Why is smart money betting against renewable energies?

Last week we did reported that the pessimistic mood in the oil markets has fallen to levels last seen during the global financial crisis in 2008. According to commodity analysts at Standard Chartered, the main themes currently dominating oil markets are expectations of macroeconomic hard landings, extreme weakness in oil demand and ongoing fears of oversupplied oil markets in 2025.

However, a recent Bloomberg analysis revealed a more surprising finding: Smart money is betting big on clean energy and opting instead for fossil fuels. Namely that one $5 trillion hedge fund industry It is a net long position in oil, gas and coal, but a net short position in batteries, solar energy, electric vehicles and hydrogen. According to Bloomberg, asset managers have concluded that many green investments will not deliver as fast or as high returns as they had hoped.

Hedge fund bets have sparked a wave of momentum against renewable energy S&P Global Clean Energy The index has lost almost 60% of its value since its peak in 2021, during which S&P Global Oil Index and the broader market S&P 500 The index is up more than 50%.

In the crucial solar sector, 77% of companies had net short positions higher than net long positions in the third quarter, a huge increase from just 33% in the first quarter of 2021. Hedge funds are particularly concerned that it China’s sheer dominance is making it difficult for Western rivals to gain traction. The largest manufacturers of solar modules, consisting of Tongwei, GCL Technology Holdings (OTCPK:GCPEF), Xinte energy, Longi Green Energy Technology, Trina Solar, YES solar technologyAnd Jinko Solar (NYSE:JKS) are all Chinese. To illustrate their dominance, imagine that they collectively produce enough panels to generate 5 exajoules of electricity each year. In comparison, the seven oil giants are below 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 SpA (NYSE:E) extract around 40 exajoules of petroleum energy from the earth every year, or almost 18 million barrels per day. However, Big Solar beats Big Oil when you consider several factors, namely the fact that only a quarter of the energy produced from an oil company’s wells is converted into usable energy and the vast majority is 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.

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Listed in the USA First Solar Inc. (NASDAQ:FSLR) is an outlier here, with FSLR up 17.2% year to date. Unlike many competitors, First Solar has developed a US-centric value chain and does not rely on crystalline silicon technology dominated by Chinese manufacturers.

The pessimistic sentiment in the industry has several negative effects: Solar companies recorded the highest amount of debt financing in a decade in the first half of 2024, according to Mercom Capital Group has reported. Solar companies raised $12.2 billion across 50 debt financing deals during the period, up 53% from the $8 billion raised across 33 deals in the first six months of 2023. Accordingly According to Mercom CEO Raj Prabhu, solar companies are increasingly forced to borrow to finance growth as investors wait due to several headwinds in the industry, including high interest rates, renewed tariffs on Chinese imports and the upcoming US presidential election.

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

Meanwhile, slowing sales growth has left asset managers wary of the once-thriving electric vehicle sector, where 55% of companies operate KraneShares Electric Vehicles & Future Mobility Index ETF Short selling, compared to 35% at the start of 2021. Net short selling of electric vehicle battery manufacturers and related suppliers increased to 57% of companies for the year Global X Lithium & Battery Tech ETFcompared to 29% at the beginning of 2021.

“I’m not saying EVs are dead forever, I’m just saying growth is slower and the industry has over-invested.“Per Lekander, founder of a $2.7 billion hedge fund based in London Clean Energy Transition LLPsaid Bloomberg. Lekander is small Tesla Inc. (NASDAQ:TSLA), with TSLA down 12.9% year-to-date.

The long-suffering hydrogen sector is still struggling to get off the ground. According to Bloomberg New Energy Finance (BNEF), only 12% of hydrogen plants do Have customers with purchase contracts. Even for projects that have signed offtake contracts, there are usually vague, non-binding agreements that can be quietly scrapped if potential buyers back out. The big problem here is that many industries that could potentially run on hydrogen require expensive retrofits to make this a reality, a step most are unwilling to take. To make matters worse, green hydrogen, which is produced by electrolyzing water using renewable energy, is almost four times more expensive than gray hydrogen, which is produced from natural gas or methane by steam reforming methane, but without capturing the greenhouse gases emitted in the process. Of course, it is difficult to build a hydrogen infrastructure when demand may not be available for years.

“No sensible project developer will start producing hydrogen without having a buyer for it, and no sensible banker will lend money to a project developer without having reasonable assurance that someone will buy the hydrogen.“ states BNEF analyst Martin Tengler.

“It is no different than any other large-scale energy development. Natural gas pipelines weren’t built without customers,says Laura Luce, Managing Director of Hy Stor Energy. Laura’s company has secured an exclusive letter of intent to supply hydrogen to an ironworks that Sweden’s SSAB SA plans to build in Mississippi.

Last month, Shell Plc (NYSE:SHEL) Plans abandoned to build a low-carbon hydrogen plant on the west coast of Norway due to a lack of demand.

“We did not see the blue hydrogen market materializing and decided not to move forward with the project.” a Shell spokesman told Reuters.

Shell’s announcement came hot on the heels of a similar move by the oil and gas giant. Equinor ASA (NYSE:EQNR). The Norwegian state-owned multinational energy company announced Just a few weeks earlier, the company announced that plans to build a pipeline to transport hydrogen from Norway to Germany with a partner would not move forward RWE (OTCPK:RWEOY), citing a lack of customers and an inadequate regulatory framework. Equinor should build Hydrogen plants This would allow Norway to send up to 10 gigawatts of blue hydrogen to Germany per year.

“We have decided to discontinue this early phase project. The hydrogen pipeline has proven to be unfeasible. This also means that plans for hydrogen production are also on hold“An Equinor spokesman told Reuters.

By Alex Kimani for Oilprice.com

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