Investing in Clean Energy: Understanding the Global Energy Transition

The State of Clean Energy Technologies

It’s hard to miss the news on renewables and other clean energy technologies today, which has ranged from unprecedented cost reductions to investments in new multibillion dollar renewable and hydrogen plants, electric vehicles, and commitments to decarbonize. For those that might have missed the larger trends, more renewables, in particular solar photovoltaics (PV) and wind, have been installed worldwide than fossil fuel power generation or nuclear plants every year for nearly the past decade. Last year alone, more than 200 gigawatts (GW) (equivalent to about 200 large scale nuclear power plants) of new renewable power was installed, and investment totaled nearly $300 billion, according to Bloomberg New Energy Finance, the International Energy Agency (IEA), and the Renewable Energy Network. Solar and wind have reached nearly two-thirds of new power added globally last year. And despite the challenges posed by the coronavirus pandemic, the economic fundamentals of renewable energy have not changed.

More renewables – in particular solar photovoltaics (PV) and wind – have been installed worldwide than fossil fuel power generation or nuclear plants every year for nearly the past decade.

Solar PV dominates in many countries (in many cases combined with storage or other clean energy sources). As the IEA recently reported in the World Energy Outlook 2020, “Solar PV is becoming the new king of electricity. Solar PV is now the cheapest source of electricity in most countries in part due to low cost financing and is set to triple before 2030 under current and proposed policies.”

The Landscape of Opportunities 

Looking forward, assessing the investment opportunities starts with an understanding of the market potential. Recent analyses indicate wind and solar PV capacity will continue to expand at more than 150 GW/year, with the potential to double annually over the next decade. Overall growth of solar PV is more than 400% by 2030 under the IEA’s net-zero emissions by 2050 scenario. For those used to evaluating energy opportunities more broadly, this growth puts renewables on course to surpass total installed capacity of natural gas and coal before 2025, as coal growth slows or decreases in select countries and as gas annual additions slow.

According to the IEA, solar PV alone will account for 60% of all renewable capacity additions through 2025, and wind will account for 30%. Our own analysis of Los Angeles’ 100% renewable energy goal indicates more than 15 GW of new renewables will be needed over the next 15 years, representing many billions of dollars of investment.  A common myth is that renewable power is problematic for power grids; while much research is needed to advance cost-effective solutions to manage the grid with 100% renewables, work over the past decades shows that the reality is that leading jurisdictions around the world regularly manage reliable power systems with annual renewable contributions approaching 50%, instantaneous contributions over 80%, and some interconnected areas above 100%. Increasingly, companies are offering smart solutions for demand management, as well as smart supply to unlock flexibility through creative business solutions that not only meet customer expectations but also offer enhanced value to energy service providers and power systems, as well as use solar and wind to produce hydrogen and other green chemicals that offer revenue diversification.

Our own analysis of Los Angeles’ 100% renewable energy goal indicates more than 15 GW of new renewables will be needed over the next 15 years, representing many billions of dollars of investment.

Policy environments, as expressed by governments and leading companies, are accelerating clean energy demand. For example, the United States, the European Union, several European countries, Japan, and South Korea have 2050 targets for net-zero emissions, and China is targeting 2060. Further, more than 250 global corporations have committed to net-zero, 100% clean or 100% renewable energy for their global operations and supply chains. And, of course, governments will be looking for ways to stimulate their economies and create jobs in the wake of the pandemic. Clean energy jobs, particularly those focused on energy efficiency and construction, are inherently high-wage, local jobs.

Considerations for Investors

On the technology front, NREL is working on a variety of new innovations in solar, storage, mobility, clean hydrogen, and many other areas. Working with startups and more than 900 partners, we focus on accelerating innovation into scalable, sustainable market solutions through programs such as the Innovation Incubator and many others.

For investors managing listed equities, the recent performance of the clean tech sector—and the broader environmental sector—offer possible insights of what’s to come. Since 2018, according to the IEA and Bloomberg, clean energy stocks have grown 2 to 2.5 times on an indexed basis, while stocks for energy overall have declined and broad market index gains have less than doubled.

Debt and project finance returns have also been robust, and while the market is anticipated to grow substantially, investors will have to be increasingly competitive to win the best risk-adjusted returns.

Since 2018, according to the IEA and Bloomberg, clean energy stocks have grown 2 to 2.5 times on an indexed basis, while stocks for energy overall have declined and broad market index gains have less than doubled.

In summary, the stars rarely align, but one might argue they have for clean energy investment today and for the coming decades. But market dynamics will no doubt evolve to uncover both unforeseen risks and new opportunities. At NREL, we continue to innovate clean energy solutions across power, mobility, buildings, fuels, and chemicals, increasingly involving big data, artificial intelligence/machine learning, and advanced computing for cybersecure, affordable, reliable, and sustainable solutions. We work with businesses and investors to bring these innovations to the market at scale as we collectively work to realize our clean energy future.