Clean Power Investment Hype Loses Its Charge

Here is an investment rationale you have probably heard: Thing X is gonna be big, huge, a world-dominating phenomenon. And to capitalize, you don’t need to actually own Thing X, just invest in the components that make it go. We have seen this sentiment for years in the realm of all things green. If hybrid and electric vehicles (EVs) are going to get the whole world from Point A to Point B, then investing in lithium, cobalt and the other metals crucial to them must be the quickest highway to riches. Ditto hydrogen, long touted as the clean power of the future. There is just a teensy problem: Markets have already priced this well-known thesis based on all the hype.

Enthusiasm for the building blocks of a bright green future has percolated for years, but it hit fever pitch with 2021’s bipartisan infrastructure bill. That package—a hodgepodge of long-term spending—paid hefty lip service to an EV charging network and clean energy. Paired with state-level EV mandates, it all made wind, solar, hydrogen and big car batteries look like surefire winners in the eyes of many.

But markets tend not to play ball with stories like this. They deal very efficiently with all widely known information, including forecasts, expectations and legislation. By the time the bill passed, markets had moved. Since its November 2021 passage, the relevant corners of the market have mostly languished.

Take lithium, the chief component in the car batteries that bear its name. On November 8, 2021, the first trading day after Congress passed the infrastructure bill, a global lithium and battery technology ETF closed at a new record high, bringing its 2021 year-to-date return to a whopping 55.6%.^[i] That turned out to be the peak. Since then, through Friday’s close, it is down -61.4%.^[ii] S&P’s Global Core Battery Metals Index, launched in June 2022 but back-tested to July 2017, shows a peak in April 2022.^[iii] The more focused Lithium Mining and Manufacturing Index, launched this January but back-tested to July 2021, peaked with broader markets in early January 2022.^[iv] However, unlike broader markets, it never recovered. As of Friday’s close, it had lost about two-thirds of its high-water mark. And ETFs tied to both indexes are negative since inception. Returns haven’t played along with the story.

Clean power is similarly disappointing. Using the S&P Kensho Clean Power Index, it peaked waaaaaaaay back in February 2021. Since then, it is down -55.5%.^[v] The related Global Hydrogen Economy Index, born in July 2023 but back-tested to May 2019, peaked around the same time … and is down about two-thirds from the high.^[vi]

Markets, as they usually do, were happy to ride the build-up to hype and high expectations. But inevitably expectations overshot. Too many people bought on the notion of a so-called Biden trade in clean energy. Selloffs led many to think it was time to buy a green dip, if you will. Reality was busy disappointing such expectations, though.

In the case of clean power, that disappointment has come in the form of high costs, hitting earnings despite the much-ballyhooed tax breaks and subsidies. Hydrogen, meanwhile, remains an unproven technology with long-term potential when producers can figure out how to generate it at scale, but we are a long way off from that. In the meantime, high costs reign, and the eventual winners (if any) are impossible to identify. Stocks, lest we forget, are a share in companies’ earnings. If earnings don’t match the hype, there is just no there there for investors.

Same song, second verse for lithium and other battery metals. EVs’ woes are well-documented, and we won’t pile on here. Suffice it to say that, much as politicians globally twist themselves in knots trying to make society hop on this bandwagon, ye olde internal combustion engine remains drivers’ technology of choice. EVs, with their high upkeep costs, subsidy-distorted prices and weak after-market value, gather dust on dealers’ lots. If you live in California, you will not believe that last sentence, given the army of EVs on Bay Area and Los Angeles metro freeways. But across the vast majority of America, the uptake is weak. About all EVs have done is driven up the secondary market value of used internal combustion cars with few bells and whistles.

And that is just the demand side of things. With commodities, the supply side matters. A lot. Metals generally go like this: Demand spikes, driving up prices. High prices incentivize new mines, so investment in new production jumps. But lead times are long, so prices stay high as the world competes for limited supply—incentivizing more and more investment. Eventually, new mines come online, stabilizing prices. And then keep coming on … and keep on keeping on coming on. Soon the shortage turns to a supply glut, tanking prices until the whole cycle begins anew.

Battery metals are in the less happy part of this super cycle. Annual lithium production is up about 540% since 2010.^[vii] This includes a 68.2% jump since 2021, despite prices falling since early 2022.^[viii] Cobalt, whose price peaked in spring 2022, has seen annual output grow 157% since 2010, with a nearly 40% increase since 2021’s end.^[ix] Even as prices have fallen, earlier investments continue boosting supply. In the world of natural resources, earnings stem from prices, not production volumes, making the supply glut a big fat stinker for returns.

There is a lesson here, a timeless one: Where hype reigns, investors should tread cautiously. High hopes and slick stories aren’t a solid investment basis. Markets deal with those too efficiently. Stocks price them lickity-split, then do something different than the masses expect. Hot expectations usually follow hot returns, teeing up hot disappointment.