Refreshing the case for renewable energy

Energy-related CO₂ emissions rose in 2023, according to data from the International Energy Agency (IEA)¹. However, thanks to the increased use of solar, wind, nuclear and EVs, emissions rose at a slower pace than in 2022. The report pointed out that the situation could have been even better had it not been for a short-term increase in fossil fuel demand to compensate for last year’s decline in hydro power generation due to drought. However, the case for clean energy isn’t just about reducing emissions. The real story is about diversifying our sources of energy, which features the development of new technologies that can help drive efficiency gains, and that make sound economic sense.

What’s driving the advancement?

Harvesting the planet’s natural power is certainly not a new concept; people have been doing it for centuries. What’s changed since the more primitive applications is the efficiency with which wind, solar, hydro and geothermal energy can be captured and converted into usable power. Most of the notable advances have occurred in the past couple of decades, but global demand requires much more to be done, which makes renewable energy a compelling long-term theme for today’s investors.

Governments across the globe have committed to reducing their amount of carbon emissions. Their plans involve the transition from being entirely reliant on fossil fuels (coal, oil and gas) to generating more of their power requirements from renewable energy. Most countries need to accelerate their efforts between now and 2050 to reach the goals they’ve set, presenting a range of companies with compelling growth prospects and investors with long-term investment opportunities.

Review of 2023

Last year saw almost a 50% increase in global renewable energy capacity, with three-quarters of this being new solar installations². China led the way, while Europe, the US and Brazil also recorded new highs in terms of the amount of renewable energy capacity added in any one year. Much more needs to be done in a relatively short space of time. UN members attending the Climate Summit in Dubai at the end of last year agreed to treble global renewable energy capacity and double energy efficiency improvements by 2030, compared with 2022.

It’s not all a political game

Economic improvements make the story even more compelling. In some countries, electricity generated from either large-scale wind or solar farms is now more cost-effective than new power plants running on the cheapest fossil fuel available. Cost improvements and efficiency gains will continue not only to these but to other clean energy technologies crucial for decarbonisation.

Costs for Solar PV declined by 88% between 2010 and 2022

Energy independence and personal freedom are also supportive of renewable energy. Although most of the electricity harvested from the sun, wind and other natural sources will be fed into the grid, households and businesses now have the opportunity to generate electricity for their own consumption through the installation of solar panels or wind turbines on their property.

Sales of electric vehicles (EVs) have slowed of late but, longer-term, should resume an upward trajectory as unit costs come down and as improvements are made to battery technology and infrastructure such as fast-charge locations. The EV market is perhaps the clearest example of where we are now versus where we need to get to in a fairly short time period. According to the International Energy Agency (IEA), EVs could be 40% of car sales in 2030 compared to just 15% now³.

A recent survey conducted by Bloomberg Intelligence (BI)⁴ found a sizable disconnect between the current intentions of car-buyers in Europe and the picture painted by the IEA and others. Only 18% of the survey respondents who intend to buy a new car in the next 12 months currently favour an EV. A lack of charging stations, the limited range many EVs offer and currently high prices are what potential buyers said make them reluctant to purchase an EV.

… which brings us to the major point

Ever since 2015, when world leaders gathered in Paris for the ground-breaking summit on climate change, most of the external communications have been focused on telling everyone we must save the planet. The reality is that electric power grids, much less the number of charging stations, are woefully inadequate to support the IEA’s outlook for EVs. Many of the core components are already in place, including the economic viability of solar and wind power at scale, but much more needs to be accomplished especially on the infrastructure front.

If consumers are reluctant to embrace clean energy technology due to practical issues, which is what it seems, we can reasonably expect to see increased demand once those issues are addressed.

What else needs to be done?

Wind and solar are both at a more mature stage of their development compared to some newer technologies, but even these already-economical energy sources still have room to improve. The photovoltaic (PV) cells used in modern solar panels currently convert only 15-30% of total solar energy into usable electricity, so there is plenty of scope to make them more efficient. Next generation panels could involve using material other than silicon or in tandem with it, with testing currently being conducted on the commercial viability of perovskite-silicon tandem solar cells.

Tracking equipment can be installed to increase the yield of a solar array, although typically they are only suitable for ground-mounted systems. When installed, the panels track the sun’s movement across the sky throughout the day, so they capture more of the sunlight than fixed-position panels. Solar tracking is more expensive than fixed panels, both upfront and in maintenance, but if costs were to come down, they may be worthwhile especially in higher northern latitudes where the greatest productivity gains are possible.   

Energy storage is another area that needs continual improvement. The biggest limitation to the two most widely used renewable energy technologies is that they only work when it’s sunny or windy. You need a way to store that energy so that it’s available for use on-demand 24/7, 365 days a year. With regards to wind technology especially, reliability can be an issue and this needs to be addressed so that turbines continue to work during extreme weather events, particularly during the harshest winter months when, not by coincidence, consumer needs for electricity are typically high.    

Hydrogen could have a big future

We need better solutions for other energy use-cases where electrification is either not possible or is an inefficient replacement for fossil fuels. A good example is long-haul transportation, whether through the air, land or sea. Heating is another example. Hydrogen power is a possible low or even zero carbon emitting solution, but there are obstacles to overcome.  Transportation and storage infrastructure will be needed to broaden out the usage of hydrogen power. 

Hydrogen can be produced in different ways, and they are colour-coded based on the type of energy used in the process. Green hydrogen uses renewable energy such as solar or wind power in an electrolysis process to split water into individual hydrogen and oxygen components, making it effectively a zero-carbon energy source. Unfortunately, green hydrogen is not yet economical to use in wide-scale applications, and there is little being produced at this time. Expect this to change. 

Blue hydrogen is the next-best choice in terms of carbon emissions. It uses natural gas to produce hydrogen in a process known as steam-methane reformation, with the CO₂ emitted in the process captured and stored safely (CCS). Grey hydrogen has a similar process using natural gas but doesn’t include CCS and, so, emits more carbon into the atmosphere. Various other categories include brown hydrogen (using coal) and pink hydrogen (using nuclear power).

What are the key risks to the outlook?

Economics and politics pose arguably the biggest threats to the clean energy transition. Rising finance costs, driven by higher interest rates around the globe, have resulted in some projects being postponed, scaled back or even cancelled. The Fed, ECB and Bank of England are among the central banks expected to begin cutting interest rates as soon as domestic factors allow. Sticky inflation is currently the main impediment to any Fed rate cut, but a weakening US economy and softening labour market could become more of a factor in the committee’s decision-making process.

Political risks in the near-term would appear to be greatest in the event of a Trump presidential victory in the November election. Biden threatened to end all drilling when he took office in 2021, which sent oil and gas prices skyrocketing, while Trump sees the need for fossil fuels until at least better solutions are available. Reality is probably somewhere in the middle, with an acceleration in the transition to renewable energy but encouraging the use of the cleanest forms of fossil fuels where needed. In other words, we could see fossil fuels move from being primary energy sources to playing more of a secondary role in many countries, possibly augmenting capacity supplied by renewable energy sources.   

How to gain exposure to the clean energy theme

Investors who want to gain exposure to opportunities within the clean energy space have a variety of choices available with ETFs. They can choose an ETF that provides broad exposure across the entire clean energy ecosystem or one that focuses on one specific technology such as solar or hydrogen.