Renewable Energy Investing: How Investors Can Maximise Returns Whilst Saving the Planet

By: Krishiv Jain

Renewable energy is crucial to helping humanity combat and mitigate the impact of climate change on society, the economy, and the environment. Renewable energy investing, which can occur in a large range of different forms, will help boost the fight against climate change whilst also providing the potential for impressive financial gains for investors, making it a compelling choice for forward-thinking investors looking to make a positive impact and secure robust returns simultaneously.

What is renewable energy investing?

Renewable energy investing is the allocation of financial resources to projects, companies, and technologies that generate power from renewable energy sources, such as solar, wind, and hydropower. It is motivated by factors including environmental concerns, government support, and technological advancement. Investors may invest directly in renewable energy companies, or indirectly through renewable energy funds, such as exchange-traded funds (ETFs) and mutual funds (Stein 2023).

Why is renewable energy investing becoming increasingly popular?

According to a 2023 report released by the International Energy Agency (IEA), concerns about affordability and energy security due to the global energy crisis have shifted momentum toward more sustainable choices, resulting in a substantial lead in investments in clean energy technologies over investments in fossil fuels.

In 2023, around USD 2.8 trillion will be invested in energy globally, out of which more than USD 1.7 trillion (60%+) is expected to go to renewable technologies, whilst the rest will go towards fossil fuels.

“For every dollar invested in fossil fuels, about 1.7 dollars are now going into clean energy. Five years ago, this ratio was one-to-one. One shining example is investment in solar, which is set to overtake the amount of investment going into oil production for the first time.” - Faith Birol, IEA Executive Director (International Energy Agency 2023).

A 2021 report published by the IEA and Centre for Climate Finance & Investment at Imperial College Business School found that in the past 10 years, returns from renewable energy investments (422.7%) were more than 7 times the return on fossil fuels (59%). In the past 5 years, the numbers are not as impressive, yet renewable energy returns were still triple that of fossil fuels (International Energy Agency and Centre for Climate Finance & Investment 2021).

Moreover, investments in electrified end-uses have drastically increased, for instance, sales of electric vehicles are projected to increase by a third this year, a further increase on the already remarkable surge observed in 2022 (International Energy Agency 2023).

What are the impacts of renewable energy investing?

Investing in renewable energy brings forth a multitude of positive benefits that encompass economic, environmental, and societal dimensions. Firstly, renewable energy sources, available in all countries, offer a pathway to reduce dependence on fossil fuel imports, thus enhancing energy security and shielding nations from the volatility of global energy markets. Lowering costs, coupled with the potential to provide 65% of the world's electricity supply by 2030, can substantially reduce carbon emissions and mitigate climate change. Investing in renewable energy can lead to lower electricity bills for consumers and businesses, boosting economic productivity (United Nations 2022).

Over the past decade, the cost of solar panels and wind turbines has declined sharply, which has led to a decrease in the cost of renewable energy (Ontario Teachers' Pension Plan 2023). This has made them increasingly competitive against traditional energy sources. The cost of electricity generation from solar and wind power has declined by 83% and 85% respectively since 2010. Solar power’s lower cost has come from the increased demand for rooftop panels for residential houses and increases in solar farms that are being built by electric utilities to replace coal-powered plants. Longer blades, which allow for increased energy output, have contributed significantly to wind power’s lower cost (Morgan Stanley 2023).

Moreover, according to the United Nations, the transition to renewable energy creates a significant number of jobs, with the potential to generate more than 30 million employment opportunities in clean energy, efficiency, and low-emission technologies by 2030, fostering inclusive economic growth and poverty alleviation. Furthermore, the issue of air pollution and greenhouse gas emissions, which have a negative impact on global health, is addressed, thus improving respiratory health and reducing healthcare costs. These positive outcomes collectively make renewable energy a pivotal and sensible choice for a sustainable future (United Nations 2022).

What are some of the upcoming opportunities for investors?

The wide range of different sources of renewable energy and the large number of projects present a multitude of investment opportunities for investors, some of which are explored below. The United States’ 2022 Inflation Reduction Act (IRA), which “is the most significant climate legislation in U.S. history, offering funding, programs, and incentives to accelerate the transition to a clean energy economy,” has resulted in enticing opportunities within the renewable energy sector in the United States (U.S. Environmental Protection Agency 2023).

