The energy demand is rising with the growth of the global population. People have been using renewable energy sources for energy services. With that, there is one question that arises in the mind of investors: Is it good to invest in renewable energy?
Global warming and climate change are major concerns for the world at present. The use of non-renewable energy sources like fossil fuels like coal, gas, oil, and nuclear energy, is the cause of environmental changes.
Frequent use of non-renewable energy sources for energy services is harmful to the environment and our health. The production of energy from these sources emit heat-trapping gases such as carbon dioxide. They cause the majority of greenhouse gas emissions in the world.
According to a recent study, if emissions continue to rise and are not controlled, the atmosphere will warm by approximately 2.7 degrees Fahrenheit above pre-industrial levels by 2040 (Stark, 2019).
It takes time to replace non-renewable energy resources with renewables. The alternative sources of non-renewable energy come from renewables.
Renewable energy resources can be replaced easily within a short time scale as they come from natural sources. Examples of renewable energy sources include solar, wind, hydro (water), biomass energy, geothermal, etc.
These energy sources make a positive impact on the environment and our health. They reduce greenhouse gas emissions into the atmosphere and play an essential role in fighting climate change.
The use of solar for electricity and energy services is common these days. Furthermore, electric/solar vehicles, energy-efficient appliances, solar-powered energy services, wind turbines, geothermal heat pump systems, hydropower, etc., have also come to use.
People have begun to envision a green future. Should you invest in renewable energy? Will it provide good returns, or is it not profitable? We will answer these questions in this article.
Rising Market Share
Fossil fuels are limited, and they have unpredictable costs. Technological advancements have helped in the production of various energy services with renewable energy sources. Moreover, the governments of many countries have started investing in the renewable energy sector. All these activities have increased growth opportunities in this sector.
Government policies regarding climate change and the use of renewable energy are becoming stringent. The future looks green.
In 2017, the global renewable energy market was valued at $928 billion. It is expected to be around $1.5 trillion by 2025, at an annual growth rate of 6.1%. A study by Bloomberg New Energy Finance shows that this industry will receive an investment worth $5.1 trillion by 2030. Further, renewable energy sources will produce over 60% of 5,579 GW of new energy capacity.
Source: Allied Market Research
The study also says that the market share of fossil fuels is likely to fall by approximately 46%. Large-scale hydropower will rise as a part of green energy resources. Similarly, the combined share of solar and wind energy will increase from 3% to 16% by 2030.
Rooftop solar panel installations will rise, and their costs will reduce. They will be a significant source of electricity in houses and buildings. Moreover, there will be a rise in on- and off-shore wind power plants for energy generation. CO2 and other emissions will reduce with an increase in the use of renewable energy sources.
Many nations have spent huge sums on green energy projects. The Bloomberg study says that some developed European countries will spend around $967 billion on green energy by 2030.
Also Read: Top 15 Renewable Energy Company in Germany
Impressive Renewable Growth
The renewable energy market has seen impressive growth in the past years. Even though fossil fuels are still the primary energy source, renewable energy has become a big part of the energy sector, especially in the last couple of years. It is also because of the rising concerns of climate change that people have started looking for alternative energy sources.
There is no doubt that the future of renewable energy is bright. It is good news for investors. Investing and holding the stocks of renewable-energy-based companies can pay handsome returns in the future.
Renewable Energy ETFs
Investing in an ETF (exchange-traded fund) like the Invesco WilderHill Clean Energy (PBW) is the easiest way for investors to contribute to the green energy sector. The Invesco WilderHill Clean Energy ETF invests in indexes with stocks of publicly-traded companies in the United States that are engaged in the advancement of cleaner energy and conservation. Even though the return of PBW has not been as promised in the past ten years, it still has a lot of growth potential in the future.
5-Year Chart of Invesco WilderHill Clean Energy ETF (PBW)
[Source: Financial Times]
The NAV (net asset value) chart shows that the value of the ETF is growing. But due to the Covid-19 pandemic, it has gone down slightly in the past few months. This particular ETF includes stocks of 39 companies involved in the clean energy sector, including top holdings of companies like Enphase Energy Inc. (ENPH), Tesla Inc. (TSLA), and Sunnova Energy International Inc. (NOVA).
Another similar ETF that invests in green energy companies is the iShare Global Clean Energy (ICLN). It has invested in 42 companies involved in this sector. Its top holdings include ENPH, SolarEdge Technologies Inc. (SEDG), and Vestas Wind Systems (VWS).
