Investing in Renewable Energy- Benefits, Growth and Going Green

The world relies heavily on fossil fuels. From the fuel in your car to your house lighting, fossil fuel is the major contributor to this energy that you use. They are also the key drivers of climate change. Fossil fuels produce large amounts of carbon dioxide in the air and raise alarm about rising temperature levels. 

Governments worldwide are seeking ways to replace fossil fuels and have initiated investments in safer and more feasible venues for energy. Due to this, the renewable energy sector is attracting investors from all quarters of the financial markets. 

As per the Global renewable energy market outlook 2017-2025, the global renewable market sector will be around US$ 2.1 trillion by 2025¹. Industry players continue raising substantial capital to fund their green expansion plans.

But why is investing in clean and green energy significant? And is it an ideal investment for you? The article aims to describe renewable energy investment, its benefits, and strategies to upscale your investments. 

What Are Renewable Energy Investments?

Renewable energy is an energy that can substitute fossil fuels. It also comprises auxiliary technologies essential for the clean energy transition. For example, solar energy harnesses the energy from the sun using photovoltaic cells or solar thermal systems.

Renewable energy is produced using renewable sources like water, solar, and wind. They are also termed as clean energy as they do not produce pollution. One can invest in the renewable energy industry by purchasing stocks of listed companies in the renewable energy sector or companies making components and equipment for generating power using renewable sources. You can also invest in corporate bonds being issued by these companies.

Why Are Renewable Energy Investments Important?

While directly investing in the renewable energy sector is gaining traction, more options emerge to allow investors to pick alternatives for their financial portfolios. Investing in renewables is more than a simple investment.

The replenishable energy holds the potential to meet the booming energy demand and reduce fuel usage. Hence, adding clean energy to your portfolio is essential for multiple reasons:

• Flexible Energy Infrastructure: Besides boosting the economy, renewable investment provides a path towards a green, prosperous, and secure future. Sources such as wind and solar power produce clean energy.
  Therefore, the renewable energy infrastructure is flexible, resilient to climate change, and less reliant on conventional sources that may cause disruption.
• Control Climate Change: Studies by the UN claim that countries must reduce energy-related carbon emissions by 45% by 2030 and aim for substantial reductions to prevent the worst effects of climate change. 
  Renewables open doors to promising and sustainable investments, particularly in response to the mounting costs of fossil fuels. It is a low-cost solution to global energy needs and comes without compromise.
• Employment Opportunities: Countries worldwide ramp up stimulus employment packages to reflate their economy. IRENA Annual Review 2022 on Renewable Energy and Jobs shows that investment in renewables can lead to 38.2 million new jobs worldwide by 2030. Most of the job opportunities will be created within medium and small-sized businesses.

What Are The Benefits Of Renewable Energy Investments?

Renewable energy is considered a way of the future, but are you ready to invest in such projects with your funds? What exactly drives investors to financially back the renewable market? Before investing in renewable energy, let us discuss some of the benefits: 

• Financial Gains: Renewable investment can be good for the environment and your bank account. The International Energy Agency (IEA) conducted a study with Imperial College Business School's Centre for Climate to assess and review the performance of fossil fuel and renewable power portfolios over 5 and 10-year periods. The study found clean energy outperforming fossil fuels in terms of total returns. For 5 years, total returns were 186.6% and 59.3% for clean energy and fossil fuels, respectively.
• Environmental Impacts: Natural sources like wind, solar, and water generate clean and renewable energy. It is safe for the environment as there is no emission of greenhouse gases during energy production. 
  Further, the present schemes and policies need to address the impact of climate change. Renewables investment is one effective way to do your part of saving the environment.
• Diversification: Investors heavily subscribe to fossil fuels to meet high energy demands. Unsurprisingly, fossil fuels like coal, petroleum, and natural gas source almost 80% of the energy consumption, as per a report titled ‘Energy Mix’ by Hannah Ritchie and Pablo Rosa published in 2020.
  The apparent lack of a split between fossil fuels and other energy sources puts energy supply securities at risk. The investors may need to identify the right energy sources for investment. Diversification in the energy sources will allow the investors to choose the right option for their portfolio’s strength. 

Understanding The Growth Potential Of Renewable Energy Investments

Although fossil fuels remain the primary energy source, renewable energy appeared as a massive part of the energy sector. It has witnessed impressive growth in the past years.

As per the International Energy Agency, Clean Energy receives a $1.7 investment for every dollar going into fossil fuel in 2023. The reason behind it is evident. Fossil fuels are finite, non-replenishable, and accompany unpredictable costs.

The anticipation and demand for lower fossil fuel has decreased capital expenditures in oil and gas. As per Bloomberg NEF’s Energy Transition Investment Trends 2022, the global investment in transitional technologies is expected to reach $2 trillion by 2025.

The rising climate change concerns have also contributed to renewable growth as people search for alternative investment options. The financial inflows and technological advancements make it an elite alternative investment.

Scaling Up Clean Energy Via Debt Capital Markets

Strong economic growth and energy security have propelled many towards clean alternative investment. The rising capital requirements for clean energy investments have highlighted the need for capital recycling. 

However, the structural issues in the under-developed bond market pave the way for undesirable events, essentially in these investments, as they are often long-term. Investors and institutions lend out capital which gets stuck till it is paid back. 

Therefore, structured financial mechanisms, capital market tools, and risk mitigation can facilitate private capital flow to clean energy projects.

Sovereign Green Bonds 

The Government of India has announced plans to issue sovereign green bonds (SGB) to mobilise the resources for green infrastructure. The announcement came from Ms. Nirmala Sitharaman, Union Minister for Finance and Corporate Affairs, on February 1st, 2022. For this purpose, two tranches of INR 8000 crore each were raised on 25 Jan 2023 and 9 Feb 2023. The funds raised from this initiative will be utilised by the public sector aimed at lowering the carbon footprints of the economy. 

The Bottom Line

Renewable energy can contribute to achieving green growth goals. It is both worthwhile and meaningful. The renewable energy sector has a huge potential for alternative investments. To ensure that your investment in this sector will benefit the portfolio, it is essential to determine the revenue stream of the investment. It will help you evaluate options and make informed decisions.
Grip is a discovery platform for alternative investments. It simplifies the process to help you get the most out of your investments. Explore Grip today to learn more about different alternative investment options.

References:

1. Statista <https://tinyurl.com/5n8w8tkd>

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