How to Invest in renewable energy in 2020
With global climate change concerns rising, the future is leaning towards renewable energy. According to BBC research, the industry reached around £650 billion in 2019. It is considered the fastest-growing energy source, that will dominate the energy markets within the next 20 years.
However, investing in the renewable energy landscape tends to be quite risky, because of the amalgamation of changing political aspects and developing technology. Fortunately, if you know where to look, there are ways to reduce risks and even generate a lot of revenue. With many forms of renewables becoming economically viable, investors and consumers have started looking to embrace these technologies.
With that being said, in this post we will take a glimpse at how you can invest in the global renewable energy industry by capitalising on these trends.
Let’s get started.
Why renewable energy? The growth potential
Research conducted by McKinsey & Company found that 77% of the global electricity generation capacity will come from solar and wind energy until 2050. In particular, the research states that:
- Due to the large existing infrastructure, fossil fuels will continue to exist for a prolonged time. However, natural gas will gradually replace coal’s market share
- India and China alone will account for two-thirds of the global electricity generation capacity
- The installed capacity of solar power and wind energy will grow five times faster than any other sources of energy for electricity generation
- Due to the rise in electric vehicles, global electricity generation will increase to 25% of all energy demand
With that in mind, it can be said that total global energy usage will continue to grow in the future.
On a global scale, solar power has taken an ever-larger market share, with the world recently reaching 1000 gigawatts of installed capacity.
Although the pace of growth of renewable energy is influenced by political leaders, the cost will be the real long-term determinant for the adoption of these sources. However, political leaders are trying to influence its growth speed by either trying to slow down its progress, mandating to accelerate its use, or by giving incentives. But in the end, it will be the ‘cost’ that matters.
The cost of these energy sources has declined substantially over the years. However, many densely populated cities across the globe have started experiencing smog problems. This has led to a dire need for electric vehicles and more electricity production from renewable sources.
In the UK, the nation is bound by the Climate Change Act, which demands 80% reduction in greenhouse gas pollution by 2050. According to the Office for Budget Responsibility, the country will spend around £8.4 billion on renewable projects in 2020-2021.
Considering all these facets, as an investor, you have plenty of opportunities to gain exposure to the renewable energy markets, and with the encouraging advances in innovation behind renewables, you can only expect the market to grow deliberately.
Ways to invest
If you are interested in gaining industry exposure, you should understand that the renewable energy sector is still nascent in many ways. With some technologies in the early stages of development, it is challenging for anybody to predict the market with absolute certainty. You don’t know which aspect of the sector will deliver the maximum returns – it could be hydroelectric or energy from waste, biomass, geothermal, solar, or wind.
Before entering the market, you must adhere to the risk factors leaning into it. We recommend that you seek professional advice if you are unsure or confused about where to invest.
Investing through equity ETFs
One of the easiest ways to invest in renewables is through ETFs (exchange-traded funds). They provide a diversified exposure of the market, including exposure to the specific types of energy. It can be wind, solar, geothermal, etc., or a broad range of alternative energies.
Luckily, there are a plethora of ETFs available that can fulfil your various needs. Some of the most popular energy ETFs include:
As an investor, you must carefully review the entities of the ETFs before you start investing in them. This is because some portfolios might be heavily inclined towards solar energy, for example, while some may be heavily concentrated in a single country, such as India.
You need to carefully consider these elements before investing because they may expose you to specific risk factors that you may have no idea about at the time of investing.
Investing through bonds
Another alternative is to invest in bonds. Companies looking to complete renewable energy projects through different sources, such as municipalities, issue bonds. Alternatively, these bonds are issued by consulting firms that are looking to raise capital to finance energy projects.
You can purchase these bonds through their brokerage firms or their websites. Renewable energy bonds are similar to your traditional bonds that mature at a certain date and make regular interest payments.
The global renewable energy industry is seeing a rapid growth as companies and governments are pushing to meet new mandates. Although the sector has undergone extreme volatility in the past, you can buy ETFs to diversify your exposure and reduce risk.