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Invest in Renewable Energy

Renewable Energy has been a hot topic in both the investment community and mainstream society over the last decade. From the creation and subsequent withdrawal of the United States from the Paris Agreement to the polarizing climate change debate, renewables are both covered by mainstream media and discussed extensively on social media platforms daily.

Sources of Renewable Energy include wind (wind turbines and wind farms), solar (PV and concentrated panels), hydro (dams), bioenergy (biomass/biofuels), geothermal (heat from the earth), and to a lesser extent tidal/ocean (using waves to harness energy).

With renewables experiencing such widespread coverage, it is easy for investors to view this industry as a viable investment. Our job is to blow past this hysteria and look at the facts.

Renewable Energy

Renewable Energy is mainly used in three energy sectors: electricity generation, heating, and transportation. Forecasting to 2023, renewables are only expected to make up 12% and 3.8% of the total global energy demand for heating and transportation respectively, registering growth rates of 20% in both sectors during the projected time frame. Renewables will experience the most growth as a source for electricity generation, registering a growth rate of 70% to 2023 when renewables will provide 30% of total global electricity generation. By 2050, Bloomberg forecasts nearly half of global electricity generation coming from solar and wind.

Though renewable sources of energy are undoubtedly increasing in usage, fossil fuels will remain the dominant energy source for the foreseeable future due to the surge in production and consumption of natural gas. Many scientists and economists have also stated that because wind and solar requires much more land area to produce energy (research done by Harvard states that if the United States were to run 100% on renewables it would require as much as 1/3 of all the land in the country), renewables may actually be less “energy dense” when compared to fossil fuels. Renewables like wind and solar also need significant amounts of storage to back up energy when the sun isn’t shining nor the wind blowing, but advances in battery technology should further reduce costs to manufacture batteries in addition to making them more efficient.

Solar Energy

The use of solar panels for electricity generation has expanded over the years with no signs of slowing down as increased cost efficiency and solar-friendly policies have been put in place globally. According to a report by the United Nations, investments in the solar industry far outpaced investments in coal, natural gas, and nuclear combined. Of the $298 billion invested in renewable energy in 2017, over half of the invested amount was attributable to the solar industry alone. The solar industry also employed more jobs than their fossil fuel counterparts (though there has been a decline in the United States under the Trump administration).

It is anticipated that roughly $11.5 trillion will be invested in renewable forms of energy through the year 2050. These investments include geothermal, nuclear, and hydro, however, it is wind and solar that will receive the lion share of investment dollars accounting for about $8.5 trillion, or 74%, of the $11.5 trillion. With the average cost to build a solar PV plant projected to fall 71% by 2050, the argument for investing, producing, and consuming solar energy has intensified.

However, there are concerns. Though solar energy is cleaner and healthier for our environment, studies show that solar-powered facilities would take much more land mass to produce electricity when compared to fossil fuels being the sun isn’t always shining and, because of this reason, more efficient backup storage batteries would need to be instituted. While these concerns are valid, the case for solar as an energy source, especially for residences, is quite strong as seen in the insurmountable rise of solar-powered homes in both the United States and in emerging markets (according to the World Economic Forum, 70,000 solar panels per hour will be added globally within the next 5 years).

While wind is more preferred over solar for large scale operations and utilities, solar energy is the top option for homeowners and remains the form of renewable energy that presents the greatest opportunity for investors.

Wind

Wind and solar combine to make the two fastest growing forms of renewables on the planet albeit with wind energy gaining the edge. In 2017, wind energy made up 21% of the total renewable energy produced in the United States while solar accounted for only 7%. This is mainly because wind energy is largely used for major large-scale projects and utilities while solar energy is used for residences. The average cost of wind energy is expected to drop 58% by the year 2050 and this increased cost efficiency will lead to more incentive for investing in wind energy ventures.

However, like solar energy, there are concerns. Studies have shown that both wind and solar energy not only require more land mass to produce electricity when compared to fossil fuels, but the need for more efficient batteries to backup energy is imperative. This is due to the nature of wind power as when the wind doesn’t blow turbines do not spin and as such cannot generate electricity, forcing the energy stored in backup storage batteries to power facilities.

These concerns aside, the potential of wind energy is massive, and this is obvious in the substantial growth in wind energy projects. As major corporations look to reduce their carbon footprint and become more environmentally conscious, there has been an influx of investment in wind energy projects.