5-Year Chart of iShare Global Clean Energy (ICLN) [Source: Financial Times]
Similarly, the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) holds stocks of companies from the US and Canada involved in the green energy industry. Its top holdings include ENPH, TSLA, and Brookfield Renewable Partners (BEP).
5-Year Chart of First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) [Source: Financial Times]
These three ETFs have relatively high assets under management (AUM), which is over $200 million.
Clean Energy Investments
In specific context to solar and wind, ETFs like the Guggenheim Solar (TAN) and First Trust ISE Global Wind Energy (FAN) are doing great in the last few years.
The hydropower sector is the dominant one against renewable energy sources. Large companies like General Electric Co. (GE) and Siemens AG have produced software, hydropower turbines, and other products for this industry. Both these companies are playing an essential role in the expansion of the renewable energy sector.
Now is the best time to invest in clean energy ETFs. The industry is growing. It has the potential to grow even more—making billions and doing good for the global economy. Moreover, the growing interest of people in this sector also shows a high-growth potential.
Clean energy ETFs are essential in a diversified portfolio. But, because the industry is new and untested, there can be market risks and price volatility.
Few Reasons to Invest in Green Energy
The main reason to invest in green energy is quite apparent—to save the environment. Climate change is directly linked with energy use. Fossil fuels harm the environment, and they have price volatility. Replacing fossil fuels with clean energy sources will prevent the environment.
Investing in sustainable energy will contribute to the preservation of the environment and our health. Renewable energy usage can reduce pollution and minimize the disease rate. Further, it reduces the emission of greenhouse gases like carbon dioxide. So the significant benefits of renewable energy include low cost, energy efficiency, low emissions, and reusability.
A study by Bloomberg New Energy Finance (BNEF) said that by 2050, 77% of investments in new power generation would be in renewables. Another study shows that 75% of Americans favour the clean energy sector over the fossil fuels sector.
Below are five reasons why you should invest in green energy.
1. Unstable fossil fuels price means opportunity in clean energy
Due to the Covid-19 pandemic, the oil demand dropped. It resulted in a massive price reduction. Crude oil prices fell to negative for the first time in history in the US. The fuel industry suffered a lot during the pandemic. Also, the stock prices of fuel companies dropped significantly.
Financial institutions have begun divesting from fuel companies as they are observing financial risks in the long term. Global warming and climate change are signs of it. Industry and transportation are two major sectors causing the most pollution and emissions.
Many manufacturing companies have started the production of low-emission products. Studies have shown that we need to reduce carbon emissions to zero by 2050. For that, we need to minimize the use of fossil fuels.
Renewable energy is growing. Alternative sources like solar, hydro, and wind have proven that a carbon-free lifestyle is possible. Electric vehicles, solar appliances, windmills and hydros for electricity production, etc., are eliminating the need for fuels. Opportunities in the renewable energy sector are growing.
2. High investment yields
In 2020, IRENA (International Renewable Energy Agency) published a report called Global Renewables Outlook. It discusses the socio-economic impact of renewable energy on several scenarios.
Among those scenarios is the Transforming Energy Scenario which says that the transition to renewables, efficiency, and electrification can drive overall socio-economic development. The report further discusses the alignment of energy investments with keeping global warming below 2 degrees Celsius. Doing so would cost $19 trillion more than the usual business approach. But it would bring benefits worth $50-$142 trillion by 2050.
IRENA also discusses the Deeper Decarbonization Perspective—turning the world to zero-emission by 2050-2060. The cost of that would be between $35-$45 trillion. It would yield a return of around $62-$169 trillion.
Investing in renewable energy not only improves this sector but also reduces financial risks. Preventing climate change will positively impact the environment and save the lives of humans and other living beings. Further, it improves the financial and economic conditions of the world.
3. New job opportunities
The growth of the clean energy sector leads to an increase in job opportunities. Currently, over 11 million people work in the renewable energy sector worldwide. More development will lead to local employment opportunities within small- and large-sized businesses.
IRENA's Transforming Energy Scenario states that jobs in the renewable energy sector could triple and reach up to 42 million by 2050. When we consider the impact of the overall industry, the total jobs could reach up to 100 million. It includes any transition-related jobs or anything that makes an impact on the sector.
