Wind, water and sunlight are – slowly, slowly – replacing coal and oil as the sources of energy to fuel civilization. And there’s a lot of money to be made from that process.
Renewable energy is derived from natural processes. The three most common forms of renewable energy are solar (from sunlight), hydro (from water) and wind power. Renewable energy can generally be replenished faster than it’s consumed.
Global investment in renewables hit nearly US$350 billion in 2015, a new high and up 11 percent from 2014. China was the biggest contributor – investing a whopping US$125 billion (36% of the total).
The International Energy Agency (IEA) forecasts that the sector will represent the biggest source of global electricity growth between 2016 and 2020.
But investment in renewables has fallen slightly this year. Global investment in the sector during the first six months fell 23 percent compared to the first half of last year, to US$116.4 billion. Investment in the second quarter was down 32 percent from last year.
According to Bloomberg New Energy Finance, China’s record levels of investment in wind and solar projects last year created a “hangover” this year, as the country’s power demand growth has slowed down. This has resulted in a drop in its clean energy financing for 2016.
The declining cost of making solar panels, as well as a global shift away from small-scale solar projects that are more expensive (on a per unit basis) than larger ones, have also contributed to a slowdown in investment.
Unlike coal and other less clean sources of energy, renewable energy is only getting started.
Renewables are powering up
The IEA forecasts that the total capacity of global renewable electricity will rise over the next five years by more than 700 gigawatts (GW). That’s more than double Japan’s current total installed power capacity.
In fact, renewables will account for nearly two-thirds of net additions to global power capacity (which is the difference between the amount of new capacity and the scheduled retirements of existing power plants). Half of the increase will come from wind power and solar photovoltaic panels (solar PV).
Much of the growth is expected to come from developing nations. The United Nations Environment Programme (UNEP) found that 2015 marked the first time that emerging economies surpassed the developed world’s investment in the sector. And while emerging countries recorded a 19 percent increase in renewables investment last year, developed countries posted an 8 percent drop.
China alone will account for nearly 40 percent of total renewable power capacity growth to 2020. Korea committed to increase its renewable energy investments to about 42 trillion won (US$36.6 billion) by 2020 in developing solar, wind and eco-friendly power plants.
The U.S. wants more renewable energy
Meanwhile, renewable energy is forecast to become the U.S.’s second-largest source of electricity generation. It’s expected to overtake nuclear power by 2020, and surpass coal by 2028.
The U.S. is the second-biggest power producer in the world behind China – which accounts for 18 percent of world electricity generation. So, renewable growth in the U.S. will be a crucial factor for the entire industry’s growth rates over the next 25 years.
The U.S. has put initiatives in place to focus on renewable investments. The Clean Power Plan (CPP) requires that the country reduce the amount of carbon emissions from power plants by 870 million tonnes – or 32 percent below 2005 levels.
This means that more power will need to be generated from clean energy sources. So to help make this happen, the plan includes the Clean Energy Incentive Program, which rewards U.S. states that opt for early investment in renewable energy generation.
The U.S. renewables sector should also benefit if Hillary Clinton becomes the country’s next president. She’s said she wants to reduce dependence on fossil fuels – which suggests a further shift towards renewable energy.
How to profit from the clean energy boom
The market for renewables over the next few decades will be enormous. One estimate calls for total investment in renewable energy to be US$5-7 trillion over the next 15-20 years. The shares of renewable energy companies are one likely beneficiary of this flood of investment.
That said, the sector hasn’t been doing well. Through the end of June 2016, the eight largest renewable energy ETFs posted an average annual loss of 4.8 percent over the past 5 years. This compares to the S&P 500’s gain of 10 percent a year for the past 5 years.
I think this is going to change in coming months for two main reasons.
First, the cost of generating power from renewables is constantly falling. Today it costs 75 percent less to install solar panels than it did in 2010. The Renewable Energy Policy Network, a UN-sponsored international initiative, recently stated that “Renewables are now cost competitive with fossil fuels in many markets.” This will improve the profitability of the sector.
Second, 2015 was a landmark year for renewable energy. In addition to the U.S.’s CPP, nearly 200 countries committed to the 17 goals of the 2030 Agenda for Sustainable Development and the Paris Climate Change Agreement. These concrete goals will drive investment in renewables.
ETFs offer an easy way to invest in renewables. The PowerShares Global Clean Energy Portfolio (NYSE: PBD), for example, tracks the WilderHill New Energy Global Innovation Index, which provides exposure to over 90 global companies using innovative technologies and providing services focusing on renewable generation and the use of cleaner energy. Its biggest exposure is to the U.S., followed by China. Hong Kong, Taiwan, Japan and South Korea are also in the top ten.