Jasmine Birtles
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Want to invest in renewable energy? Look out for these 3 risks
Karl
21st Jun 2023
With the world shifting towards ‘cleaner’ energy, it’s a near certainty that most of our power will soon be generated by renewable energy sources.
In this article we’re going to take a look at the renewable energy market, and explore whether investing in wind, solar, or hydropower is a good idea right now.
Keep on reading for all the details or click on a link below to jump straight to a specific section…
The rise of renewable energy
Solar, wind, hydropower, and geothermal are all forms of renewable energy and it’s estimated that 90% of global electricity demand could come from such sources by 2050.
While this is probably a tad unrealistic given the world’s current reliance on ‘fossil fuels’, we shouldn’t forget that the EU, UK, plus a host of other countries, are targeting ‘net zero’ carbon emissions by the middle of the century.
While the current cross-border drive to cut carbon emissions is encouraging for our planet, the transition is also rather painful. For starters 8% of your household energy bill already goes towards a ‘green levy’. Meanwhile, the transition to net zero is estimated to cost the global economy a cool $9.2 trillion (£7.2 trillion). And no, that’s not a one-off payment, but for each and every year, up to 2050!
While many feel the cost of accelerating towards green energy isn’t worth the financial pain, net zero targets are now enshrined in law in many nations. It’s now just a question of how soon it is likely to happen on a global scale.
Is it a good idea to invest in renewable energy?
As the world transitions towards renewable energy, you may feel that investing in wind, solar, or hydropower is a good idea.
After all, how many other industries are pretty much guaranteed to become more and more relevant over the next three decades or so? We can’t think of many.
Therefore if you’re interested on jumping on the renewable energy bandwagon because we’re moving towards a greener future, then nobody can really blame you for it.
While the sector might not deliver extraordinary profits, if you invest in an established, growing industry there’s always a decent chance you’ll enjoy stable and reliable returns.
As an added boon, we shouldn’t forget that demand for energy is also pretty inelastic. This is why the renewables sector might not be as impacted when the global economy suffers its next recession (and there’s likely to be a few economic collapses over the coming decades).
Besides the potential for decent financial returns, there is of course the added benefit that investing in renewable energy is good for our planet.
So, if you want to do your bit to help tackle climate change – while supporting jobs and other economic benefits in the sector – you may wish pour some of your capital into renewables.
What are the risks?
Besides the obvious risk of losing money – which applies to all forms of investing – here are three other risks to bear in mind when it comes to backing renewable energy.
1. The renewable investing hype
Unlike old-fashioned fossil fuels, renewable energy is all the range these days. In others words, putting your wealth into industries that are aiming to unleash the full benefits of sustainable energy, while making the most of existing renewable technologies is all rather… ‘cool’.
Yet in the investing world, ‘coolness’ often comes at a price.
The fact is, it’s no secret that the renewable sector is nailed on to grow over the next few years. Because of this, there’s a real risk that renewable energy stocks are overpriced right now, particularly because demand for so-called ‘ethical investments’ is currently red hot.
This is why it isn’t always a great idea to invest in sectors with a lot of hype. We can point back to the the dot-com bubble in the early 2000s for an example of how hype can skew valuations.
Of course, that’s not to say that renewable stocks are overpriced right now, or in any sort of bubble, but the risk is certainly there.
2. Net Zero could be unrealistic
Read pretty much any article about climate change or renewable energy and it won’t be long before you’ll hear about the government’s grand ambitions to reach net zero by 2050. While many feel such a goal is laudable, there’s no doubt it’s a very ambitious one.
According to the govenrment’s own figures, 78% of the energy required to provide transport, heat buildings, generate electricity and power businesses across the UK comes from fossil fuels.
Put simply, it will be a massive, massive achievement if the UK is successful at getting fossil fuel reliance down to 0%. As a result, it’s probably fair to assume that net zero is probably nothing more than a soundbite right now.
So, if you’re keen to invest in renewable energy solely because of the govenrment’s promise that it will hit net zero by 2050, you may wish to have a re-think.
In all likelihood, it will take quite a while longer to reach this target which is why there’s every chance returns from renewable investments might not be quite as juicy as many are expecting.
3. You could ‘back the wrong horse’
Renewable energy covers a host of different industries: solar, wind, geothermal, hydropower, ocean energy, bioenergy… the list goes on.
And while many predict that solar and wind are the frontrunners to lead the renewable transition, there are no guarantees that any one power source will come out on top.
This is why if you invest in renewable energy, it might be a good idea to invest in the wider industry through an ETF (more on this below), or through a handful of different firms.
Also, we also shouldn’t forget nuclear energy. While nuclear energy has a bad rep in the media – and is not officially a ‘renewable’ source of power – if it becomes more popular over the next few decades, there’s a good chance it could overshadow any renewable energy solutions. Again, this is another risk worth bearing in mind if you’re interested in clean energy stocks.
How to invest in renewable energy
If you want to invest in renewable energy, there are two ways you can go about it. You can either buy shares involved closely in the renewable energy sector. Or, you can buy an exchange-traded fund (ETF) covering the wider industry. Let’s take a closer look…
1. Buy shares in renewable energy firms
If you want to buy shares directly in firms involved in supplying or producing clean energy then you can do so via a investment broker. This is just like buying shares in any other sector.
UK-listed firms involved in clean energy include:
- Octopus Renewables Infrastructure Trust PLC
- SSE
- Greencoat UK Wind
- ITM Power
- AFC Energy
Remember, these are just a handful of firms and, if you wish, you can buy non-UK renewable stocks too. Always do you own research to determine if a company is as heavily involved in clean energy as it claims to be.
2. Buy a exchange-traded fund
Rather than backing individual firms involved in renewables, you may prefer to invest in the wider clean energy industry as whole.
One of the easiest ways to do this is to buy a renewable energy ETF. Here are some examples of renewable energy ETFs.
- iShares Global Clean Energy
- L&G Clean Energy UCITS ETF USD Acc
- Invesco Global Clean Energy UCITS ETF Acc
- Solar Energy UCITS ETF
- Global X Wind Energy ETF
Again, always do your research before choosing renewable energy investments. Also, take a look at our article that explains how to check if a fund is generally green.
And while we’re at it… do you want to learn more about investing? Why not sign up for our fortnightly MoneyMagpie Investing Newsletter. It’s free and you can unsubscribe at any time.
Disclaimer: When investing your capital is at risk. Remember, the value of any investment can both rise and fall. Always do your own research.
MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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