On the other hand, the fossil fuels industry will lose jobs in the future. It is not very good unless the governments and authorities make active plans for the workers. They need to transform workers from the fossil fuels industry to the renewable energy sector by providing training and other educational programs.
4. Technological improvements
Solar panels, wind turbines, and other equipment have become advanced with technological improvements. Their costs have been reduced, and quality has improved. Similarly, other essential components like inverters, batteries, controllers, etc., have also improved performance and reliability.
Energy storage is one of the most significant technological improvements that could drive the industry's growth to a massive level. Solar and wind are the most common renewable energy sources. Using these sources, we can store energy in batteries for later use. This mechanism has enabled storing energy and using it when the sun is not available or when the wind is not very strong.
Many companies have been manufacturing powerful batteries with massive storage capacities long with high performance and efficiency. These companies also create virtual power plants to aggregate thousands of storage systems and supply energy to the grid.
Most electric vehicles also require renewable energy systems. Manufacturers have been using recycled materials and green energy products for manufacturing such vehicles.
Technology is sure to grow in the future. With technological advancement, renewable energy systems will also be innovative and more energy-efficient.
5. Growing sector
The renewable energy sector is a growing sector, primarily due to the rising concerns of climate change. Zero-emission projects have started in many nations. Meanwhile, renewable energy developments are becoming cheaper than fossil fuels.
Onshore wind is cheaper in most places in contrast to creating a new combined cycle gas turbine. Solar is used in most households for various energy services. Therefore, the increasing demands will lead to more advancements and cost reductions.
With the increasing energy-producing capabilities of solar and wind, forecasters have predicted an average of 15% annual growth in this market. These will be the cheapest forms of electricity.
Bioenergy is another growing area that accounts for about one-tenth of the global energy supply. Forecasters have predicted that biofuel production will increase by 25% by 2024. Transportation biofuel is expected to grow at an annual rate of 3%. Similarly, bioenergy electricity generation is expected to increase at an annual rate of 6% by 2030.
Renewable electricity capacity additions, 2007-2021, updated IEA forecast (Source: IEA)
A report published by IEA shows that in 2020, the renewable electricity capacity experienced its first decline since the year 2000. It was mainly due to the Covid-19 outbreak. However, many delayed renewable energy projects all over the world are expected to resume in 2021. The renewable electricity capacity will also rebound to its previous growth.
Companies working in this sector are likely to grow massively in the next few years. People's preference for renewable energy over fossil fuels is also a sign of sectoral growth. Investing in renewable energy is low risk with long-term profits. It is good financially and for the betterment of the environment and the future of our planet.
Is it Good to Invest in Renewable Energy?
In the US, UK, and Europe, renewable energy investments have delivered better returns than fossil fuels. There is indeed a lot to be done to fight global climate change. Furthermore, it is also true that the amount of investment currently available in the renewable energy sector is not enough yet.
A study by Imperial College London and the International Energy Agency (IEA) found that investing in renewable energy yielded returns of 178.2% in 5 years in Germany and France. Fossil fuels produced a return of -20%.
Likewise, in the UK, renewable energy investments yielded a return of 75.4%, and fossil fuels produced only 8.8% in the same amount of time. Similarly, in the US, renewable energy investments yielded 200.3%, and fossil fuels generated 97.2%.
It shows that the sector is growing and people's interest is also rising. However, the pandemic has brought down investments in green energy by 20%. It is due to the low demand for energy, low prices, and rise in non-payment of bills.
Experts say that investment in clean energy is a must if we want to reduce global emissions in the long run. Investment in this sector is still low because many financial institutions and investors seek liquidity, which is not available currently.
Furthermore, investors are unsure because many of them believe that this sector is in its developing phase. In the current market, there are only a few green energy companies. The investors do not have much information about these companies. Also, because these companies are new, they have relatively short trading histories.
Investing in renewable energy is suitable for the long term. As technology grows and the demand for clean energy rises, companies involved in the renewable energy sector will play significant role in the future. Moreover, renewable energy is the answer to fighting global climate change. Investing in this sector is appropriate if you want a better future for our planet.
Fossil Fuel Production Down
In the past, non-renewable sources like fossil fuels are the sources for electricity generation. As it became inevitable that fossil fuels were damaging the environment, people started looking for alternative energy sources.
Climate change and global warming are caused due to the use of non-renewable energies. With technological advancements, fossil fuel usage has lowered, and energy production using alternative sources has risen.
