Investing in renewable energy – a powerful investment?

Governments around the world have committed to dramatically lowering their CO2 emissions, in a bid to combat climate change. With limited supplies of fossil fuels and growing concern over their environmental impact, renewable sources of energy like wind and solar are gaining big momentum. ‘Renewables’ are expected to produce most of the new energy produced across the world over the next few decades.

The UK government aims for 15% of our energy to come from renewable sources by next year. That means 85% of our energy needs will still come from non-renewable sources though, despite billions spent on renewables. So what’s holding it back?

While the infrastructure for non-renewable energy sources is largely in place, enormous investments in solar panels, wind turbines and the like are needed. Fossil fuels and nuclear power can also be controlled to produce a steady, reliable output. Many renewables are at the mercy of the elements. Not only that, the main output of renewables – electricity – makes up only a fifth of the world’s energy consumption.

The vast majority of global energy use is still carbon-based. And the biggest energy consumers of the future, China and India, are increasing their use of fossil fuels, although renewables are on the rise there too – China is the world’s largest investor in renewable energy.

Forecast global energy consumption

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Source: iea.gov International Energy Outlook 2019

So there’s still a long way to go, but renewable energy technology is getting better and cheaper, and the potential is huge. It’s predicted several trillion dollars will be spent on renewable energy infrastructure over the coming decades. For everyday investors though, what are the opportunities – and the risks?

Things to consider

Before you consider investing in a niche area like renewable energy, we think there are some things you should bear in mind.

Just because something is likely to have a big impact on the world doesn’t necessarily make it a good investment. Since the AIC (investment trusts) Renewable Energy infrastructure index began in August 2013*, it’s performed better than the global index of oil & gas companies, but has lagged the broader global stock market. Of course this doesn’t indicate future performance, but it shows investing in renewable energy isn’t a sure thing.

Renewable energy vs oil & gas vs global stock market

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Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2019

Any form of energy infrastructure normally involves lots of debt to finance construction and upkeep. Combined with potentially volatile energy prices, some renewable technologies are yet to prove they’ll be commercially viable. Some companies are reliant on government funding to keep going, and there’s no guarantee that funding will carry on.

Investing in an emerging sector like renewable energy is higher-risk. That’s why we think you should only invest in it as a small part of a well-diversified portfolio. That way, if your investment doesn’t do well, it doesn’t have such a dramatic impact.

How can I invest?

One way to invest in renewable energy is to buy shares in the companies producing the power. As most renewable energy companies are smaller than the big multinationals that dominate stock markets, you’ll likely have to look further down the size spectrum to find them. Remember investing in smaller companies in general is more risky, not all will succeed and the performance is more volatile.

Many renewable energy companies aren’t listed on a stock market though – known as ‘unquoted’ companies. That makes their shares more difficult to buy and sell. Investing in them also normally requires large sums, making them off-limits to most everyday investors.

Investment trusts can be a way to get around this. They pool investors’ money to make up the big amounts needed to invest in unquoted renewable energy companies. Their ‘closed-ended’ nature also means they’re never forced sellers of companies, including hard-to-sell unquoted ones.

We think investment trusts are a good way to invest in renewable energy. Specialist managers and teams use their experience and expertise to invest in a range of companies they think have the best long-term potential. We also think they’re a better vehicle than open-ended funds for investing in unquoted companies. Some trusts focus on one type of renewable energy, such as wind or solar, while others invest across a range of renewables.

You can search for investment trusts on our website. Ones specialising in renewable energy investing can be found under either the ‘Environmental’ or ‘Sector Specialist: Infrastructure’ sectors. Not all trusts in these sectors focus on renewable energy, so you should check each one’s objectives and where it invests. Before investing in any investment trust, please make sure you read the trust’s Key Information Document for more information.

This article isn’t personal advice. If you’re not sure an investment is right for you, please seek advice. Investments rise and fall in value, so you could get back less than you put in.

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