Is Renewable Energy a Good Investment Theme for 2022?

By Patricia Miller

Aug 17, 2021

Investors around the world are considering whether renewable energy can provide a positive impact for not only their portfolio, but also the planet.

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Investors around the world are considering whether investing in renewable energy can provide a positive impact for not only their portfolio, but also the planet.

The good news for our planet is that renewable energy technology is getting better and cheaper by the day. As a result, it’s predicted that companies, governments and investors will contribute several trillion dollars to renewable energy infrastructure over the coming decades.

According to the IEA (International Energy Agency), global renewable energy consumption will grow to 111 billion quadrillion BTUs (British Thermal Units) in 2021. That’s up from 106 quadrillion BTUs in 2020. This rise illustrates how the demand for renewable energy is growing, a trend that is expected to continue over the next few years.

Indeed, the same forecasts from the IEA suggest that total renewable energy consumption could hit 252 quadrillion BTUs by 2050. However, getting to this stage will require a tremendous amount of investment.

With all these points in mind, investors are asking is renewable energy a good investment and should I buy renewable energy stock?

Fundamentals of renewable energy stock

Competition in the renewables industry is increasing, which in turn makes it difficult for individual investors to find opportunities. There are some attractive-looking investment opportunities out there, but there’s no guarantee these businesses will be able to make a success of their technologies.

But where do you look for the best renewable energy investments?

The pandemic disrupted the power sector just like any other industry in 2020, but it wasn’t all bad news. Relative to 2019, energy demand in 2020 declined for all forms of generating capacity except renewables.

Coal, gas, nuclear, and oil demand decreased between 3% and 9%, while demand for renewables ticked up by almost 1%. These numbers appear to suggest that investors are looking past the renewables industry’s short-term headwinds and concentrating on its long-term potential.

Despite the pandemic, figures show that wind capacity additions grew 8% in 2020, and the uptake is expected to accelerate in 2021. According to IEA forecasts, generation from solar energy is expected to increase at an annual rate of 15% through 2030.

And as more and more money piles into the industry, the financing costs for renewable energy projects continue to fall.

According to research from Oxford University, investors typically require wind and solar energy projects to make returns of at least 10% to 11%, reflecting the perceived low risk of such investments. Since 2010, solar photovoltaic, onshore wind, and offshore wind financing costs have declined by 20%, 15%, and 33%, respectively.

Simultaneously, the return on investment required by investors to justify new coal projects has dramatically increased. The research from Oxford University suggests that these projects now need to earn a return of around 40% to justify construction costs.

If these trends continue, the cost of funding and building renewable energy projects could reach incredibly low levels over the next decade.

On the other hand, projects involving hydrocarbons could become prohibitively expensive. This may accelerate the adoption of renewable energy around the world.

Of course, these are only projections at this stage, but they seem to show the potential of the renewable energy industry.

What is the bull case for renewable energy stock?

A decade ago, investors shied away from costly renewable energy projects such as wind and solar farms, citing high costs and low returns. Instead of funding these projects, Wall Street invested hundreds of billions of dollars in hydrocarbon projects, such as shale oil, to help the United States achieve energy independence.

What’s more, ten years ago, ExxonMobil, the world’s largest publicly traded oil producer, was one of the world’s largest companies. Its market value topped out at $446 billion in mid-2014, the last time crude prices traded above $100 a barrel.

Today, the company is a shell of its former self. Its market capitalization has slumped to $241 billion. In comparison, the market capitalisation of electric vehicle manufacturer Tesla has surged to $702 billion.

These numbers illustrate just how quickly the world’s energy system has shifted. It appears as if this transformation is only just getting started. Based on what has happened in the industry over the past ten years, it does not seem unrealistic to say that by 2030, the energy sector could have completely changed once again.

As demand for renewable energy continues to expand over the next few decades, the sector may remain one of the market’s top growth industries. This suggests the booming market may not only lead to positive results for the planet but for investors’ portfolios as well. There are many ways investors can gain exposure to the renewable energy industry.

Investment trusts, common mutual funds, and ETFs are one route. These pooled investment vehicles allow investors to acquire a basket of stocks with exposure to renewable energy themes.

They may be the best way to invest in the industry’s growth considering how fast it is evolving and how difficult it may be to pick winners in such a rapidly developing industry.

A couple of ETF examples are iShares Global Clean Energy ETF, which has $5.6 billion of assets under management (AUM), the Invesco Solar ETF, with $3.2 billion AUM, and the First Trust NASDAQ Clean Edge Green Energy Index Fund, which has AUM of $2.7 billion.

What is the bear case for renewable energy stock?

As the electric vehicle market has picked up speed and with many car manufacturers announcing their plans to be fully electric or hybrid in the next 10 years, combined with the excitement around hydrogen fuel cell companies, the narrative on renewable energy has taken a shift.

It appears that the renewable energy market is experiencing some volatility, with many stocks taking a dip. Whether this shift in narrative will stay or blow over is yet to be seen, but developments in hydrogen fuel cell technology will certainly be a deciding factor in the future of renewable energy.

Once deemed as the future and the investment choice of 2020, renewable energy stocks seemingly appear less attractive to investors at present, but this shift could well be short-term.

Despite the change in sentiment towards renewable energy stocks, the renewable energy industry is going through a tremendous growth spurt, and money is pouring into different technologies. Trying to predict which companies and technologies will come out on top at this point is challenging.

Should I invest in renewable energy stock?

As with trading or investing in any stocks, investors will be taking an element of risk. Diversifying your portfolio and avoiding putting all your eggs in one basket or one type of renewable energy can help reduce your exposure to risk.

The future is certainly moving away from fossil fuels and renewable energy technologies are continuously improving, and while investor sentiment may not be great right now that is not to say the market will not shift in favour of renewable energy stock once again.

Observing and analysing performance of stocks will help investors make better informed decisions and the current fall in stock prices could provide a good opportunity for investors to start their renewable energy stock portfolio.

Important Notice And Disclaimer

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.