Dr. Samuel Barbosa Da Cunha, CEO and chairman at Bar Trading Japan, recently explained why renewable energy is the future for investors looking for higher yields and a sustainable market.
Across the UK, the U.S. and in Europe investing in renewable energy is currently delivering much better returns than fossil fuels. This is according to a study by the International Energy Agency and Imperial College London that analyzed stock market data to come up with rates of return over a ten year period.
However, the level of investment is still too low to offset the damage being caused by climate change. This is despite the fact that investing in green energy stocks is far less volatile than in fossil fuels. Renewables have held up remarkably well even during the pandemic, compared with the near total collapse of oil and gas.
Investing in renewable energy offers demonstrably higher yields
The study examined different regions around the world and the kinds of returns investors can expect from investing in renewables. In France and Germany, investors in renewable energy can expect returns of 178.2% over five years. This is particularly impressive when compared with 20.7% over the corresponding time period for fossil fuel investments.
For the UK, the data shows that over the five years investments in green energy gave returns of 75.4%, compared with a tiny 8.8% for fossil fuel investments. In the US, renewables investing yielded 200.3% compared with a yield of 97.2% for fossil fuels. This data seems to make a clear case for investing in renewables, but the study also shows that the level of investment in this sector is relatively low.
According to the director of the Centre for Climate Finance and Investment, Charles Donovan, this is largely down to traditional thinking. He says that the conventional stance among investors still favors fossil fuels as more profitable than investing in renewables. He also says that this thinking is incorrect.
I think some of the reluctance to invest in renewables is a kind of denial among some investors. Even though recent months – and even years – have shown just how volatile and unstable fossil fuel markets really are in the 21st century, there appears to be a reluctance to move away from this sector. The reality is, of course, that the days of automatically risk-free big returns from investing in gas and oil are over.
Investing in renewables must double to offset climate change
In order to properly mitigate climate change and reach de-carbonization goals, a much higher level of investment in renewables is needed. A global report from the IEA shows that the total investment in energy in 2020 is down by 20% on last year. This is obviously down to the COVID-19 pandemic and the IEA says that this sharp fall is “staggering in both its scale and swiftness and has serious potential implications for clean energy transitions.”
This fall in energy investment is because of various pandemic side effects, including a lower general demand, an increase in bills not being paid and lower prices. So, while the pandemic has resulted in lower emissions, it’s not for the kind of reasons that will maintain this long-term. In order to reduce global emissions in a meaningful and lasting way, there must be a sharp uptick in investment in clean energy.
Even before COVID-19, the level of global investment in renewables was nowhere near the target set by the Paris Agreement to reduce global warming to within 2 degrees (Celsius) by the year 2100. What must countries do to get close to this target? The International Renewable Energy Agency says that if countries at a minimum double their annual investment every year then this target is potentially achievable.
Why are some investors reluctant to back renewables?
So, why are renewable investments still much lower than they should be, even though they can give higher returns than fossil fuels? According to Imperial College, it’s down to the biggest asset managers wanting deeper liquidity than the market offers. In other words, investing in renewables is still a relatively new market and investors are still cautious.
It’s now time for investors to shed this caution and invest more in renewables. The sector is predicted to be the fastest growing source of energy over the next two decades. The market is further boosted by the costs of solar and wind power falling and coal becoming less popular. It now costs less to generate electricity from offshore wind farms than through nuclear energy for the first time ever.
If we look at figures for the UK, we see that in 2007, renewable energy accounted for 23% of the country’s capacity to generate power. By 2017, this reached more than 60% and recent figures from the National Grid show that approximately 50% of the UK’s electricity is generated by non-fossil fuels. At the same time, global coal use has flattened out. By 2040, the coal share of total energy consumption at a global level will decline to 22% from 27% in 2015.
All of this is happening alongside a consistently rising demand for energy around the world. This is down to the rapid growth of emerging economies in India and China. Over the next two decades, globally we’ll be using almost 40% more energy than today. This means fossil fuels are simply not sustainable and the future must lie within renewables.
Japan commits to push renewables and increase investment
Here in Japan, there has been a renewed commitment by the country to invest more than $100 billion in solar and wind power generation over the next ten years. Japan’s latest Strategic Energy Plan says that the country aims to generate 27% of its electricity from renewables. In 2019, they reached 19%, with 8% directly from solar and wind power generation.
In many ways, the next ten years is about balancing the growth of renewable energy to reach the vitally important global goals. But at the same time the sector needs to ensure that the consumer and end-user bills remain relatively stable. In Japan, the costs for supplying power have fallen by 15% since 2019 due to crashing oil prices and the pandemic. This should help the country double the generation of power from solar and wind sources to 18% by 2030 without adversely affecting consumer bills.
Currently, coal powers around 33% of power used in Japan, but the recent decrease in energy demands means it will shift away from power generated by coal. According to GlobalData analysts, by 2030 coal will be responsible for 26% of Japan’s power. The Government in Japan is going to shut down all low-efficient coal plants, which will leave just 10% of its existing number of plants. The Government has also pledged to drop support for any overseas coal projects.
Globally, investors keen to move into renewable energy should factor in that this is still an emerging sector. Some of the technology used to create green energy is still in its early stages and needs development. It’s a sector without complete certainty, but it’s also a sector that gives increasingly attractive yields and is fast becoming the only option for a sustainable future.