Renewable energies have struck two blows in the war against climate change. Is it time for investors to jump aboard, and if so, how?
Good news in the war against climate change, but how can investors join the fight?
Exponential: some technologies change at an exponential rate and we are lousy at allowing for this.
What do I mean? Moore’s Law is an example of exponential change. It describes how computers double in processing capability (or at least used to double) every 18 months. Renewable energies such as solar and wind power are falling in cost at an exponential rate. So is the cost of lithium ion batteries which have fallen from $1,160 dollars per kilowatt hour in 2010 to $176 per kilowatt hour in 2018.
Bill Gates once said that we overestimate new technology in the short run, but underestimate it in the long run. If it is indeed the case that we are lousy at allowing for exponential change then I reckon we have a explanation for Bill Gates’ observation. It is simple maths, exponential means low change in the short run, big change in the long run.
Why do I say this? Because the IEA (International Energy Agency) has consistently underestimated the share that renewable energies have in the energy mix. For example, the amount of energy generated by solar in 2019 was around 18 times greater than the IEA forecast for that year back in 2006. It is three times greater than the level the IEA forecast in 2014 and even 25 per cent greater than what it forecast last year.
According to the World Energy Outlook: “As a result of continued cost reductions, solar PV becomes the most competitive source of electricity in 2020 in China and India, and largely closes the gap with other sources by 2030 in the European Union and United States. In the Stated Policies Scenario, the global average [levelised cost] of solar PV declines by about 50% from 2018 to 2030.”
Exciting so far, but I haven’t yet told you about the two victories secured by renewables in the war with climate change.
Victory number one: because of the falling cost of energy generated by renewables, global warming, without further action, will be three degree centigrade, this is less than previously predicted, or so says the IEA. This is still a dangerously high projected increase, of course, but it marks progress. It makes the war that little bit easier to win.
I reckon that as renewable energy costs fall, more battles will be won — never enough on their own, but important, nonetheless.
The second piece of good news is an odd one. It seems that climate change is making the planet windier, which in turn is decreasing the cost of generating energy from wind power.
I am not sure what to make of that second one. Are we supposed to be celebrating climate change because it makes it easier to fight climate change? But I think there is a wider point, energy generated by wind power is falling too. Furthermore, the benefits from off shore wind turbines are only just beginning to kick-in.
Don’t get me wrong, I think climate change poses an existential threat to our species, few things wind me up more than climate change denial, and yet I remain optimistic — this is a war we can win, providing we don’t carry on doing stupid things like electing leaders who are climate change deniers.
So, what about investors? What can they do?
Well, for one thing they can buy shares in the companies that are leading the fight. Tesla remains an obvious candidate.
And in the UK, from a renewable energy perspective, I am impressed with Drax.
Another option is to invest in funds that specialise in renewables or energy storage, such as the Gore Street Energy Storage Fund and Gresham House Energy Storage Fund or Greencoat Renewables, Greencoat UK Wind or the Aquila European Renewables Income trust.
Many of these funds are big dividend payers.
The new kid on the block is the Octopus Renewables Infrastructure Trust — The Sunday Times forecasts a three per cent yield in year one, rising to double that in future years.
There is one concern with many of these renewable funds, they seem to have quite high valuations, often exceeding net asset value (NAV) by quite a large margin.
So, are they over priced? Let me refer you back to the beginning of this article. Maybe, if renewable energies are falling in cost at an exponential rate, then high NAVs could be justified.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees