We look at whether investing in renewable energy can provide a positive impact for your portfolio and the planet.
The good news for our planet is that renewable energy technology is getting better and cheaper by the day. As a result, it’s predicted that companies, governments and investors will contribute several trillion dollars to renewable energy infrastructure over the coming decades.
According to the IEA (International Energy Agency), global renewable energy consumption will grow to 111 billion quadrillion BTUs (British Thermal Units) in 2021. That’s up from 106 quadrillion BTUs in 2020. This rise illustrates how the demand for renewable energy is growing, a trend that is expected to continue over the next few years.
Indeed, the same forecasts from the IEA suggest that total renewable energy consumption could hit 252 quadrillion BTUs by 2050. However, getting to this stage will require a tremendous amount of investment.
Renewable energy investment
Competition in the renewables industry is increasing, which in turn makes it difficult for individual investors to find opportunities. There are some attractive-looking investment opportunities out there, but there’s no guarantee these businesses will be able to make a success of their technologies.
So, with that in mind, where do you look for the best renewable energy investments?
The pandemic disrupted the power sector just like any other industry in 2020, but it wasn’t all bad news. Relative to 2019, energy demand in 2020 declined for all forms of generating capacity except renewables.
Coal, gas, nuclear, and oil demand decreased between 3% and 9%, while demand for renewables ticked up by almost 1%. These numbers appear to suggest that investors are looking past the renewables industry’s short-term headwinds and concentrating on its long-term potential.
Photographer: Karsten Würth | Source: Unsplash
Despite the pandemic, figures show that wind capacity additions grew 8% in 2020, and the uptake is expected to accelerate in 2021. According to IEA forecasts, generation from solar energy is expected to increase at an annual rate of 15% through 2030.
And, as more and more money piles into the industry, the financing costs for renewable energy projects continue to fall.
Renewable energy returns
According to research from Oxford University, investors typically require wind and solar energy projects to make returns of at least 10% to 11%, reflecting the perceived low risk of such investments. Since 2010, solar photovoltaic, onshore wind, and offshore wind financing costs have declined by 20%, 15%, and 33%, respectively.
Simultaneously, the return on investment required by investors to justify new coal projects has dramatically increased. The research from Oxford University suggests that these projects now need to earn a return of around 40% to justify construction costs.
If these trends continue, the cost of funding and building renewable energy projects could reach incredibly low levels over the next decade.
On the other hand, projects involving hydrocarbons could become prohibitively expensive. This may accelerate the adoption of renewable energy around the world.
Of course, these are only projections at this stage, but they seem to show the potential of the renewable energy industry.
The tide is turning
A decade ago, investors shied away from costly renewable energy projects such as wind and solar farms, citing high costs and low returns. Instead of funding these projects, Wall Street invested hundreds of billions of dollars in hydrocarbons projects, such as shale oil, to help the United States achieve energy independence.
What’s more, ten years ago, ExxonMobil, the world’s largest publicly traded oil producer, was one of the world’s largest companies. Its market value topped out at $446 billion in mid-2014, the last time crude prices traded above $100 a barrel.
Today, the company is a shell of its former self. Its market capitalization has slumped to $240 billion. In comparison, the market capitalization of electric vehicle manufacturer Tesla has surged to $686 billion.
These numbers illustrate just how quickly the world’s energy system has shifted.
Further growth ahead
It appears as if this transformation is only just getting started. Based on what has happened in the industry over the past ten years, it does not seem unrealistic to say that by 2030, the energy sector could have completely changed once again.
As demand for renewable energy continues to expand over the next few decades, the sector may remain one of the market’s top growth industries. This suggests the booming market may not only lead to positive results for the planet but for investors’ portfolios as well.
There are many ways investors can gain exposure to the renewable energy industry.
Investment trusts, common mutual funds, and ETFs are one route. These pooled investment vehicles allow investors to acquire a basket of stocks with exposure to renewable energy themes. They may be the best way to invest in the industry’s growth considering how fast it is evolving and how difficult it may be to pick winners in such a rapidly developing industry.
A couple of ETF examples are iShares Global Clean Energy ETF, which has $5.6 billion of assets under management (AUM), the Invesco Solar ETF, with $3.2 billion AUM, and the First Trust NASDAQ Clean Edge Green Energy Index Fund, which has AUM of $2.7 billion.
Another option is to buy individual stocks, but this strategy may not be suitable for all investors due to the challenges outlined throughout this article.
The renewable energy industry is going through a tremendous growth spurt, and money is pouring into different technologies. Trying to predict which companies and technologies will come out on top at this point is challenging.
Renewable energy stocks
One strategy could be to focus on operators of renewable generation capacity—companies such as Brookfield Renewable Partners, NextEra Energy Partners, or Atlantica Sustainable Infrastructure. These companies have diversified energy generation portfolios, which may allow them to navigate the changing environment more effectively.
Another strategy could be to target industry suppliers like Enphase Energy. This solar power technology company supplies micro inverters for solar panels. This kind of technology has multiple uses, and if another renewable technology supersedes solar power, Enphase may be able to repurpose its technology.
These are just some of the investment options available to investors today. New opportunities are continuously emerging as the sector grows and evolves.