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Renewable energy: How and where to invest

Investing money in renewable energy can be one of the many ways to protect our planet from the ravages of climate change.

But we often forget that where we invest our money can make a difference.

Therefore, below, we discuss:

  • Types of renewable energy, including wind and solar

  • How to start investing in renewable energy

  • The future growth of the sector

The rise of renewable energy

By 2050, about half of global energy production is expected to come from renewable sources such as wind and solar power, according to the US Energy Information Administration.

That shift requires huge amounts of energy investment. And there is already evidence that Britain’s biggest energy companies are putting their money where their futures are.

Shell, for example, has spent about $2bn (£1.4bn) since 2016 on investing in renewable energy.

Institutional investors such as big pension funds are also putting vast amounts of money into the sector. A recent survey from the alternative-investment manager Octopus found that they plan to plough $743bn into renewables in the next decade.

Types of renewable energy

By 2050, about half of global energy production is expected to come from renewable sources such as wind and solar power.

The world will need several types of renewable energy in order to meet global energy demands. And it is possible to invest in all of them (as discussed below).

Here are some of the most common forms of renewable energy generation. In total, they make up almost a third of UK energy generation.

  • Solar energy: Energy that comes from the sun can be harvested by various technologies including solar panels, either on individual homes or in large solar farms. Solar energy now accounts for about 4% of the UK’s electricity.

  • Wind energy: Wind turbines, both on and offshore, contribute about a quarter of the UK’s electricity needs. The UK is the world leader in offshore wind farms, with more capacity than any other country.

  • Water energy: Energy produced by flowing water, also known as hydropower, contributes 2.2% of the UK’s electricity generation needs.

Is renewable energy a good investment?

The world needs more green energy to replace fossil fuels as an energy source. And strong demand tends to make a good case for energy investments such as wind and solar powers.

However, there are other factors that determine whether backing renewables with your money is the right decision for you. These include the health of the global economy, local regulation and policy.

When the global economy is strong, demand for power soars and its price grows. This means that the value of companies producing power begins to rise.

Green companies are also affected by regulations and policies in different companies across the world. Governments may mandate a certain amount of energy to be renewable or penalize companies who use fossil fuels, thus benefiting green businesses.

They may also choose to withdraw green incentives, pushing prices down.

The financial strength of individual companies are also important for investors. Companies with weak balance sheets can struggle even in a growing sector like green energy.

That is why it is important to research the different ways of investing in renewable energy before making a decision.

Why invest in renewable energy?

These are some of the strongest reasons for investing in renewable energy from different sources:

  • It is ethical and offers the opportunity to invest in line with your values.

  • The sector is at the forefront of technological development. More efficient solar cells, using a structure called a “perovskite”, is just one example of the cutting-edge research that is leading to lucrative breakthroughs in increasing generation capacity.

  • It benefits from worldwide government support, including pledges from many countries to reduce their carbon footprints – requiring greater use of renewable energy.

  • Renewable energy could boost the economy by creating jobs in rural areas and lowering fuel imports.

How to invest in renewable energy

There are several ways to invest in renewable energy. These range from buying shares in individual companies to investing in funds where the returns replicate the performance of a specialist stock market index related to clean energy.

Some of the possibilities for investment are as follows:

Direct investment in renewable energy projects

Taking a stake in a new wind farm or solar energy project offers a very clear link between your money and the benefits it provides.

Ethical finance firms such as Abundance ; Triodos and SFP Group offer investors a chance to fund developments such as solar panels for schools or ground-mounted solar farms.

These tend to be very long-term energy investments. And because they involve putting your money into one project, rather than spreading it around, you take the risk of not getting your money back if the project fails.

Some of these investments can be held in an ISA so that the returns are tax-free.

Before you invest in a project, make sure that the firm you invest through is regulated by the Financial Conduct Authority (FCA). This gives you some protection against mis-selling.

You can check that a company is authorized on the FCA’s financial services register, using the address and name of the firm’s registered office.

Invest in exchange-traded funds

Exchange-traded funds (ETFs) mimic the price movement of certain baskets of stocks, such as the FTSE 100. They allow you to gain exposure to a diverse portfolio of stocks and are also very liquid, meaning you can buy and sell them easily.

In the renewable energy sector, there are ETFs that track a number of indices, such as:

  • The S&P Global Clean Energy index, which consists of a basket of clean energy stocks from around the world

  • The Nasdaq Clean Edge Green Energy index, whose 50-plus constituent companies, including Tesla, are publicly traded in the US.

While ETFs can be a very easy way to get exposure to these types of companies, it is important to understand what the charges are and exactly what the ETF is tracking before you invest.

Some ETFs own the stocks they track (physically-backed ETFs) while others are what are known as “synthetic” ETFs. These may not track an index exactly, as they rely on financial instruments and a number of counterparties to try to replicate performance.

Your own individual risk tolerance and view of fund charges will determine what you are comfortable with in this case.

Buy renewable energy stocks

Investing in renewable energy in individual shares is another way to get exposure to this sector. These may be companies that produce energy via wind turbines or solar cells, or they may make the metals and other commodities needed to ensure that these products can be developed.

Buying stakes in companies listed on the stock market is relatively easy, and they are easy to sell again too. However, they should be seen as a long-term investment, and it is also important not to put all your eggs in one basket because the fortunes and share prices of individual companies can be volatile.

Instead, they should be part of a diversified portfolio so that you spread your risk.

Shares in companies can go down as well as up. So ensure you read a company’s balance sheet and understand the risks before you invest.

The future of renewable investing

While renewable energy already makes up a large proportion of the UK’s energy supply for instance, there is still plenty of scope for this to grow, increasing the viability of renewable energy investment.

Recently, there have been new commitments to green energy targets including reducing fossil fuels from nations including the UK ahead of the COP26 climate-change summit in Glasgow in November.

These include the EU’s objective to achieve carbon neutrality by 2050 and the US’s return to the Paris Agreement on climate change.

In order to meet these targets for radically reducing emissions, investment in renewable energy will need to continue. It could therefore be a sustainable investment strategy for anyone looking for long-term returns.


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