The primary environmental concern using fossil fuels is the emission of harmful gases into the atmosphere. Renewable energy decreases these emissions by a significant amount. Fossil fuel production is slipping away, and clean energy production is growing.
In 2016, according to the calculations of the Environmental Impact Assessment (EIA), global fossil fuel production was reduced by 7%. Most specifically, the production of coal went down by 18% that year.
In the same year, renewable energy development grew by 7%, wind energy production increased by 50%, and solar energy production increased by 25%.
In a Gallup poll, 60% of participants voted that environmental conservation was essential over traditional energy development. Among them, 75% of the voters said that the government should focus on alternative energy sources for energy production.
A report from leading research organizations and the UN—called the Production Gap Report—published a finding that says, between 2020 and 2030, global production of fossil fuels would have to go down annually by 6% to follow a 1.5 degree Celsius consistent pathway. In that, coal, oil, and gas production should decrease by 11%, 4%, and 3%, respectively.
Also Read: Top 15 Canadian Renewable Energy Companies
History of Green Rewards
The global population is growing day by day. So energy requirements are high. Fossil fuels are unreliable for the long term because of their harmful effects on our planet and living organisms.
Governments are considering green solutions to protect the environment and the global population. Entrepreneurs, individuals, businesses, and companies should also consider investing in renewable energy.
However, history shows that investing in green energy is not much of an advantage financially for companies and businesses, especially those looking for quick and large profits. Research conducted by the Massachusetts Institute of Technology (MIT) shows that many companies have invested in renewable energy strategies in the past. But they have not seen good financial returns.
Investing in green energy might not be winning, but it is not losing either. Environmental Leader, a leading trade publication, conducted a poll that showed that among the 400 companies that invested in renewable energy, only 20% could achieve a return of 15%.
According to research by MIT, the annual rate of return on investment in green energy strategies is between 20 to 25%.
Clean Tech Mutual Funds and ETFs
Several renewable energy investment options include individual company stocks, mutual funds, index funds, and ETFs. It is up to the investor to choose whether to invest in stocks or other funds.
Clean energy indexes track companies that are involved in the sector. When it comes to investing in renewable energy, the best option for investors is an ETF. Below, we will be discussing a few mutual funds and ETFs that are best available in the market for investors.
First, let us look at a few clean-tech mutual funds.
1. The Calvert Global Alternative Energy Fund (CGAEX)
CGAEX tracks the performance of the Calvert Global Energy Research Index. It focuses on the sustainable energy sector and invests at least 80% of its net assets in stocks of US and non-US-based companies. These companies focus mainly on reducing greenhouse gas emissions and foster renewable energy usage.
2. The New Alternatives Fund (NALFX)
NALFX seeks long-term capital appreciation. It invests in equity securities—mainly common stocks. Further, it also invests in other securities like depository receipts, real estate investment trusts, and publicly traded master limited partnerships.
This mutual fund invests at least 25% of its assets in the renewable energy sector, including companies involved in recycling, clean air and water, and conservations.
3. Pax World's Global Green Fund
This fund invests in the US and international companies to reduce the impact of commerce on the environment. Green energy and energy efficiency are primary focus points for investment decisions.
Moreover, it also focuses on water treatments, pollution control, waste management, and resource management.
4. The Winslow Green Growth Fund and the Winslow Green Solutions Fund
These funds have a broader focus than other green-tech mutual funds. Both of them invest in companies that are involved in providing solutions to global environmental challenges. The primary focus of these companies is green energy, energy efficiency, and green transportations and buildings.
The Green Growth Fund invests in small-cap domestic companies that have high growth potential. And, the Green Growth Fund invests in small- and medium-cap domestic, international companies involved in the green energy sector.
Exchange-Traded Funds (ETFs) are considered the easiest way to invest in the renewable energy sector. Clean-tech mutual funds are relatively fewer in number. ETFs make a diversified investment in this sector. Below are some of the most popular clean-tech ETFs for investors.
1. Invesco Solar ETF (TAN)
It tracks investment results of the MAC Global Solar Energy Index. It invests at least 90% of its total assets in securities from that index involved in the green energy sector.
The index is designed to track the global solar energy equity sector. The Invesco Solar ETF is a non-diversified fund. In 2020, it soared 233.95%.
2. Invesco WilderHill Clean Energy Portfolio ETF (PBW)
This fund tracks investment results of the WilderHill Clean Energy Index. It invests at least 90% of its total assets in securities in that index, including stocks of publicly traded companies in the US involved in clean energy and conservation.
