The Stern Review on the Economics of Climate Change of 2006 concluded that the benefits of taking early actions to tackle climate change outweigh the costs. Governments around the world took note and announced commitments towards a low carbon economy and various incentives to support clean energy. In 2007 clean energy stocks were the bright spot of the financial markets. The NEX index, which tracks the performance of 88 clean energy stocks worldwide, finished the year 57.9% higher, comfortably beating the MSCI world index over the same period. Now, fast forward to 2010, after a global recession and a failed climate conference in Copenhagen, the bull run for clean energy stocks is no more; the same NEX index has fallen 24% so far this year, 4 times more than the 6% drop by MSCI. Suddenly, the prospects for the clean energy sector seem grim, so does this mean clean energy is moving forward or stepping back?
Policy uncertainties have created turbulence Austerity measures have impacted governments’ support for the clean energy industry. Governments across Europe have introduced austerity measures recently due to tight finances. Germany, Italy and Spain all reduced subsidies to new solar plants and other support is now also at risk. Most clean energy developments won’t be profitable without the subsidies, so it’s not surprising that the stock market reacted negatively. The 2009 Copenhagen climate summit is generally considered a failure because no binding treaty to succeed Kyoto protocol was agreed. This means there is no clarity on what is going to happen to the global carbon market when Kyoto protocol runs out in 2012. In addition, the US climate bill has been debated in the congress over a year and there is still no clear sign of it being passed. Again, these shattered investors’ confidence in carbon finance and the clean energy sector. Long term growth drivers remain valid However 2⁰C is still the magic number. Despite the differences in Copenhagen, the international community agreed global warming needs to be kept below 2⁰C in order to minimise the impact of climate change. This means reducing 16 gigatonnes (that’s nine zeroes) of CO2 by 2020 from where we are now. Bloomberg new energy finance estimates that in order to achieve this goal, renewable energy will make up 22% of world’s installed power generation base by 2020, up from 13% today. Also energy diversification is not a question of ‘if’, but a question of ‘how’ and ‘when’. The limited oil and gas reserve on earth and the volatile oil price mean energy diversification is inevitable. The recent disastrous BP oil spill in the Gulf of Mexico has caused public backlash against the oil industry. This might be a catalyst in speeding up the energy diversification process, and ultimately benefit the clean energy sector. In addition the cost of clean energy is falling and gaining competitiveness. The costs of solar panels and energy storage devices such as batteries have been dropping consistently over the past decade. Wind turbines are becoming more efficient and the size of wind farms are increasing, hence drive cost down massively. The trend is set to continue, making clean energy more competitive against oil. Short term vs. long term So, in the short term, prospects of the clean energy industry look quite bearish, but as long as the fundamentals of the sector are healthy and the long term growth drivers remain valid, a strong recovery will be just a matter of time, because we have to assume that the debt crisis will pass, the austerity measures will come to an end and the right policies will be put into place. .