The use of fossil fuels must be reduced in order to limit global warming to 1.5 degrees Celsius, says the IEA. Even still, carbon emissions from the energy sector hit a record high in 2022. Further, fossil fuel production in 2030 is estimated to be more than double the amount considered within range of the Paris climate goals. In August 2023, GHG emissions contributed to the world’s hottest month on record.
Following frantic negotiations that went overtime by almost 24 hours, COP28 concluded with a landmark agreement from nearly 200 countries to “transition away from fossil fuels in energy systems in a just, orderly and equitable manner” to accelerate action to achieve net zero by 2050. While the language is a compromise to transition away rather than explicitly committing to phase out fossil fuels, it does call on governments to triple renewable energy capacity globally by 2030.
Renewable energy in 2023.
Looking back this year, it’s ironic that renewable energy technologies like wind and solar power – the very thing slated to save us from catastrophic climate change – have fallen short in the market. This is discouraging for SRI investors like VCIM who are looking to support the clean energy transition. But there seems to be light (and wind) at the end of the tunnel.
Renewable energy companies were very recently basking in high valuations and raking in some serious cash. According to The Economist, average returns on capital in the renewables industry rose from 3% in 2015 to 6% in 2019, just slightly less than their carbon-intensive cousins in the oil and gas industry, except less volatile. In addition to rock bottom interest rates, the costs of core components, such as solar panels and wind turbines, fell due to economies of scale and as technologies became more advanced. These factors kept the levelized cost of electricity (LCOE) – essentially, the capital and operating expenditures per unit of energy – way down. This allowed the cost of renewables to compete with “dirty” alternatives like coal and natural gas. It seemed like nothing would stop the tide of good fortune for renewable energy until the perfect storm of interest rate hikes, supply chain constraints, and bottlenecks hit the sector.
Renewable energy infrastructure is naturally capital-intensive. Wind farms, for example, are incredibly efficient (i.e., the average wind turbine can generate enough electricity in about 45 minutes to power an average home in the US for one month) but also very cumbersome; the average wind turbine is 320 feet tall with turbine blades averaging 210 feet long. Wind has been hit particularly hard by cost increases and supply chain problems — as evidenced by Orsted, the world’s largest offshore wind developer, halting major wind projects in the United States this year.
Overall investment in renewable energy is actually at an all-time high, with Bloomberg New Energy Outlook reporting that global new investments (both public and private equity) skyrocketed to $358 billion in the first half of 2023. That’s a 22% rise from 2022 and the highest investment for any six-month period. Solar won the bulk of this investment at $239 billion with China seeing the largest influx. Investment in wind power (offshore and onshore), on the other hand, decreased by 8% in the first half of 2023 versus the first half of 2022. According to Bloomberg’s New Energy Outlook, the world still needs to come up with $8.3 trillion between 2023 and 2030 to align with a global net-zero trajectory by 2050.
Despite increasing investments in renewable energy, high interest rates have plagued the capital-intensive sector since 2020 and the performance of renewable energy shares have plummeted. For example, CNN Business reports that iShares Global Clean Energy ETF (which tracks performance of renewables) is down 29% this year, underperforming the MSCI World Index (which had a 15% gain). Major players have seen their share prices drop in 2023, such as Enphase Energy by 60%, Solar Edge Technologies by 71%, and NextEra Energy by 29%.
Our 2024 outlook for renewables.
From an environmental perspective, it makes sense to invest in renewables. Clean power is not only central to reaching the global decarbonization strategy for the energy sector, but also important to set the path for decarbonizing other high-emitting sectors like shipping, transport, agriculture, aviation, and industry. According to the IEA, tripling renewables by 2030 will be the single largest driver of emission reductions and key to keeping global warming below the 1.5C mark.
Unfortunately, high interest rates over a longer than anticipated period has scared the market. But Yahoo Finance notes that even though it is expensive to go green, “there is still significant utility scale growth in renewables in the coming years” and they see “particularly attractive buying opportunities”. BloombergNEF appears to support this outlook, stating that renewable power projects are still a safe asset class, and the recent turmoil is an exception to consistent project cost declines over a longer period. Barron’s also supports this argument, saying that a combination of falling interest rates and better supply chains can significantly change the tide for clean-energy stocks possibly as soon as 2024.
Some analysts estimate that as of 2030 (by 2025 for solar), it will be cheaper to build both utility-solar and wind than operating existing gas or coal plants. Under this view, it’s advisable that investors continue to hold a selection of quality renewables as renewables will increasingly become the future of energy, rather than just the “alternative”.
