At the beginning, investments in renewable energies only drew environmentally motivated capital. Money was allocated with the heart. But presently it would be difficult for family offices and other types of investors to neglect the opportunities generated by clean energies.
Indicators look good. Global energy demands continue to rise, partly driven by fast growth in emerging economies such as India and China. Costs are on a downhill and technology is improving. According to the International Renewable Energy Agency, the cost of generating power from onshore wind has fallen by around 23% since 2010 while the cost of solar photovoltaic electricity has fallen by 73% in that time.
One of the strongest motivations for investors to invest in clean energies is their wish to diversify portfolios in the current context of market volatility across all sectors
In just a few years, renewable energy should be a consistently cheaper source of electricity generation than traditional fossil fuels.
This is the backdrop against which we should interpret the 8% decline of global clean energy investment last year to $332 billion, according to Bloomberg NEF. Additions of new wind and solar projects still increased (new annual photovoltaic capacity broke the 100GW barrier for the first time) but the sharp decline of capital costs led to lower overall investments.
The growing relevance of renewable energy investments is boosted by a range of factors.
Institutional capital is expanding. Pension funds, insurance companies, sovereign wealth funds, and other institutions are starting to look at renewables as a viable investment strategy. According to a report, 42% of institutional investors already invest in renewable energy. Norway’s $1 trillion sovereign wealth fund announced this month its intention to sell out a host of oil and gas companies. Lisbon-based Gulbenkian Foundation is also about to close the selling of Partex Oil and Gas, the largest asset in its endowment portfolio.
Diversification is also key. One of the strongest motivations for investors to invest in clean energies is their wish to diversify portfolios in the current context of market volatility across all sectors. Diversification may maximize returns and protect from the market risk found in traditional asset classes.
The third motivation is the growth of ESG investments. Given the viable risk/return equation of sustainable investments and the mainstreaming of this market, asset owners and asset managers are increasingly pressured to find ESG assets worldwide. The renewable energy field, where it is possible to find interesting ESG products in various asset classes (from bonds to PE) is often the preferred and most tangible choice.
There is also the political backing. Countries have shown an appetite to adopt grand renewable energy schemes with sweeping targets to wean their economies off fossil fuels. Spain, for instance, has recently announced the “Climate Change and Energy Transition Law.” This is a trend that started in 2008 when the UK’s parliament adopted the Climate Change Act and when Morocco announced a national energy policy aiming at raising the share of renewable energies to 42% of its total installed capacity by 2020 (later updated to 52% by 2030).
Naturally, there are challenges. The technology that underpins the industry is fastly changing leaving more conservative investors wary. Solar panel efficiency, energy storage, microgrids and artificial intelligence are moving targets and affect the economics of an asset. With that comes energy price uncertainty. Last year was the first one in a handful of years that didn’t produce a world-record-low solar PV price, but the market estimates that prices may hit the $15/MWh mark soon (the current record stands at $17.7 in Mexico).
How to invest?
One option is mutual funds, which invest in sustainable energy generators or green energy technology companies. The menu of possibilities is very extensive from the world’s first listed energy storage fund (Gore Street Energy Storage Fund) to the world’s largest (BlackRock Sustainable Energy Fund, which is $1,1 billion).
Other is Exchange Traded Funds specialized in the clean energy industry. One of the oldest in the market is Invesco WilderHill Clean Energy ETF, which targets the WilderHill Clean Energy Index.
Other investors may enter the green bond market, which are fixed-income securities that raise capital for a project with specific environmental benefits. This is a fast-growing market. In 2018, total green bond issuance reached $167 billion, corresponding to 1,543 green bond issues from 320 issuers, according to the Climate Bonds Initiative.
For investors with more risk appetite, the VC/PE market is also an option. Global venture capital and private equity investment on renewables jumped 127% to $9.2 billion, the highest since 2010, according to Bloomberg NEF.
Just last month it was announced that a Chinese solar energy facility in space could beam energy to almost any part of the world, potentially transforming the renewable energy market. This is a strong indication of the innovative capacity of the clear energies market.
And infrastructure investors may look at utility-level allocations. If only a few years ago, a 250 MW capacity plant was considered large scale, presently the largest ones are more than 500 MW, such as Marangatu in Brazil, Longyangxia Dam Solar Park in China or Shakti Sthala in India, which will be 2,000 MW.
Returns for the green energy industry are naturally shrinking from the 15-20% targets of a few years back – as risk declines and the market consolidates. But with growing pressure to act on climate change and to diversify portfolios, renewable energy investments are set to keep growing.
Rodrigo Tavares is founder and president of the Granito Group, a company that advances the sustainable economy through management consulting, financial advisory, and policy & research. He was nominated Young Global Leader by the World Economic Forum (2017).