The UK invested nearly £8bn in renewable energy projects in 2018 amid the ongoing push to create a cleaner and greener future for power generation across the country.
We are among the countries leading the charge in many areas of the clean energy revolution, with wind and solar projects receiving solid government subsidies and industry investment, and we appear to be already reaping the rewards.
UK wind energy generation hit a new high on February 8, according to National Grid data, and provided 36 per cent of Britain’s electricity demand.
This is a good example of how the nation’s energy mix is shifting towards renewable sources of generation.
Supporting clean energy generation will be vital as the world transitions towards a lower carbon economy and away from its reliance on fossil fuels.
Broadly speaking, governments are behind the development of the industry as part of efforts to reduce reliance on fossil fuels and a clear ‘green agenda’.Renewable energy has become a crucial infrastructure sector in its own right as the effects of climate change become more evident, and its growth has opened up a new world of investment opportunity.
Wind and solar are often considered key in the battle to reduce fossil fuel consumption, but there are a broad range of opportunities available to invest in companies that own operational renewable energy assets, from offshore wind projects to hydroelectric power and anaerobic digestion.
One area in which we expect to see significant growth within the renewable space is the need for energy storage solutions – most typically in the form of battery technology.
Wind and solar generate a volatile and intermittent supply of power for obvious reasons, and as renewables capacity grows this is having an increasing impact on the grid in terms of its ability to balance supply and demand.
Developing effective ways of storing energy is a critical step in harnessing the potential of renewable energy supply; effectively storing energy generated when conditions are suitable or when demand for electricity is lower in order to deploy it during periods of lower output or when demand is high.
This dynamic underpins the investment opportunity in energy storage.
There is a growing opportunity set to invest in companies that play a part in the broader theme of ‘cleaner energy’. There are an increasing number of thematic opportunities to consider, including companies operating in the renewable energy supply chain, for example, or those that develop energy efficiency technologies.
Wind turbine manufacturers, solar module manufacturers and developers of carbon neutral properties would all fit into this category.
There are many opportunities in this growing market, but our exposure here is small owing to our focus on income generation and the increased economic sensitivity within this group.
It is likely that the most stable returns will come from investing in the operational assets responsible for the generation of renewable energy.
Renewable energy projects, such as solar parks and wind farms, typically benefit from long-term, contracted cash flows often with an element of government-backed subsidy.
Broadly speaking, governments are behind the development of the industry as part of efforts to reduce reliance on fossil fuels and a clear ‘green agenda’.
The UK government, for example, recently committed to increasing the use of renewable energy and outlined aims to generate a third of the UK’s electricity via offshore wind farms by 2030.
Even in the US, where the President appears less than enthusiastic about the battle against climate change, tax incentives exist to stimulate increased development of renewable energy capacity.
The drive towards lower carbon emissions is being taken on at state-level and also by large corporations.
In California, home to 12 per cent of the total US population, the adoption of renewable energy is advancing rapidly and the state has signed into law a requirement for 100 per cent of its electricity to be produced from renewable sources by 2045 – a goal also set by Hawaii and being discussed by other states.
The scale of development across the globe should provide a bigger pool of assets and expand the universe of investment opportunity available. Risks do exist, of course; the sector relies on governments to honour their commitments in relation to subsidy support, for example.
In addition, long-term power purchase agreements – the mechanism through which generators sell their output – do have potential counterparty risk, as evidenced by the recent bankruptcy of PG&E in the US.
On balance, however, we believe there are many attractive opportunities within this growing sector and investors can target investment towards companies operating in the more utility-like renewable energy generation space, those developing new technologies to facilitate the transition towards a more sustainable, lower carbon world or a combination of both.
Will Argent is fund adviser to the VT Gravis Clean Energy Income fund
