Originally published in Real Assets Adviser, a Publication of IREI. A revised version was published on CaroFin.
Renewable energy became mainstream in 2016. The perceptions that renewable energy is easily outcompeted by conventional fossil fuels, burdened by technological risk and uncertainty, or simply an environmental luxury for the wealthy have been thoroughly debunked. Do not let these myths cloud your judgment, as renewable energy is now a considerable presence within the energy market. This is not a hypothetical or some potential future, but the ground truth reality in today’s market, which many investors and industry experts project will remain the case for the foreseeable future.
The following article will center around investing in renewable electrical power generation. There are other forms of renewable energy that do not pertain to electricity, such as biofuels, or that are complementary grid edge technologies, such as energy storage. We will also leave aside traditional low-carbon generation sources such as large-scale hydroelectric and nuclear plants.
In 2016, more than 50 percent of new installed capacity came from renewable electricity for the second year in a row. This phenomenon was largely driven by wind and solar, but also included some less prevalent generation sources such as biomass and geothermal. Non-hydro renewable energy sources now comprise nearly 9 percent of total U.S. electrical generation, according to the U.S. Energy Information Agency. And the lion’s share of that renewable generation capacity has been built over the past six years.
This is not an anomaly, but rather appears to be the start of a period of sustained growth. Wind and solar are projected to account for 64 percent of the estimated $11.4 trillion invested in energy globally through 2040, according to Bloomberg New Energy Finance. The key drivers underpinning the remarkable emergence of renewable energy are: (1) dramatic cost decreases in solar and wind to the point where they are often the lowest cost of new generation available to the grid, (2) structural decline of coal and nuclear in large part due to low-cost natural gas, and (3) policy incentives and broad public support for renewable energy. Renewable energy is not a passing fad or a trendy alternative to conventional power sources; it has become the predominant form of energy development and investment in the United States and globally.
Before considering available investment vehicles, some current context would be useful. In 2016, renewable energy investment dropped 18 percent to below $288 billion. However, much of this drop can be attributed to dropping technology costs, as total renewable power capacity increased by more than 9 percent. The costs for solar panels and wind turbines have fallen by 80 percent and 35 percent, respectively, since 2009, according to the International Renewable Energy Agency. Of this total, over 70 percent was in direct project investments, as opposed to corporate investments or M&A, notes Bloomberg New Energy Finance.
While it stands to reason that a primary way in which to invest in renewables is through direct project investments, there are a range of other vehicles to consider based on an investor’s level of sophistication, risk tolerance, liquidity preference and investment horizon.
The discussion below should not be considered a direct endorsement of any of the strategies or investment vehicles that are identified. Nor should this be considered a comprehensive review; there are a wide array of alternatives within each broad investment theme that should be considered before making an investment. Specific investment strategies should be developed in accordance with each investor’s investment goals and with the assistance of a professional investment adviser.
The remainder of the article can be downloaded here.
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