Investing In Renewable Energy For A Sustainable Future

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The Growing Importance Of Renewable Energy

With climate change continuing to grow in extent and impact, the shift to renewable energy sources has become imperative. While the environmental benefits of this gradual shift to using greener and cleaner raw materials to generate energy cannot be stressed enough, growth in the renewable energy space is also set to open up a myriad of new and promising avenues for investments. There are many long-term opportunities here to take advantage of. For businesses, this may come in the form of increased margins because of financial incentives or infrastructural support from the government. For investors, this could mean more under-the-radar investment options–something to help diversify their portfolios into the much-talked-about ESG (environmental, social and governance) space.

Headwinds & Tailwinds In The Face Of The Transition

As the world transitions towards renewable energy, the space is now propelled by more tailwinds than the headwinds it is facing. While headwinds such as the high cost of renewable energy production and project delays continue to weigh down the pace of growth and advancement in the sector, we’re also seeing strong demand, new and increased incentives, and cost competitiveness serving as key tailwinds enabling this transition. The Covid pandemic did bring about supply chain disruptions, interconnection bottlenecks, transmission limitations and trade policy uncertainty–impacting investment into and development of the renewable energy sector. However, it also brought a sense of caution (against where the world was heading) and a renewed drive towards more responsible living.

Although renewable energy costs may rise over the short term due to the aforementioned issues, wind and solar energy are now more competitive in terms of LCOE (levelized cost of energy) as the cost of energy via conventional sources has also been moving higher.

A Renewed Shift In Geopolitical Dominance

For years, fossil-fuel (oil) rich countries have been able to exercise dominance and power over the energy markets. Governance systems such as the OPEC (formed in 1960) are a byproduct of such power. With the advent and recognition of climate change and the need to transition to clean energy, there’s also a noticeable shift in this geopolitical dynamic. The dominance that oil-producing countries enjoyed over the oil-consuming countries all these years, is now weakening. The relative abundance of natural resources powering renewable fuel is the simple reason behind this shift. Though China has emerged as a forerunner and a primary manufacturing center for cleantech products–such as solar panels, wind turbines and EV batteries–other nations with such renewable resources are steadily catching up.

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Macro Trends And Policies Powering The Transition

The Inflation Reduction Act of 2022 (IRA) is currently incentivizing U.S. manufacturers to accelerate the transition to a clean energy economy. The Act is extending various benefits, such as investment tax credits (ITC) and production tax credits (PTC), to its Green Power Partners. Benefits and incentives being extended under the Act are expected to drive new plants, increase investment in renewables infrastructure, and improve renewable energy supply chains across the U.S. The Act has extended tax credits for solar and wind projects that begin construction before 2025 and also offers technology-neutral credits through 2032. While only solar and wind technologies are key focus areas for 2023 and 2024, the Act also covers energy storage that’s connected to these areas. Currently expensive, hydrogen could become more mainstream going forward as a clean energy source as the $3/kg tax credit for eligible clean hydrogen could help turn the economics in favor of manufacturing hydrogen for producers.
The International Energy Agency (IEA) founded in 1974 currently comprising 31 member developed and developing countries, expects renewables to account for 90% of global electricity capacity expansion over 2022-2027. Contribution to such expansion is expected to be led by China, the European Union, the United States and India as these nations continue to implement policies and reforms more quickly in response to the energy crisis.
India has stepped up its renewable energy capacity targets to 450 gigawatts by 2030. It aims to reach net zero emissions by 2070 and to meet 50% of its electricity requirements from renewable energy sources by 2030.
Under its Saudi Green Initiative, the Kingdom of Saudi Arabia is poised to achieve net zero emissions by 2060 and to increase domestic generation capacity from renewable energy to 50% by 2030.
The Global Battery Alliance was incubated by the World Economic Forum (WEF) in 2017 “to help establish a sustainable battery value chain by 2030.” With its 130-plus members spread globally, the GBA is yet another example of more economic and geographic inclusion in the world’s clean energy future.