Renewable Energy Manufacturers: The IRA allocates substantial public funds for domestic energy security and climate programs, with an anticipated $3.5 trillion in private capital investment in U.S. energy infrastructure over the next decade, primarily in solar and wind. Clean energy manufacturers can qualify for tax credits by utilising U.S.-made components, driving several companies to invest in U.S. facilities to meet these requirements. By capitalising on these subsidies, renewable energy manufacturers could potentially double their profitability by 2025. The market has responded swiftly to these incentives, with a surge in investment in American renewable energy projects and factories following the bill's enactment. This trend presents an opportune time to enhance equity portfolios, particularly by increasing allocations to energy transition-focused manufacturers, and global thematic equity funds can provide exposure to companies in the renewable energy components sector.

The Electric Vehicle (EV) Supply Chain: The IRA presents promising investment opportunities within the EV supply chain. The IRA, offering a $7,500 tax credit to EV buyers, contingent on domestic sourcing of components and critical minerals, fosters a significant shift in the industry. With this policy support, corporate initiatives to expand EV adoption have gained momentum, projecting a notable surge in passenger EV sales by 2026. Investors have the potential to benefit from this growth, particularly in the critical minerals and battery sectors, which could see increased order volumes. Furthermore, government-driven industrial policies are spurring innovative U.S. EV supply chain development, creating additional investment prospects. Opportunities extend to equities of companies engaged in critical minerals, battery solutions, and private market ventures in battery recycling, all poised to gain from the evolving EV landscape.

Semiconductors: Semiconductors hold immense promise for investors as they play a pivotal role in decarbonisation. These tiny chips are indispensable for renewables and substantially enhance energy efficiency, reducing carbon emissions across "smart" electric grids and other essential applications. The semiconductor industry is on the brink of substantial growth, embedded in the clean energy value chain within photovoltaic solar cells, wind turbines, EVs, batteries, charging stations, and power grids. The CHIPS and Science Act of 2022, alongside the IRA, allocates over $50 billion to bolster domestic semiconductor manufacturing. These government incentives, coupled with the diverse applications of semiconductors, are driving companies to scale up supply. With both production support and escalating demand, particularly driven by the energy transition, semiconductors offer a twofold investment opportunity. Emerging trends suggest that global semiconductor equipment companies stand to benefit significantly in the coming decades (J.P. Morgan 2023).

What opportunities exist outside of the United States?

Unsurprisingly, there exists a plethora of opportunities around the world. In fact, the East Asia and Pacific region had the highest amount of renewable energy investment, with 66% of global investment in 2022. North America and Europe followed closely behind, with 18% and 16% respectively.

For example, Ontario Teacher’s Pension Plan (OTPP), a pension plan based in Toronto, has made numerous investments in renewable energy companies across multiple nations and technologies. Whilst some of them are listed below, the opportunities are ever so plentiful across the world.

Wind Power: Scotland, with vast coastal resources, is at the forefront of the United Kingdom's decarbonisation efforts. In early 2022, the Scottish government allocated leases for around 7,000 square kilometres of seabed to 17 offshore wind projects. OTPP has backed one such project, the West of Orkney Wind Farm, which is a collaborative effort involving Corio Generation, TotalEnergies, and RIDG.

Battery Storage: Australia's transition from coal to renewables is a vital and complex process. Whilst coal comprised 54.6% of electricity generation in 2022, renewables grew to 35.9%, with a government target of 82% by 2030. OTPP is actively investing in this transition through Equis Development, which is spearheading a substantial battery energy storage project near Melbourne, set to become Asia's largest, with the capacity to store excess energy and enhance grid stability. This project is a significant step towards accommodating more renewable energy sources. Once completed, the Melbourne Renewable Energy Hub will serve over a million households, and its first phase is scheduled to commence operations in 2025.

Renewable Energy in Developing Nations: Investing in developed nations is vital to address the challenges posed by rapid economic growth in developing countries. While economic progress in countries like China and India has significantly reduced poverty, it has also led to a substantial increase in emissions. In 2022, OTPP acquired a 30% stake in conglomerate Mahindra Group’s renewables platform, based in India. Mahindra Susten was a first mover in India’s solar sector and has a track record of building and operating significant renewable projects, including solar energy, hybrid energy, and integrated energy storage (Ontario Teachers' Pension Plan 2023).

What are the opportunities for investments in startups?

Investment opportunities in renewable energy startups are flourishing, driven by increasing funding levels and a rise in mega investments, with numerous startups maturing into the development stage.

Batteries, a crucial aspect of renewable energy storage, have attracted substantial investments, including a notable $5 billion in 2022, ensuring more dependable and less intermittent renewable energy. About two-thirds of global venture capital energy funding in 2022 flowed into batteries and renewables, tripling investments in renewables technology from $1 billion in 2021 to $3 billion in 2022.