Major Renewable Energy Events

  • Equinor ASA (NYSE: EQNR), previously Statoil, has morphed into a leading developer of offshore wind farms. One of their biggest current projects is Empire Wind, which is the building of a 1,000 megawatt offshore wind farm 20 miles south of Long Island, New York. The 80,000 acre project is anticipated to potentially power up to 1 million homes.
  • Google (NASDAQ: GOOG) and Amazon (NASDAQ: AMZN) are currently battling it out for leader of renewable energy buying with the lion share of spending going toward wind energy projects. The top five buyers of renewables, Google, Amazon, 3M (NYSE: MMM) , Microsoft (NASDAQ: MSFT) , and Dow Chemical (NYSE: DWDP)have bought 5x more wind than solar in the effort to power operations with clean energy. Google also recently invested $600 million for a 300-acre wind farm in Minnesota to power the tech giants new data centers.
  • Jobs in the solar industry grew 17x faster than the entire U.S. economy in 2016 and by 2017 there were over 250,000 people employed in the sector, a whopping 168% rise from the number employed in 2010 (this number has declined under the Trump administration)
  • The Netherlands has begun plans to develop the world’s largest offshore wind farm by 2027. The ambitious project, which will be equipped with a 2.3 square mile artificial island, will produce 30 gigawatts of electricity (double the amount of offshore wind power in Europe currently) into the Netherlands and the United Kingdom and eventually Denmark, Belgium, and Germany. In a separate event, Royal Dutch Shell (NYSE: RDS-A and RDS-B) and Swiss Investor Partners Group has committed $1.5 billion to build a wind farm in the North Seas, which would power up to 825,000 homes
  • 14 states in the United States currently receive more than 10% of their power from wind as Iowa, Kansas, Oklahoma, South Dakota, and North Dakota lead the way with 37%, 36%, 31%, 30%, and 26% of power coming from wind respectively
  • The state of California passed a mandate requiring most new homes to include solar panels beginning 2020 (and an initiative to be completely devoid of fossil fuels by 2045); the states of Minnesota and New Jersey are reportedly next in line as they seek to expand solar power use as well
  • In one of the more polarizing acquisitions of the last several years, Tesla (NASDAQ: TSLA) bought solar power company SolarCity in late 2016 for a reported $2.6 billion in a bid to transform the automaker into an “energy company”
  • Big Oil has entered the renewable industry: Shell Technology Ventures, the investment arm of Royal Dutch Shell Plc (NYSE: RDS-A; RDS-B), splits its investments in both oil & gas and renewable technologies equally with the company stating that investments in renewables will increase to 60% of spending sooner than later; Chevron (NYSE: CVX) has been investing in solar, wind, and geothermal since the early 2000’s; BP (NYSE: BP) has allocated $500 million of their capital expenditure budget toward renewable energy technologies; and ExxonMobil (NYSE: XOM) is committing $1 billion annually for investments in low-carbon technologies
  • China presently has the largest capacity of wind, solar, and hydro power worldwide having reached their capacity goals years in advance. In addition to China reaching capacity sooner than planned, the country also spends the most on alternative energy compared to the rest of the world with China spending 3x more on renewable energy projects than second fiddle the United States. However, China is also the global leader in coal consumption, consuming nearly 6x as much coal as the United States.
  • Saudi Arabia has announced an initiative to invest $7 billion to ramp up renewable energy capacity as the country aims to source 10% of its power from renewable energy within the next 5 years

The Future

The world is slowly moving away from fossil fuels towards clean energy and this trend should gain more momentum over the next several years as cost reductions and alternative energy-friendly policies are instituted. Though we don’t believe the world will be running on 100% renewable energy anytime soon (probably not even this century), investment in renewables is far outpacing new investment in fossil fuels as funding for renewables hit $288 million for the year 2019, marking the 10th consecutive year of renewables receiving over $200 million of investment.

The major issues with renewables, as mentioned above, are the lack of sufficient backup storage power and the large amount of land mass required for both wind and solar energy. More efficient batteries will need to be produced to backup enough power to generate electricity during off-peak sun/wind times. It is this reason why even renewables need fossil fuels to be a consistent energy source. Though renewable sources of energy like hydro, geothermal, bioenergy, and wave power exist, both solar and wind are poised to experience the most growth.

The largest growth in the wind energy industry will come from the utilities sector, followed by industrial, commercial, and finally the residential sectors. Most of the corporations in the wind energy industry operate their wind businesses through subsidiaries (with only a few exceptions), offering investors limited direct exposure to the market. However, as the industry and revenue generated from the industry advances, the companies that maintain the largest footprints will be in a position to thrive. Solar energy will forever remain the most abundant form of energy in the world. Apart from geothermal, nuclear, hydropower, and tidal/wave power, all other forms of energy are derived from the sun. Even energy stored in the fossil fuels we’ve been using for centuries originate from sunlight. This endless amount of energy the sun has gifted us will continue to drive the demand for solar rooftop installations and concentrated solar power systems worldwide. And even with some uncertainties regarding political policy, battery efficiency, and lack of energy density, the global solar energy industry is expected to grow to a value of $422 billion by 2022, a whopping 490% increase from 2015.

Renewable Energy is set to grow over the next 30 years carving up more share of total global energy demand when compared to fossil fuels. Coal is slowly being phased out and replaced by the emergence and subsequent demand for natural gas. While renewables are increasing in both production and consumption, we suggest investors be patient and cautious with the industry as natural gas is currently gaining more traction as the energy to beat for electricity generation.

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