So What's Next and Can We Make Money on It?
It’s becoming a bit of a given that oil is not the wave of the future. But still we cling to black gold, celebrate low gas prices by running out to buy SUVs and, most importantly, are hesitant to invest in “greentech”. So what’s holding this wave of the future back, and when will this tsunami hit the shore?
As good as it sounds to invest in greentech, there are very real financial and market reasons for those waiting to put their money where their mouth is. From an investment point of view, it’s not the surest, nor the fastest bet. The very reasons any other investment might be passed on exist just as much in this idealist sector. Let’s consider what these roadblocks are now, and then ponder the possibilities for the future. After all, Earth Day is upon us and, heck, reading a paperless blog about greentech is a step in the warm fuzzies direction, right?
Yeah, Why Aren't We All Driving Biodegradable Compost-Fueled Cars?
Cast off ye dreadlocks and put on a tie and think for a minute about the uphill battle greentech has for generating a significant return on investment. For any new technology there is the issue of competition with the known and the established, companies that may have significant political and regulatory clout. To gain a large market share, especially when the market is everybody, like with oil, is difficult.
In energy the first and foremost obstacle is infrastructure, which is prohibitively expensive. To be commercially successful, a solar company, for example, would have to be able to afford millions, if not billions, in upfront investment in the technology and its production. From a business perspective there is a serious catch 22 in this: companies need to be able to provide a high enough supply to lower the price to something the masses would actually demand. If they can't afford to do that, they will have an expensive product with low demand and the old technology will plug on.
Therefore, significant investment and/or government subsidies are necessary to even get off the ground. An issue that stems from this is that from an investment perspective it can be difficult to valuate a heavily subsidized industry. And once the necessary capital is available, the next investment is time. This is not an app for the iPhone; for almost all greentech, after the innovation is done, there are things to literally build from the ground up and an uphill battle for traction with a market that already has a solution, even if it isn't the best one.
It can take years to ready the tech for market, and it can take years for the market to ready itself for the tech. There has to be that tipping point, like having enough cars to justify building highways, or the internet making owning computer ownership worth the sticker price (90s problems, the struggle was real). Already the greentech "bubble" has been declared bust several times, simply because all of the enthusiasm in the world didn't make it a sound investment in the current market.
Regarding tech investment, in general, Warren Buffet has referenced the great innovations in recent history. The automobile was a huge disruption, but that doesn't mean investing in a car company was a safe bet. Many of them were gone with the wind before the movie by the same name was shot, and even today GM isn't exactly a great investment - but the company developing a way to replace buttons with 3D hand gestures might be.
Those venture firms who lost big on Solyndra can try to find solace in the fact that when solar becomes standard and vast sums are being made, they helped that momentum. And there will be a truth to that, though it doesn't put money back in the coffers. But there are signs that the market is more ready than it was in 2009, 2006, or that time GM killed its own electric car.
Why You Don't Have to Invest in Oil While It's Rock Bottom
Some of the same conditions as before still exist. It's going to take capital and commitment to transform an industry. But partnerships with existing competitors can reduce some of the initial overhead. And there are indications in several sectors that this will be a possibility. In the example of solar, mainstream energy companies are now looking to offer alternatives that customer's have asked for in survey after survey. The customers just aren't interested in being the only one to finance the endeavour by paying exorbitant prices.
Between this demand and the dropping cost of the technology, solar may become a reality. In this field, grid parity is the key word - when kilowatts per hour come to be equal or less than that from traditional electricity sources. Grid parity will result due to innovation that has continued behind the scenes, innovations that may be realistic, or even wise, to invest in. One example is (and this isn't an investment recommendation, it's just an example) Utilight, a company that innovated a way to 3D print the wafers make up solar panels. The invention of solar panels, if you will, cannot truly be disruptive, until there is an innovation that makes it a marketable reality.
The Stone Age didn't end for a lack of stones, it ended up because eventually useful combinations with copper resulted in a more useful material - bronze. And so it will be with oil. The investor's job is to discern what will be the next best thing at the right time and not invest in tin.
That's one way to save the planet...backing innovative companies might be easier, though.