Renewable energy is derived from sources that are naturally replenished, and can therefore continue to generate electricity subject to natural conditions. It differs from sources of energy that are finite and will eventually run out, led by fossil fuels, which cannot be replenished once extracted.
Sources of renewable energy
There are two ways to invest in renewable energy: either by buying the equities or bonds of the electricity or utility companies supplying the energy, or of the companies making components for the equipment that is needed to create power. This can be done through strategies such as the RobecoSAM Smart Energy and Smart Mobility strategy, which specifically target this sector.
There are five principal sources of renewable energy:
- Hydroelectric power is the oldest form of renewable energy, dating back to pre-Roman times, when the water wheel was used to turn gears that could grind corn. It remains the most common renewable source, in use industrially since the 19th century. Water power is usually harnessed by dams across rivers. The world’s largest hydroelectric plan is the Three Gorges dam complex in China, which can generate 22.5 gigawatts of electricity – equivalent to 40 average-sized coal-fired power stations. However, they also come with concerns over environmental damage and human rights violations, and have been blamed for diverting river systems.
- Wind power is harnessed by turbines that are mainly laid out in ‘wind farms’, comprising hundreds of machines – many of which are offshore. Some turbines are now the size of skyscrapers, while large-scale wind farms are capable of generating enough electricity to power entire cities. The world’s largest wind farm at Gansu in China has 7,000 turbines that can generate 20 gigawatts of electricity.
- Solar power is captured by photovoltaic panels, which convert the sun’s rays into heat. They rely on light refraction, so they don’t necessarily need the sun to be shining brightly to work. The world’s largest solar park at Jodhpur in India is spread across 40 square kilometers and can generate 2.2 gigawatts of electricity.
- Biomass power is generated by burning biological materials that are either living or decaying, led by wood, plant, forest residues and compost material. It is either burnt in power stations or converted into biofuels such as ethanol, which can power normal internal combustion engines. Some crops such as rapeseed are specifically grown as biofuels. Biomass is not considered as environmentally friendly as other renewable sources since its burning generates greenhouse gases. Many coal-fired plants such as the giant 4 gigawatt Drax complex in the UK are being converted to biomass in order to reduce emissions.
- Geothermal power is harnessed from the Earth’s natural sources of heat, led by volcanic activity. It is the source of 30% of all electricity power in Iceland, which taps into thermal
- springs heated by molten rock lying thousands of meters below the surface. However, this form of renewable energy is restricted to areas with volcanic sources, and generates only about 14 gigawatts of power globally each year.
Why invest in renewable energy?
These are some of the strongest reasons for investing in renewable energy from different sources:
- It is ethical and offers the opportunity to invest in line with your values.
- The sector is at the forefront of technological development. More efficient solar cells, using a structure called a “perovskite”, is just one example of the cutting-edge research that is leading to lucrative breakthroughs in increasing generation capacity.
- It benefits from worldwide government support, including pledges from many countries to reduce their carbon footprints – requiring greater use of renewable energy.
- Renewable energy could boost the economy by creating jobs in rural areas and lowering fuel imports.
How to invest in renewable energy
There are several ways to invest in renewable energy. These range from buying shares in individual companies to investing in funds where the returns replicate the performance of a specialist stock market index related to clean energy.
Some of the possibilities for investment are as follows:
1. Direct investment in renewable energy projects
Taking a stake in a new wind farm or solar energy project offers a very clear link between your money and the benefits it provides.
Ethical finance firms such as Abundance and Triodes offer investors a chance to fund developments such as solar panels for schools or ground-mounted solar farms.
These tend to be very long-term energy investments. And because they involve putting your money into one project, rather than spreading it around, you take the risk of not getting your money back if the project fails.
Some of these investments can be held in an ISA so that the returns are tax free.
Before you invest in a project, make sure that the firm you invest through is regulated by the Financial Conduct Authority (FCA). This gives you some protection against misspelling.
You can check that a company is authorized on the FCA’s financial services register, using the address and name of the firm’s registered office.
2. Investment in exchange-traded funds
Exchange-traded funds (ETFs) mimic the price movement of certain baskets of stocks, such as the FTSE 100. They allow you to gain exposure to a diverse portfolio of stocks and are also very liquid, meaning you can buy and sell them easily.
In the renewable energy sector, there are ETFs that track a number of indices such as:
- The S&P Global Clean Energy index, which consists of a basket of clean energy stocks from around the world
- The Nasdaq Clean Edge Green Energy index, whose 50-plus constituent companies, including Tesla, are publicly traded in the US.
While ETFs can be a very easy way to get exposure to these types of companies, it is important to understand what the charges are and exactly what the ETF is tracking before you invest.
Some ETFs own the stocks they track (physically-backed ETFs) while others are what are known as “synthetic” ETFs. These may not track an index exactly as they rely on financial instruments and a number of counterparties to try to replicate performance.
Your own individual risk tolerance and view of fund charges will determine what you are comfortable with in this case.
3. Buying renewable energy stocks
Investing in renewable energy in individual shares is another way to get exposure to this sector. These may be companies that produce energy via wind turbines or solar cells, or they may make the metals and other commodities needed to ensure that these products can be developed.
Buying stakes in companies listed on the stock market is relatively easy, and they are easy to sell again too. You can also invest within your stocks and shares ISA.
However, they should be seen as a long-term investment and it is also important not to put all your eggs in one basket because the fortunes and share prices of individual companies can be volatile.
Instead, they should be part of a diversified portfolio so that you spread your risk.
Shares in companies can go down as well as up. So ensure you read a company’s balance sheet and understand the risks before you invest.
Investing money in renewable energy can be one of the many ways to protect our planet from the ravages of climate change. But we often forget that where we invest our money can make a difference.