[Note from Nick: Today’s Fortune & Freedom comes from February 2008, when guest editor Michael Orme gave some sage advice about the ESG craze of its day to The Fleet Street Letter readers. As you’ll discover, there’s nothing new under the sun when it comes to renewable energy bubbles.]

Reality apart, what could be better than totally “clean” technology, or more realistically, an alternative energy and infrastructure (AEI) boom? Or should that be “bubble”?

Eric Janszen, founder of the iTulip financial blog, has caused quite a stir with his Harper’s article, The Next Bubble: Priming the markets for the tomorrow’s big crash.

His thesis is that the web, telecoms and housing overvaluations were no accident – the US has to operate as a kind of perpetual “bubble blowing machine” to keep its growth going. The next big bubble, according to Janszen and a growing number of gurus and analysts, will be the AEI bubble. True, AEI was going to be the next big thing 40 years ago. This time, though, it really is looking different.

The AEI market is being stoked by:

  • Billions in seed corn and venture capital funding. HSBC reckons over $100bn was invested in clean energy, worldwide, last year and that clean energy firms returned 26% on investment.
  • The “politics of fear”. Energy security has risen to the top of the agenda thanks to the geology and geopolitics of oil and fears of terrorist attacks on long supply lines.
  • The fact that the message about man-made climate change is getting through. At least in terms of what the media majority have to be seen to endorse.

Whoever gets into the White House now, including John McCain, there are two certainties in America’s future. One, a carbon tax (there already is one in California) and; two, a lot of federal support for AEI down the line to complement piecemeal state initiatives. Even George Bush had emphasised AEI in his 2007 State of the Union address, not to mention the fact that CEOs from GE to BP to Toyota now keenly tout their revenue streams from clean technology.

A pre-bubble bubble?

There have been early signs of bubbly behaviour though. For example, the soaring (and subsequently slumping) share prices of solar companies last year, led by the success of China-based JA Solar’s initial public offering (IPO). All these companies rely on selling their wares into subsidised markets, which currently exclude the biggest of all, China itself. Few, if any, make real profits. The current crop are largely deploying silicon-based photovoltaic (PV) technology, a serious obstacle to further growth given the tight and volatile supplies of refined silicon, controlled by a handful of refineries.

At the same time, PV is dubbed ‘toy tech’ at R&D centres such as Caltech, given its low energy conversion rates of 20%- 30%. In addition, unless (or until) there are step changes in storage technology to eliminate the ‘intermittent’ nature of solar power (the same goes for wind power) it’ll never be accepted as anything more than a piffling sideshow by the hard-nosed engineers who run the electricity grids hour by hour.

So, after years of false starts and lack of interest (it’s perceived as dull tech by investors), perhaps storage technologies may become a hot investment sector. Hybrid ultracapacitor/battery systems are showing promise, in particular. Until storage is sorted, the main solar business will be the installation of solar panels on the sides of buildings or roof tops – with big volumes in prospect. Already, Solar City Inc, California’s leading panel installer, can’t find anything like enough installers to fulfil its orders.

Influx of credibility

Meanwhile, there is a propaganda onslaught to soften up the mob for a flood of AEI IPOs. For example, Al Gore is fast becoming the poster boy for the AEI economy. He has joined John Doerr, legendary venture-capitalist at Kleiner Perkins, who assisted at the births of Amazon, Google, Genentech and Sun Microsystems, amongst others.

Moreover, the founders of Google themselves, Messrs. Brin and Page, are getting more and more air time as “green grid” leaders. Google is investing hundreds of millions to turn itself “green” by running a next generation data centre on wind power, and investing in AEI start-ups.

One of the key leftovers of the dot.com bubble is a cadre of rich, tech literate, youngish men (and women) who now need to spend less time with their families. They are putting money, drive and brainpower into what many call the “next big driver of the US economy”.

Led by IBM, Sun Microsystems and Google, among others, the electronic system and software honchos are gearing up to try and turn the electricity industry into a branch of AEI. They talk of the coming of the “electricity web” and “peer-to-peer electrical networks”, rather than the traditional grids. They think in terms of microcontrollers, microprocessors and smart sensors along with smart algorithms and software embedded in anything that uses, generates, distributes or stores electricity.

The momentum is gathering behind the notion that the world can’t wait for disruptive clean-energy technologies to tackle the climate change problem, and the US can’t risk its future for much longer by having to depend on importing over 20 billion barrels of oil a day. Interest in radically disruptive technologies is taking wing.

New technologies

A case in point, Hyperion, a start-up, backed by unspecified funding from Altira Group, based at the Los Alamos National Labs. It’s developing a “hot tub” sized nuclear plant to be encased in cement and buried underground to fuel up to 20,000 homes for five years. It’s to be powered by a steam turbine and operates like a uranium hybrid battery. It has no moving parts. The goal is to start manufacturing it in New Mexico in 2014, starting with 4,000 units.

A loony idea? Yes, reckons one top research executive at the Alamos Labs. He suggests it’ll be a typical “bubble” ramp and that the founders and the backers will float the company into a hype bubble well before it goes into production. But at least it doesn’t sound quite as dangerous as the Russian project to sell offshore floating nuclear plants to the likes of Indonesia and Burma.

More tangible and less “bubbly” is NanoSolar. Messrs. Brin and Page put seed corn funds into it on personal account. The five-year-old company, with $100m behind it, has gone into production with solar cells printed on aluminium foil like a newspaper. The cells are based on copper indium gallium selenide, rather than scarce and costly refined silicon, and can produce energy at less than a dollar a watt. This brings it in line with coal, oil and gas fuels. The company says it has already pre-sold its total output for the year.

There is money to support this optimism

These contrasting examples capture what much of the American economy has always been about – boundless optimism, amidst what Schumpeter called “gales of creative destruction”, and working the effects of high-risk “trial and error”.

When the dot.com and telecoms bubbles blew up, there were still highly significant and transformative leftovers, apart from a cadre of tried and tested tech entrepreneurs – eBay, Amazon, Google, social networking platforms, fibre optic cables, broadband access and whole new ways of living and having our being online, as well as the fraud and massive exercises in wealth destruction.

So, depending on your definition of AEI, it could be a trillion-dollar bubble or even bigger. Does AEI include, for instance, the expansion of rail to reduce pollution from the roads, lighter vehicles, nano-coatings for turbines, the whole value of new energy “smart buildings” and LED bulbs? What about the whole IT and consultancy business of developing the so-called “fifth fuel” – saved energy?

And will there be enough washed, rinsed and recycled funds to spawn and sustain it, given the super-critical mass of “fissionable material” in some of the credit derivative pits? Billions in venture funds have already kick-started the AEI part of the mix, with a lot more available, and there’s no doubt that financial engineers in New York and London will work with sovereign wealth funds, among others, to create some interesting financial instruments to enable the “man in the street” to participate in the next major bubble. You have been warned.

Michael Orme
The Fleet Street Letter