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Energy independence and sustainability – how we could get there and the opportunities

Can we become energy independent in a sustainable way? We take a closer look and share two investment case studies that could stand to benefit.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Laura Hoy and Dominic Rowles
ESG Analysts

Published on 27 October 2022

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Since the crisis in Ukraine began, the topic of energy independence has been at the top of mind for countries around the world. In Europe the problem is magnified, given our reliance on Russia.

There’s no question that this dilemma has caused some friction with the energy transition – coal consumption is climbing and the UK’s issuing fresh permits to drill for more oil and gas.

These are short-term fixes. As we march into a challenging winter with soaring costs and looming blackout threats, it’s important to keep an eye to the future. Upping our power supply at any cost isn’t a long-term strategy – in fact, by delaying the transition to renewables, we’re actually making it more expensive. That’s because credible, actionable plans now mean there’s less chance of a harsh carbon tax to speed the transition in the future.

That doesn’t mean turning off the oil taps suddenly. However, there are two main ways we can work toward energy independence and sustainability at the same time.

What you need to know about global energy markets

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments and any income then produce can rise and fall in value, so you could get back less than you invest.

Can we become energy efficient in a sustainable way?

Laura Hoy, ESG Analyst

Energy efficiency

Perhaps the most obvious, but least talked about, solution for both issues is to reduce the amount of energy we use. No matter how you slice it, all energy comes from somewhere and will have an impact in one way or another. Cutting down on energy usage is an important pillar of our transition.

That doesn’t mean we need to make huge sacrifices, though. There are lots of ways to cut down our energy needs by becoming more efficient. The cost-of-living crisis means efficiency will be top of mind for everyone – soaring energy costs mean even those who aren’t as interested in the transition are looking for ways to keep usage low.

While the energy price cap helps in the here and now, it doesn’t solve the problem of getting these costs under control longer term. That’s where improving efficiency comes in. When it takes less to heat your house, it costs less too – better insulated houses could save over £1,000 a year on bills at the current price cap level.

There are some government programmes designed to help soften the cost of improving your home’s efficiency as well. The boiler upgrade scheme, for example, can shave £5,000-£6,000 off the cost of a new low-carbon heating system.

Households aren’t the only ones who will be looking to efficiency in times like these. A survey by Npower shows energy is the top concern for 77% of UK businesses. When asked how they’ll manage this risk, their top answer was through energy efficiency.

Notably, although they still believe in net zero, 93% were worried about funding this transition. The cost to achieve net zero is only increasing as we kick the can further down the road.

Progress on renewables

Increasing renewables as part of the energy mix is another pillar to achieving both net zero and energy independence. This doesn’t mean a short, sharp transition away from fossil fuels like oil and gas though. Instead, it requires careful planning to slowly reduce dependence on these materials by investing in renewable technology.

Renewable technology has a long way to go before it can be considered a reliable alternative – but getting to that point will require investment. Some of this will come from the legacy oil and gas companies themselves.

BP is one example of this – while the group still makes the bulk of its money from legacy oil and gas, the transition to more sustainable alternatives like renewables has become a large part of the group’s growth story.

Almost half of the group’s $15bn capital expenditure budget will be funnelled toward the energy transition by 2025. This should help the group generate $9-10bn in underlying cash profits from this arm of the business by 2030.

BP’s not giving up on oil – but it is using some of the profits it’s making now to shore up its future in a more sustainable energy landscape.

Volatility in oil and gas – who could benefit?

There are other ways the transition is supported as well – Power Purchase Agreements (PPAs) are another way businesses can stabilize their energy costs while also working toward net zero.

These agreements between a company and a renewables provider can be used to set a pre-determined energy price, making it easier to budget. They can be used as a direct contract for an energy supply, or as an offset for traditional energy usage.

In a perfect world, the purchaser still uses a legacy energy provider, but pays for the same quantity of cleaner energy from the renewables provider. The renewables provider then goes on to distribute those units back into the grid. It’s a round-about way of integrating renewable power into the existing energy market.

When the PPAs are good quality, it means renewables projects get the financing they need to improve efficiency and reliability. The idea is that the investment in renewables will push the industry forward so that longer term, all PPAs can be direct investments.

Annual PPA capacity in megawatts

Scroll across to see the full chart.

Source: Energy Monitor, *2022 data is through 30 September.

The market for PPAs grew by seven times between 2016 and 2021, reflecting a growing interest in the shift to net zero. The energy crisis has put the brakes on growth in this space – European companies bought about 56% fewer megawatts in the first 9 months of 2022 than in the whole of 2021.

But zooming out further shows there’s still growth overall in this market. We’re still comfortably on track for expansion compared to 2019 and 2020 levels.

The bottom line

The current energy independence push means questions about how we’ll reach net zero have started to emerge. That’s not necessarily a bad thing. It’s important to understand how the financial and ethical benefits align as we make the transition in order to drive long-term change.

The ongoing energy crisis has only increased scrutiny in this space, and that can be a positive development that will drive innovation and action.

2 investment case studies that could benefit from the renewable shift

Dominic Rowles, Lead ESG Analyst

Investors should note both investment case studies below invest in quite a niche area of the stock market, so any investment should usually only form a small part of a well-diversified portfolio. Investors should only invest in specialist areas if they have the time and knowledge to carefully select and monitor their investments, and if they intend to invest for the long term.

Greencoat UK Wind

Wind is currently the UK’s largest source of renewable electricity. UK wind farms produce power and sell it under long-term agreements to utility companies who are obliged to produce a certain percentage of power from green sources. Greencoat UK Wind lets you invest directly into these wind farms.

This investment trust invests in over 40 operating wind farms that produce enough clean energy to power over 1.5 million homes. Recent investments include the Windy Rig windfarm located in Dumfries & Galloway, Scotland. Windy Rig consists of 12 turbines and is 100% owned by the trust.

Revenues depend on the ongoing attractiveness of wind-farm investments in general, as well as wind conditions, which the fund has no control over. That said, the managers are encouraged by what they believe is an attractive pipeline of projects, both onshore and offshore. In 2021, Greencoat had approximately 5% market share of operating UK wind farms.

Investors should note that investment trusts can trade at a discount or premium to the net asset value. You should also remember that investing in one sector, like renewable energy, could leave you at risk if that sector falls out of favour.

More about Greencoat UK Wind plc, including charges

Greencoat UK Wind plc Key Investor Information

FP WHEB Sustainability

The FP WHEB Sustainability fund takes a more diversified approach, aiming to make a positive impact across nine sustainable investment themes. These range from cleaner energy and sustainable transport to education and wellbeing.

Investments in the fund’s cleaner energy bucket include First Solar, a US-based maker of solar panels. The company is pioneering new solar technology and operates a sector-leading approach to the manufacture and recycling of its solar modules, according to the managers. The fund also invests in Vestas Wind Systems, the world’s largest maker of wind turbines.

The fund's focus towards small and medium-sized companies, and its investments in emerging markets, add risk.

More about FP WHEB Sustainability, including charges

FP WHEB Sustainability Key Investor Information

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