, First Solar has developed a US-centric value chain and doesn’t rely on crystalline-silicon technology, which is dominated by Chinese manufacturers.

The bearish sentiment pervading the sector is having several negative ramifications: Solar companies recorded the highest amount in debt financing in a decade during the first half of 2024, Mercom Capital Group has reported. Solar companies raised $12.2 billion across 50 debt financing deals in the period, marking a 53% increase from the $8 billion raised in 33 deals during the first six months of 2023. According to Raj Prabhu, CEO of Mercom, solar companies are increasingly being forced to borrow to finance growth while investors sit out due to several industry headwinds including high interest rates, renewed push for tariffs on Chinese imports and the upcoming U.S. presidential election.

“Financing activity in the solar sector remains restrained despite tailwinds from the Inflation Reduction Act and favorable global policies,” Raj Prabhu said.

Meanwhile, slowing sales growth has made money managers turn cold on the erstwhile high-flying electric vehicle sector, with 55% of the companies in the KraneShares Electric Vehicles & Future Mobility Index ETF sold short compared with 35% in early 2021. Net shorts against producers of EV batteries and related suppliers have soared to 57% of companies in the Global X Lithium & Battery Tech ETF, compared with 29% in early 2021.

“I’m not saying EVs are dead forever, I’m just saying growth is lower and the industry has over-invested,” Per Lekander, founder of $2.7 billion London-based hedge fund Clean Energy Transition LLP, told Bloomberg. Lekander is short Tesla Inc. (NASDAQ:TSLA), with TSLA down 12.9% YTD.

The long-suffering hydrogen sector is still struggling to take off. According to Bloomberg New Energy Finance (BNEF), just 12% of hydrogen plants have customers with offtake agreements. Even among projects that have signed offtake deals, most have vague, nonbinding arrangements that can be quietly discarded if the potential buyers back out. The big problem here is that many industries that could potentially run on hydrogen require expensive retooling to make this a reality, a leap that most are unwilling to take. To complicate matters, green hydrogen made by electrolyzing water using renewable energy costs nearly four times as gray hydrogen created from natural gas, or methane, using steam methane reformation but without capturing the greenhouse gasses emitted in the process. Quite naturally, it's hard to build hydrogen infrastructure when the demand may not materialize for years.

“No sane project developer is going to start producing hydrogen without having a buyer for it, and no sane banker is going to lend money to a project developer without reasonable confidence that someone’s going to buy the hydrogen,” BNEF analyst Martin Tengler notes.

“It’s no different than any other energy development at scale. Natural gas pipelines didn’t get built without customers,” says Laura Luce, chief executive officer of Hy Stor Energy. Laura’s company has secured an exclusive letter of intent to supply hydrogen to an iron mill that Sweden’s SSAB SA plans to build in Mississippi.

Last month, Shell Plc (NYSE:SHEL) ditched plans to build a low-carbon hydrogen plant on Norway's west coast due to a lack of demand.

"We haven't seen the market for blue hydrogen materialize and decided not to progress the project," a Shell spokesperson told Reuters.

Shell’s announcement came hot on the heels of a similar move by oil and gas giant, Equinor ASA (NYSE:EQNR). The Norwegian state-owned multinational energy company announced just weeks prior that it will not move forward with plans to build a pipeline to carry hydrogen from Norway to Germany with partner RWE (OTCPK:RWEOY), citing a lack of customers as well as an inadequate regulatory framework. Equinor was to build hydrogen plants that would enable Norway to send up to 10 gigawatts per annum of blue hydrogen to Germany.

“We have decided to discontinue this early-phase project. The hydrogen pipeline hasn’t proved to be viable. That also implies that hydrogen production plans are also put aside,” and Equinor spokesman told Reuters.

By Alex Kimani for Oilprice.com