Investing in renewable energy
The renewable energy sector is seeing rapid growth, driven by falling costs and global energy demands. We examine the outlook for the sector.
What you'll learn:Click to toggle accordion What you'll learn:
How the renewable energy sector has matured and continues to evolve.
How investors may be able to potentially benefit from the growth of the renewable energy sector.
How impact investing allows investors to contribute to environmental solutions.
Renewables are predicted to be the fastest-growing energy source over the next 20 years, with the sector boosted by falling costs for wind and solar power, and the energy market approaching ‘peak coal’.1
The cost of electricity from offshore wind turbines is now cheaper than nuclear energy for the first time, with improved infrastructure and higher voltage cables seeing prices falling by almost half in the past two years. Bigger turbines, a growing UK supply chain, and the challenges facing the coal, oil and gas sector are among the various factors that have contributed to the falling cost and growing use of offshore wind energy. In 2007 renewable technologies accounted for 23% of new power capacity in the UK. Last year, this figure reached 61%, setting a new record of 157GW, dwarfing the 70GW of net fossil fuel generating capacity added in 2017.2 Latest figures from the National Grid show that around half of the UK’s electricity last summer was generated from non-fossil fuel sources.3
Meanwhile, according to the US Energy Information Administration, worldwide coal use remains flat, with the coal share of total world energy consumption predicted to decline from 27% in 2015 to 22% in 2040.4
Some commentators claim the falling price of renewables and growing demand for these alternative energy sources signals a “new era” for UK energy, which could present opportunities for investors. The UK government has confirmed that it is committed to cutting carbon emissions to combat climate change and last October said that up to £557m would be made available for less established renewable electricity projects as part of its ‘Clean Growth Strategy’ to drive economic growth and clean up the energy system.
The outlook for renewables
Global energy demands continue to rise, partly driven by rapid growth in emerging economies such as China and India. Total worldwide energy usage is predicted to increase by nearly 40% over the next 20 years, which would require huge supplies of coal, oil and gas. However, fossil fuels are non-renewable sources that will one day be exhausted.5
The UK is bound by the national Climate Change Act, which demands an 80% reduction in greenhouse gas pollution by 2050.6 The Office for Budget Responsibility, the independent watchdog which provides analysis of the UK’s public finances, recently projected that £8.4bn will be spent on renewable projects in the UK in 2020/21.7
September 2017 saw the opening of the UK’s first subsidy-free solar farm, demonstrating that that at least one solar can remain a commercially viable technology despite earlier government cuts to subsidies.8 The UK has a target to meet 15% of its energy needs from renewable sources by 2020, up from 8% in 2015.9
There are also encouraging advances in the technology behind renewable energy production. For example, improvements in renewable energy and battery technologies could see energy generated from renewable sources such as solar panels stored for future use and fed into the grid when needed.10
Ways to gain exposure to the renewable energy sector
Falling costs in the clean energy sector indicate an industry which is maturing, and is able to construct projects competitively and increasingly without subsidies. Government policy has also benefited the sector, though changes in regulation for the renewable energy sector may pose a risk to companies.
Investors keen to gain exposure to renewable energy must remember that this is still an emerging sector, with some technologies relatively untested and in the early stages of development. It is impossible to predict with absolute certainty which, if any, renewables will deliver returns and investors must therefore be comfortable accepting that there may be a greater risk of losses compared to investing in more established technologies. If you’re unsure where to invest, consider seeking professional advice.
Funds investing in renewable energy companies include the Pictet Clean Energy fund. Current holdings in this fund include Legrand, global specialist in electrical and digital building infrastructures, which earlier this year was recognised by the Science Based Targets Initiative for its commitment to reducing greenhouse gas emissions,11 and Aptiv, a global technology company that develops safer, greener and more connected solutions enabling the future of mobility.
Another option is ExchangeTraded Funds (ETFs), which are passive investments that mirror the performance of a single sector or market index, and can be traded in ‘real time’ just like shares. Their value falls and rises in line with the particular market or resource they are tracking. Options include the iShares Global Clean Energy ETF, offering exposure to dozens of the world’s largest companies involved in renewable energy. These include Verbund, Austria’s leading electricity company and one of the largest producers of hydropower electricity in Europe, and SolarEdge which provides critical components to solar panels to maximise power generation whilst lowering the cost of energy produced.
Bear in mind that focusing on any individual sector is a risky approach as returns are dependent on the performance of the particular sector you have chosen. Ensuring your portfolio is properly diversified across a range of different sectors, asset types and geographical areas can help provide a degree of protection as, if one or more of your investments falls, hopefully some of your other holdings in different asset classes, sectors or regions, will be going up in value.
Please be reminded that this article serves to illustrate how it is possible to invest in line with this theme. In using the funds and companies as examples, this does not constitute a recommendation to invest in these, or any other investment. Barclays has not undertaken a review of these funds, nor are they part of a Barclays Select list.
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.
Through impact investing you can combine your financial goals with your social and environmental ambitions.
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1 The Telegraph, UK renewable energy firms grab contracts worth billions (April 2017)
2 Reuters, Solar power eclipsed fossil fuels in new 2017 generating capacity (April 2018)
3 BBC, UK energy has ‘greenest’ summer to date, National Grid says (September, 2017)
4 International Energy Outlook 2017
5 The Guardian, Time to shine: Solar power is fastest-growing source of new energy (October, 2017)
6 Committee on Climate Change, The 2050 target [PDF, 13.5MB]
7 The Guardian Renewble investment will fall by 95% over the next three years (January, 2017)
8&9 Reuters, Britain opens first subsidy-free solar power farm (September, 2017)
10 BBC, UK energy has ‘greenest’ summer to date, National Grid says (September, 2017)
11 Legrand becomes the 6th CAC 40 company to be recognized by the Science Based Targets Initiative for its commitment to reducing greenhouse gas emissions (March 2018)