Investments in technologies like hydrogen production and carbon capture and storage are also increasing, furthering the energy transition. Startups involved in emissions data collection, innovative grid technology, and solutions for energy efficiency are capturing investor attention, especially amid mounting pressure for emissions reporting and sustainability measures.

Innovative partnerships between established energy players and startups offer opportunities to accelerate the energy transition, capitalise on new business models, and rapidly diversify portfolios. As the energy transition gains momentum, these collaborative efforts are critical to unlocking new value pools in the evolving green energy landscape (Fritz et al. 2023).

Why renewable energy stocks underperformed in 2023, and what does the future hold?

The rise in interest rates to combat inflation has caused clean energy stocks to be some of the worst performers in the market this year, with the sector significantly underperforming the market (Soni 2023). The S&P Global Clean Energy ETF and the iShares Global Clean Energy ETF, two indexes which track global clean energy companies, are down more than 30% since January (S&P Global 2023). Renewable energy companies tend to have considerably more debt, which makes them vulnerable to increases in interest rates.

Following the pandemic, rampant inflation and disrupted supply chains led to a significant surge in costs for companies in the sector. Just as businesses were starting to rebound from the supply disruptions, interest rates increased, further impacting their profitability. Despite these headwinds, investments in clean energy continue to grow. The future looks promising, with a reasonable recovery trajectory expected in the coming years, supported by the IRA and recovering demand (Soni 2023).

References:

Fritz, Thomas, Mark Pellerin, Leopold Zangemeister, and Christopher Sohn. 2023. “INVESTMENT in CLEAN ENERGY STARTUPS IS BOOMING.” Oliver Wyman. 2023. https://www.oliverwyman.com/our-expertise/insights/2023/may/investment-in-clean-energy-startups-is-booming.html.

International Energy Agency. 2023. “World Energy Investment 2023.” May 2023. https://www.iea.org/reports/world-energy-investment-2023.

International Energy Agency, and Centre for Climate Finance & Investment. 2021. “Clean Energy Investing: Global Comparison of Investment Returns a Joint Report by the International Energy Agency and the Centre for Climate Finance & Investment.” https://iea.blob.core.windows.net/assets/ef1d6b50-66a6-478c-990e-ee227e2dd89b/Clean_Energy_Investing_-_Global_Comparison_of_Investment_Returns.pdf.

J.P. Morgan. 2023. “The Energy Transition Is Ramping Up. Investors Should Take Note.” June 20, 2023. https://privatebank.jpmorgan.com/gl/en/insights/investing/the-energy-transition-is-ramping-up-investors-should-take-note.

Morgan Stanley. 2023. “Megatrends: Investing through the Renewable Energy Transition.” March 13, 2023. https://www.morganstanley.com/articles/decarbonization-renewable-energy-investment-ideas.

Ontario Teachers' Pension Plan. 2023. “Investing in Renewable Energy.” 2023. https://www.otpp.com/en-ca/about-us/news-and-insights/global-perspectives/investing-in-renewable-energy-report/.

———. n.d. “Corio Generation.” https://www.otpp.com/en-ca/about-us/news-and-insights/portfolio-insights/corio-generation-offshore-wind-renewables/.

———. n.d. “Equis Development.” https://www.otpp.com/en-ca/about-us/news-and-insights/portfolio-insights/equis-development-renewables-battery-energy-storage/.

———. n.d. “Mahindra Susten.” https://www.otpp.com/en-ca/about-us/news-and-insights/portfolio-insights/mahindra-susten-india-renewable-energy/.

S&P Global. 2023. “S&P Global Clean Energy Index.” 2023. https://www.spglobal.com/spdji/en/indices/esg/sp-global-clean-energy-index/#overview.

SolarUnion. 2023. “How to Store Energy from Solar Panels.” March 23, 2023. https://www.solarunion.com/blogs/2023/march/how-to-store-energy-from-solar-panels/.

Soni, Aruni. 2023. “Clean Energy Is the Future, but Stocks Aren’t Acting like It. Here’s Why.” Markets Insider. November 5, 2023. https://markets.businessinsider.com/news/stocks/renewable-energy-stocks-climate-change-outlook-performance-interest-rates-markets-2023-11.

Stein, Zach. 2023. “Renewable Energy Investments.” Carbon Collective. 2023. https://www.carboncollective.co/sustainable-investing/renewable-energy-investments.

U.S. Environmental Protection Agency. 2023. “Summary of Inflation Reduction Act Provisions Related to Renewable Energy.” 2023. https://www.epa.gov/green-power-markets/summary-inflation-reduction-act-provisions-related-renewable-energy.

United Nations. 2022. “Renewable Energy – Powering a Safer Future.” 2022. https://www.un.org/en/climatechange/raising-ambition/renewable-energy.