Renewable Energy Investing

What is renewable energy investing?

Renewable energy is an umbrella term that covers a range of low carbon emitting energy sources. It includes-

-          Solar photovoltaics,

-          Solar thermal,

-          Wind,

-          Biomass and

-          Small hydro

-          It does not include energy derived from large hydro projects  or nuclear power.

Renewable (or “clean”) energy funds include all funds focused on investing in companies developing low carbon energy technology and renewable energy projects. The market for renewable energy is growing fast. As a sector, McIIvaine, the US-based specialist industry analysis company, estimates that the market for renewable energy was worth $27 billion in late 2005 and expects it to almost double by 2010.

Why invest in renewable energy?

The investment environment for renewable energy is compelling. There are several aspects to consider:

-          High and stable demand for energy – The energy sector is set for a period of high growth.With the rapid industrialization of many developing countries, coupled with the heavy reliance of developed countries on energy, demand is expected to grow significantly.

-          Rising fossil fuel prices –We have seen a step change from $20 to $30 per barrel (in real terms) throughout the 1990s to over $50 per barrel in this decade. The price at the time of this writing was $78 per barrel. There are many column inches written debating whether the price of oil will rise further or fall back to lower levels. The reality is that we do not know. However, few expect it will fall back to the earlier more modest levels. Projects that were previously considered ideological are now turning into financially viable concerns.

-          Concern over continuation and security of supply – Broadly speaking, geologists have already mapped out where oil is going to come from over the next century. In layman’s terms, cheap easy-to-access oil is no longer available, and we are now in the stage where oil will be more expensive and harder to get. The cost of exploration and production has risen considerably in the last few years and is set to rise further. The global threat of climate change resulting in government legislation and intervention – One of the major contributors to climate change is the rise of carbon dioxide in the atmosphere, which comes from the burning of fossil fuels to make energy. This is creating an imperative to diversify the energy mix. Major governments around the world are responding to this with a range of measures, including legislation, subsidies, tax relief and procurement strategies.

How to invest in renewable energy

A variety of funds are now available to long-term investors wanting to capitalise on this opportunity. Funds are either private or public and are in the form of either equity, debt, project finance or some combination of these. Funds can be clean energy-specific or broadened to include other “clean technologies” such as water and waste management solutions. The vast majority of the funds are actively managed, although a number of index funds have recently been introduced.

Investment horizons tend to be medium- to long-term. The risk profile of clean tech funds is hard to establish at this stage due to the newness and variety of the sector. It is likely to be driven by the underlying investments that will tend to have high idiosyncratic risk. In terms of return, analysis of the companies and projects in the sector suggests double-digit profit and high growth forecasts over the coming years. But there will no doubt be a lot of failures (similar to the dot-coms), and careful manager selection will play a critical role.