Tom asked earlier what the "anarchic" disintegration of Lehman Brother's carbon trading desk -- taking place within the broader disintegration of the entire company -- means in the bigger picture.
And the answer, most likely, is pretty much nothing. This is true for a variety of reasons, not least among them that Lehman Brothers was a small player in the carbon markets. The center of gravity in the carbon-trading world is in Europe. Beyond that, the carbon market itself is just one corner of the energy finance universe. Lehman is a corner of a corner, and anyway the disappearance of a single trading desk is nothing really to fret over.
A trickier question is what affect the broader issues in the financial markets have for the development of clean energy. And, well, it's hard to say, as all sorts of countervailing forces are at work. As Tom also noted, one short-run effect of the economic turmoil in the financial industry is to make a carbon caps a trickier sell in New York. Looking more broadly, I see at least four large trends affecting the clean energy market over the next few years:
- The credit crunch. Banks, you may have noticed, are having a
hard time of it right now. This is an unequivocally bad thing for the
clean energy sector. Clean energy projects typically entail massive
up-front capital outlays, followed by relatively low ongoing costs.
Banks provide the money for those up-front expenditures in the form of
loans.
Except that right now, banks have retreated into their pillow forts. One analyst projects that, by 2020, the clean energy sector in Europe will require about 85 billion euros per year in financing to meet E.U. goals. Given the current pace of lending, debt finance will fall about 21 billion euros short. I'd put very low confidence in these specific numbers, but they are illustrative of the problem faced by energy developers who need cash to turn blueprints into megawatts. - Fossil fuel prices. To simplify: high fossil fuel prices make clean energy projects look more attractive.
There are many people paid more money than to me predict the direction of fossil fuel prices, and I won't pretend to have any special insight here. Based on my own analysis, which involves drawing a supply and demand curve on piece of graph paper with a crayon, I predict that fossil fuel prices will continue to gradually rise for years to come, while also exhibiting high volatility. (I further predict that the press will continue to cover movements in spot prices as though spectating a ping-pong match.) The underlying upward trend in fossil fuel prices will be positive for clean energy development, but the volatility will blunt some of the benefit by injecting a high degree of uncertainty into the market. - Supply chain constraints. One inevitable consequence of the current clean energy boomlet is that manufacturers are having a hard time keeping up with demand for basic infrastructure, such as wind turbines. This situation should eventually right itself, but it will remain a brake on growth in the near term.
- Global carbon policy. In fits and starts, governments worldwide are putting a price on carbon. And though the shortcomings of these early attempts have been well-noted, in aggregate policymakers are stumbling in the right direction. These efforts are helpful, even if they aren't anywhere near enough.
So the scorecard on macro trends in the clean energy sector reads: credit crunch, very bad; high fossil fuel prices, very good; supply chain constraints, bad, but self-righting; global carbon policy, nascent, but directionally correct.
I should add that these issues interact or reinforce one another in confusing ways, particularly in the short-term. A poor economy weakens the political will for aggressive carbon policy. On the other hand, the weak dollar seems to have made America enormously attractive to European clean energy developers.
Anything to add to this list?
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Comments
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Delay And Deny Posted 10:17 am
17 Sep 2008
I agree they have something in common.
Wall Street has acted in recent times more as a barrier to finance than as a conduit. It extracted maximum payment for its services, and skimmed the cream with arcane instruments like derivatives.
Just as the ice is melting, providing new passageways between continents, Wall Street is melting, providing point to point access to capital.
The Internet and it's storehouse of information, may be a better arbiter of where capital should flow than one island in the Atlantic.
Open the capital passageways...melt the middlemen.
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Sean Casten Posted 11:08 am
17 Sep 2008
Whoever wins the white house is going to face a massive economic slump, that's really hard to reconcile. Thousands of business owners right now - not just in the clean energy space - can't get access to capital right now. This means they can't expand their factories, get working capital loans, test out new business plans, etc. Slow that engine down and you get immediate falloffs in economic activity. In the short term, it's hard not to see this leading to political conversation based on JobsJobsJobs, at the expense of much else. In the medium term (say, 2 years), it's hard not to see this leading to a slow down in economic growth, with a concomitant fall off in energy use, and thus energy prices.
Recognizing the danger in making predictions about anything as complex as the economy, this alignment of stars seems to augur for lower, not higher fossil fuel prices.
(On the other hand... since any economics conversation always has to end with that phrase... those sectors of the energy system that are currently capacity constrained, like power generation and petroleum refining will likely also face constraints on access to capital, causing supply tightening as well.)
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wreckenhavoc Posted 11:23 am
17 Sep 2008
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Sam Wells Posted 12:26 pm
17 Sep 2008
I mean an electrical infrastructure.
I wouldn't worry about the investor pool in clean energy, as many have bailed from financials and traditional oil and are seeking new opportunities. True, the "clean liquids" market for ethanol, bio-diesel, and synthetic distillate may take a bum rap. But thanks to Florida Light & Power, some major Australian and EU investors, and more interest in clean power sources, my thinking is they should do OK.
If they can sell electrical power over this WWII system of transmission wires we have today.
-sam
Onward through the fog
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Pangolin Posted 5:24 pm
17 Sep 2008
Converting a good chunk of that money to a geothermal heat pump for the mcmansion along with some solar panels is a quick way to get it earning gold-plated returns as wells as being tax free. The government can't tax you on money you don't spend but the effect on the bottom line is the same as earnings.
It's also a hedge against inflation since fuel and electricity prices tend to go up regardless of the state of the economy while the government is likely to increase the money supply to pay it's bills. Dr. Tummytuck even gets a tax credit if he lives in the right state. A solar panel, once installed, is fixed cost electricity for twenty years which PG&E isn't about to give you.
The next good storm when the power is out and your neighbors run out of gas for the generator Dr. Tummytuck gets to brag that the solar panels kept his house warm and beer cold while everybody else fed generators at $4/gallon. If they could get the gas. Independent power supply is starting to become a neccesity if you live out of town even a few miles.
Multiply this event by several hundred thousand in various combinations and you've got a new industry that will look for new customers further down the economic ladder. A little help from the government on building codes and financial vehicles that allow people to pay for new installations as part of their utility bills and we're talking real money.
Wall Street is a disaster. Real estate is a disaster. Commodities is just gambling. Where else are the petit-bourgeoisie going to hide their money?
Put the Carbon Back
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Adam Stein Posted 2:44 am
18 Sep 2008
If so, I agree that there will be all sorts of unpredictable short-run effects, which is why I think there will be tons of volatility. Supply is tight, but there's lots of room for demand to swing around, which will lead to spikes and troughs in price.
But the underlying secular trend in demand and prices should be upward, no? China, etc.
www.terrapass.com/blog
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Sean Casten Posted 3:01 am
18 Sep 2008
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Adam Stein Posted 4:38 am
18 Sep 2008
www.terrapass.com/blog
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Sean Casten Posted 7:01 am
18 Sep 2008
See here for a discussion of why the CCX price has fallen so much in recent weeks, and in particular that:
Eckert confirmed that Lehman Brothers - the US investment bank that was put into administration on Monday - was registered as having a 3.4% stake in Climate Exchange and he suspected that there were other "forced sellers" among the firm's shareholders.
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Adam Stein Posted 10:08 am
22 Sep 2008
www.terrapass.com/blog
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