These companies focus on the development of clean energy and transition towards a cleaner future. In 2020, the fund increased by 204.83%.
3. iShares Global Clean Energy ETF (ICLN)
This fund tracks the investment results of the S&P Global Clean Energy Index that includes stocks of companies involved in the renewable energy sector. The index tracks the performance of around 100 companies involved in this particular sector.
The fund invests at least 80% of its assets in stocks of the index. It also considers investments that have economic characteristics that are substantially identical to the index's component securities. Furthermore, it invests about 20% of the assets in derivatives like futures, options, swaps, etc.
4. Invesco MSCI Sustainable Future ETF (PZD)
This ETF tracks investment results of the MSCI Global Environment Select Index. It invests at least 90% of its total assets in the companies from the index. It is a custom index that includes companies focusing on providing products and services that contribute to the clean energy economy.
The companies use natural resources and ensure to prevent the environmental impact by using renewable energy sources.
The renewable energy sector is a growing sector. It is new and untested. But we all know that if we want to save our planet and make the future green, renewable energy is the solution. As awareness grows, people's preference for green energy over fossil fuels has also increased.
Will this growth remain persistent? Is it good to invest in renewable energy today? Some renewable energy ETFs have shown a massive increase in the time frame of just a year. Although the market movements have driven the renewable energy sector, too, this sector has solid durability. Fossil fuel production has come down, and clean energy production has increased.
It is good to invest in renewable energy because the unstable fossil fuel prices indicate more opportunities in the clean energy sector. This sector has the potential to provide high investment yields. Furthermore, there will be new job opportunities as the industry grows. The technological advancements will bring more innovations to this sector too. Overall, it is a growing sector.
But investors need to seek proper financial advice before making their investments. Do your research and analyses properly—not just regarding which companies to invest in, but also concerning the decision about whether to invest in stocks, mutual funds, index funds, or ETFs.
It is good to invest in companies that will positively impact the environment and do good for the planet. Rather than seeking short-term profits from your investments, it would be best if you think long-term in the context of the renewable energy sector.
FAQs on Investments in Renewable Energy
1. Is Renewable Energy more profitable?
Over the past decade, the return on investment for renewable energy has been better than fossil fuels in the US, UK, and Europe. According to a study by the Imperial College Business School of London and IRENA (International Renewable Energy Agency), renewable energy's risk and return ratio are superior during normal conditions and crises.
In the past decade, profits from green electricity were 367% higher than from fossil fuels. With technological development and increasing awareness of the importance of renewable energy, the profit in renewable energy is likely to rise in the coming days.
2. Which country invests the most in Renewable Energy?
China lies at the top when it comes to investments in clean energy. In 2019, China invested $83.4 billion (USD) in the research and development of clean energy. The United States of America is the second country with maximum investments in renewable energy, with a total investment of $55.5 billion. In the third position is Japan, with an investment of $16.5 billion.
- China - $83.4 billion
- USA - $55.5 billion
- Japan - $16.5 billion
The total worldwide investment in this sector is around $219.2 billion. China, the US, and Japan comprise 71% of the total investment in alternative energy.
3. Are clean energy stocks expensive?
Clean energy stocks are expensive, and investors need a degree of faith before buying them. It is mainly because of the low-interest rates set by the Federal Reserve. It has not only increased the stock prices of renewable energy companies but the overall stock market.
A JP Morgan analyst, Paul Coster, said that the prices are high because the renewable energy sector has achieved good results. Further, it has more growth potential in the future too.
4. What is the best renewable energy stock to buy?
The best renewable energy stocks in 2021 are:
- Renewable Energy Group, Inc. (NASDAQ: REGI)
- Brookfield Renewable (NYSE: BEP)
- NextEra Energy Inc (NYSE: NEE)
- First Solar (NASDAQ: FSLR)
- SunPower Corporation (NASDAQ: SPWR)
- Enphase Energy, Inc (NASDAQ: ENPH)
5. Is Renewable Energy cost-effective right now?
Renewable energy is one of the cheapest sources of new electricity. Its production has the potential to make a global economic impact.
According to Francesco La Camera, Director-General of IRENA, renewable energy investments are stable, cost-effective, and attractive. They provide consistent and predictable returns and, at the same time, supply benefits to the global economy.