Clean energy purchases by firms should fuel returns

Thought of the day

by Chief Investment Office 04 Feb 2019

Tech giant Google signed long-term contracts to buy 547 megawatts of renewable energy in January alone, the largest commitment of any company worldwide. While that was almost five times more than second-placed Vale for the month, more businesses are stepping up their commitment to clean energy. Last year corporate purchases hit a record 13.4 gigawatts, according to Bloomberg.

This corporate drive towards green energy is just one of several forces that we believe will make renewable energy an attractive theme for long-term investors.

  • The economics of renewables have been improving relative to fossil fuels, largely due to technological innovation. More than two-thirds of global electricity production still depends on coal, gas and oil. With falling costs and improving efficiency, solar and wind are now cost-competitive with coal and even natural gas. In some markets they are already the cheapest way of producing electricity. Depending on the assumed utilization rate, the cost for wind- or solar-generated electricity in Europe is less than half that of coal, having fallen by 50% and 70%, respectively, since 2009. As a result, we expect wind, solar and hydro power to continue to attract investment and expand market share. Cumulative investment in renewables is forecast to exceed USD 9 trillion by 2050.
  • The political commitment to reducing air pollution and greenhouse gas emissions has been increasing. The German government recently set the goal of phasing out coal-powered power stations entirely by 2038 – while acknowledging some flexibility may be needed on timing. And China expanded its renewable power capacity by 12% in 2018, and clean energy now accounts for 38% of the nation's total installed power capacity. While the US federal government has been less enthusiastic recently in promoting green energy, many of the 50 US states have pressed ahead with rules to favor clean fuel. South Dakota, for example, now derives close to a third of its electric power from wind turbines.
  • And global energy demand continues to grow. This is partly due to the rising global population, which the UN expects to swell from 7.6 billion people today to around 10 billion in 2050. Meanwhile, per capita energy consumption is rising alongside technological progress. Every step forward in science and technology requires an energy source. And energy consumption accelerates particularly rapidly as prosperity spreads and lifestyles improve in emerging nations.So we believe investors should consider long-term investments in companies exposed to renewable energy, including operators, developers and manufacturers. From today's market perspective, we see the greatest potential in certain project developers in the utility sector and wind turbine manufacturers. For more details, please see our Renewables Longer Term Investment theme.

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