Renewable energy slowdown is more apparent than real

Thought of the day

by Chief Investment Office 18 Jan 2019

Investment in clean energy around the world fell 8% in 2018, according to data released this week from Bloomberg NEF. The decline, which took capital spending in the sector to USD 332.1 billion, was led by reductions in China, Japan, India and Germany.

But despite the discouraging headline, we believe the dollar investment data is the wrong metric by which to judge the progress of the industry. Renewable energy continues to offer attractive long-term opportunities for investors.

  1. The investment decline for 2018 largely reflects the falling cost of adding new wind and solar capacity, rather than declining activity. As Bloomberg analysts observed, cost reductions for renewable projects mean that every year the industry has to run faster to stand still in terms of money invested. In fact, the amount of new capacity added last year marginally increased. In terms of changes in real activity, there were some areas of weakness, including in China where the government reduced subsidies for solar projects. However, there were also areas of strong growth, such as the US and Europe.
  2. Technological progress has dramatically improved the economics of renewables. With falling costs and improving efficiency, solar and wind are now cost-competitive with fossil fuels. 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.
  3. Rising global electricity demand further boosts the need for investment. Due to a rising global population, the rising use of electronic devices, and urbanization, global electricity production will need to rise by about 50–60% by 2040, according to the International Energy Agency. Renewable energy can be expected to make up much of this extra capacity, given the improving economics along with public concern over air pollution and climate change in both developed and developing 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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