David Vetter Senior Contributor
Renewable energy investments are delivering massively better returns than
fossil fuels in the U.S., the U.K. and Europe, but despite this the total
volume of investment is still nowhere near that required to mitigate
climate change.
Those are some of the findings of new research released today by Imperial
College London and the International Energy Agency, which analyzed stock
market data to determine the rate of return on energy investments over a
five- and 10-year period.
The study found renewables investments in Germany and France yielded
returns of 178.2% over a five year period, compared with -20.7% for fossil
fuel investments. In the U.K., also over five years, investments in green
energy generated returns of 75.4% compared to just 8.8% for fossil fuels.
In the U.S., renewables yielded 200.3% returns versus 97.2% for fossil fuels.
Green energy stocks were also less volatile across the board than fossil
fuels, with such portfolios holding up well during the turmoil caused by
the pandemic, while oil and gas collapsed. Yet in the U.S., which provided
the largest data set, the average market cap in the green energy portfolio
analyzed came to less than a quarter of the average market cap for the
fossil fuel portfolio$9.89 billion for the hydrocarbons versus $2.42
billion for renewables.
Speaking to Forbes.com, Charles Donovan, director of the Centre for Climate
Finance and Investment at Imperial College and the report’s lead author,
said: “The conventional wisdom says that investing in fossil fuels is more
profitable than investing in renewable power. The conventional wisdom is
wrong.”
In spite of the chaos seen in the fossil fuel markets in recent years and
months, Donovan said that many investors were finding it hard to let go of
hydrocarbons. “Many investors are sleepwalking through a technological
disruption of the energy industry, preferring to believe in a fairyland
where upstream oil and gas projects earn big risk-adjusted returns,”
Donovan warned. “Those days are gone.”
Donovan also warned that, despite the impressive returns from renewables,
such figures had “not triggered anywhere near the level of investment
required” to decarbonize the economy and mitigate climate change.
This was a point addressed yesterday in a separate report from the IEA,
which showed total global investment in energy down 20% almost $400
billion compared with last year, largely as a result of the coronavirus
crisis. The IEA characterized the drop as “staggering in both its scale and
swiftness, with serious potential implications for energy security and
clean energy transitions.”
The IEA laid the blame for the collapse on lower demand for energy, lower
prices and a rise in non-payment of bills , which were side effects of the
pandemic.
“The crisis has brought lower emissions but for all the wrong reasons,”
said Fatih Birol, IEA’s executive director. “If we are to achieve a lasting
reduction in global emissions, then we will need to see a rapid increase in
clean energy investment.”
Indeed, even before the coronavirus, global investment in green energy was
falling well short of that necessary to hit the Paris Agreement target of
limiting global warming to within 2 degrees Celsius by 2100. In order to
achieve that, countries will need to at least double their annual
investment in renewables compared to current levels, from around $310
billion to more than $660 billion, according to the International Renewable
Energy Agency.
In answer to why investment in renewables remains relatively low despite
apparently stellar returns, the Imperial College report noted that large
asset managers and institutional investors such as pension funds required
deeper liquidity than the renewables market currently held. “It is easier
to allocate a meaningful percentage of their assets under management to
renewables if the market is deep and liquid,” the report stated.
“Currently, that is not the case.”
The authors attributed much of the uncertainty around renewables to the
market being relatively young. “It is not surprising that many investors
still consider the renewable power sector as a nascent area,” they wrote.
“There are too few pure-play companies, too little information about those
companies, and relatively short trading histories. While there is a body of
literature developing on the specific investment risk factors associated
with renewable energy, the body of empirical evidence remains limited.”
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