Technology Innovations And Investments: Key To Energy Transition

Innovation and continued developments in clean tech are critical to achieving the net-zero carbon emissions dream. While technological advancements have helped lower the cost of solar and wind power over the years, we’re now seeing a similar trend in the lithium-ion battery technology space–both key technologies to the world transitioning to clean energy.

Clean hydrogen and advanced biofuels also have their share in the industry. Though currently more expensive than fossil fuels alternatives, with greater government support, technology innovation and cost reductions, clean hydrogen too, has the potential to gain more prominence in the future. CCUS (CO2 capture, utilization, and storage) is also gaining prominence among industrial sectors that are difficult to decarbonize. Although nascent in terms of technology or capital deployment, CCUS also holds the potential to serve as a great source of fossil-free carbon products in the future.

According to the International Renewable Energy Agency (IRENA), cumulative investment in transition technologies must represent $35 trillion by 2030 for global average temperature rises to keep below 1.5°C.

Investing In Renewable Energy

With policy support and more inclusion and competitiveness aiding the space, many in the investing community are eyeing opportunities over the long term. Investments and incentives are already in place to boost the sector, so one could expect at least the stronger players in the field to reap good returns for early investors. The capital markets have already recognized this trend. According to a McKinsey study, private-market equity investors launched more than 330 new ESG and impact funds between 2019-2022, taking the cumulative assets under management (AUM) for these funds from $90 billion in 2019 to a whopping $270 billion in 2022.

We’re seeing listed public utilities such as NextEra Energy (NEE), Sunrun (SUN), Brookfield Renewable Partners LP (BEP) and FirstSolar (FSLR) leading the decarbonization trend.

Other stocks that could potentially benefit from ESG trends to keep an eye on are:

FuelCell Energy (FCEL): A pioneer in renewable energy is now collaborating with Chart Industries on decarbonization and hydrogen technology.
Bloom Energy (BE): Another hydrogen player is set to launch the first natural gas-powered solid oxide fuel project in India. The company’s stock recently got upgraded by J.P. Morgan.
Plug Power (PLUG): Another green hydrogen player, recently secured three major deals in Europe.
Air Products & Chemicals (APD): A leader in industrial gases is investing heavily in low-carbon hydrogen projects.
L’Air Liquide SA (AIQUF): Aims to power the world with clean and renewable energy sources.
Linde plc (LIN): Industrial gas and engineering company is also investing heavily in clean technologies.
Cummins (CMI) – After acquiring Hydrogenics in 2019 for its hydrogen production technology, the company has recently announced more than $1 billion in investment commitment to help decarbonize America’s truck fleets.

For those willing to invest in renewables but fear concentration risk, investing in clean energy ETFs is a way to lend your portfolio diversified exposure to the space. The iShares Global Clean Energy ETF (ICLN) is the largest ETF in the space with over $4.5 billion AUM. The First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN) is the next best competitor with over $1.4 billion in AUM. The Invesco WilderHill Clean Energy ETF (PBW) and the BlackRock World ex U.S. Carbon Transition Readiness ETF (LCTD) are other growing ETFs in the space.

For those seeking focused exposure to solar energy, the Invesco Solar ETF (TAN) ($2 billion AUM) is one to consider. For wind energy, the First Trust Global Wind Energy ETF (FAN) provides focused exposure. However, with its $275 million in AUM, it often falls short in comparison to many others on that list above.

Conclusion

There’s no denying that electricity will be increasingly supplied by renewables like wind and solar as declining costs make it easier to replace thermal generation. Once up to an economical scale, clean hydrogen produced from renewables could as well open up another supply vertical. The global market for renewable energy is predicted to grow at a 7.2% CAGR (2021-2030). Certainly, the speed of transition to renewables in the U.S. particularly, especially with the added incentives and tax credits, appears to have picked up steam. After all, the residential solar PV market size for the U.S. alone was valued at $14.21 billion in 2022 and is forecasted to grow at a 15.3% CAGR (2023 – 2030).