What California’s Electric Vehicle Mandate Teaches Investors About Chasing Riches in Renewables

For eons now, politicians globally have had a noble dream: a wholesale shift to clean, renewable power. The sources getting most attention from headlines and investors alike are wind and solar, and for the better part of a decade, investors have tried to identify the big winners. Now traditional Energy companies are getting in on the action, with BP the latest to announce a big push toward wind and solar. Meanwhile, California has quietly poked holes in this as a viable long-term strategy, and counterintuitively, Governor Gavin Newsom’s announcement yesterday that all new cars sold in the state must be electric beginning in 2035 might just be the nail in the coffin. The story I am about to tell carries a timeless moral: Long-term visions aren’t a sound investing thesis.

At the most basic level, California’s forthcoming ban on sales of new gas and diesel-powered cars rests on an oversimplified notion of energy and emissions. The goal is to make California’s streets emission-free, which seems logical considering electric vehicles don’t have tailpipes. However, if you think beyond the immediate, you realize electric vehicles do generate emissions—at the power plants that generate the electricity they run on.

Wind and solar have made huge strides in California and now represent the state’s biggest source of electricity at 37.7%.^[i] They don’t generate carbon emissions. But they have already proven ill equipped to handle California’s vast electricity needs. The grid operator has warned for years that as wind and solar gain more responsibility, the state will face power shortages due to their intermittent nature. While natural gas and nuclear plants can run 24/7, the wind doesn’t always blow and the sun doesn’t always shine. Due to the abundance of turbines and solar panels in the state, when the weather is sunny and breezy, renewable sources generate plenty of spare power. But the grid lacks storage capacity, so that power doesn’t get saved for a rainy day (pun intended). That forces natural gas-fired plants, which generate 37.4% of the state’s electricity, to fill the shortfall.^[ii] That worked for a while, but as the state decommissions natural gas plants, the shortfall intensifies. In August’s heatwave, the grid was reportedly 4,000 megawatts short of power, triggering rolling blackouts.^[iii] As more gas-fired plants go offline, the shortage will worsen—and, barring major new developments, when the Diablo Canyon nuclear plant shuts in 2025, it could get really bad.

That is before you add millions more electric cars to the road, which will require a huge expansion of power plants and the grid that supports them. Based on recent experience, it seems highly unlikely wind and solar will cut it, potentially dashing the hopes of investors who speculated on these as the long-term winners in the quest for emission-free power. Cryogenic compressed air energy storage, a relatively new technology that is more efficient than batteries (and generates less toxic waste), has gotten some attention lately as a solution to the solar energy storage problem, and that could help. But the vast amounts of turbines and solar farms needed to support an entire state of electric vehicles seems like an environmental problem in the making, in my view. Turbines’ deadly impact on local and migratory birds is well-known and tragic. Solar panels, meanwhile, generate toxic waste, creating dilemmas over disposal. Ditto for wind turbines. Every energy decision is an ethical and environmental trade-off.

Then too, wind and solar aren’t the only “clean” renewables in town. Fifteen years is a long time from now—a long time for nascent technologies to mature and prove their worth. Some companies are pursuing ocean wave energy, which is basically an offshore version of hydroelectric (officially known as hydrokinetic energy). Hydrogen is another contender. It is getting a lot of headlines because of Nikola’s (allegedly dodgy, pending an SEC investigation) hydrogen fuel cell truck project and Airbus’s rendering of a hydrogen-powered airplane, but some very fine minds are already hard at work on hydrogen power plants. Los Angeles recently contracted a company to build the world’s first. Elsewhere in cutting-edge electricity generation we have geothermal energy, which, unlike hydrogen, is already operating. Lastly, as Andy Kessler highlighted in The Wall Street Journal this week, the next generation of nuclear reactors (called Small Modular Reactors, or SMRs) are tiny, relatively inexpensive and have overcome the Chernobyl and Three Mile Island-type safety issues the world has long associated with nukes.^[iv]

It is impossible to know today which of these, if any, will be the most viable long-term energy source (and investment). It could be one of them. They could all do excellently and share the load. Or it could be some technology we haven’t yet heard of. The answer could depend on regulators’ whims, which defy prediction. This, in a nutshell, is the problem with making speculative investments whose payoff won’t arrive in the foreseeable future—the same problem plaguing people speculating on wind and solar a decade ago. (Google “Solyndra” for one example.) The aforementioned Nikola is another example, especially in the wake of one short-seller’s allegations of investor fraud. Whether those have merit is now the subject of an SEC investigation, but even the volatility associated with the initial allegations shows the danger of making such long-term, pie-in-the-sky moves—especially given all the hype around electric cars and clean energy.

In my view, the best way for investors to navigate all of this is the most boring way: Wait it out. Invest on probabilities, not possibilities—especially the far-flung variety. Diversify and focus on earning market-like returns (or close to it) from year to year, building wealth gradually over the long term. It isn’t the most exciting, but it is also a proven approach. Hitting it big with one speculative pick isn’t proven. It is the sort of thing that generates human interest stories a few times a year, but it isn’t viable, because there is no way to know whether or not you are waiting for a big payday that never comes. Call me crazy, but that doesn’t seem like the soundest way to fund retirement.

As for next-generation power sources, appreciate them for what they are: signs that creative people continue trying to solve the world’s problems—another link in the long chain from automobiles to washing machines to the Internet and beyond. Follow them if you enjoy reading about technology. But when it comes to investing, stay diversified and make sure your thesis to own any company is based on a strong likelihood of delivering results in the foreseeable future—about 3 – 30 months out or so—and not on a distant possibility of payoff in 10 – 15 years that hinges on a litany of unknowable developments.