Train passing before wind turbines

Resilient renewables a top pick for investors

The global pandemic has encouraged investment in renewable energy, but is this only a trend?

The global pandemic has encouraged investment in renewable energy, but is this only a trend?

Renewable energy has been one of the few winners from the global economic turbulence precipitated by the coronavirus pandemic. There was an uptick in talk about the need to switch to greener power generation options and, as investors dropped traditional energy stocks, renewable energy proved a consistently attractive alternative. 

Governments helped this wave of interest by putting green investments at the heart of economic recovery packages. This moment is a “unique opportunity to boost economic growth, create millions of jobs and put global greenhouse gas emissions into structural decline,” according to an October 2020 Wärtsilä report. 

However, experts caution that there remains much more to be done before renewables become the norm. 

“This is an opportunity for us to take a pause and think about rebuilding because what Covid-19 has shown us is that power systems can take a lot of renewables. However, it’s important that the system is flexible enough to maximise their potential,” says Sushil Purohit, President of Wärtsilä Energy.

Hot investment

A glance at the stock price of companies with major exposure to renewable reveals the sector’s good health. Danish power company Ørsted, which supplies windfarms, has seen its share price climb by as much as 55 percent so far this year, while shares in Spain’s Iberdrola, another important player in the offshore-wind power market, have risen almost 23 percent. 

Institutional investors have flocked to companies like these because they were relatively unaffected by the crisis, according to Andrea Carzana, European Equities Portfolio Manager at Columbia Threadneedle Investments. 

“It’s all about resiliency,” says Carzana. “There was no big delay in the plans of these companies to expand renewables, so, fundamentally, they have seen very little impact on their revenue and on their growth.” This resiliency has been evident across the renewable sector, from wind power to solar — and everything in between.

At the same time as this boom in renewable stocks, many energy companies working in oil and gas have seen their shares take a steady nosedive — the stock prices of oil major BP and Royal Dutch Shell both fell as much as 60 percent in the first ten months of 2020. “Investing is always a relative game,” says Carzana.

Cheaper than ever

The pandemic has drawn attention to the increasing commercial viability of renewables as — in many countries — the cost of alternative energy is now below that of traditional power. 

A United Nations report published in June revealed that technology improvements, economies of scale and competition means the price of wind and solar electricity continues to fall. For example, there was an 83 percent drop in the cost of electricity produced from new solar photovoltaic plants in the second half of 2019. 

While the report pointed out that overall investment in new renewable energy development has been falling amid the economic shock of the pandemic, the authors underlined that this contraction was less severe than for non-renewables. They also believe that the economic turbulence means governments now have a unique chance to phase-out polluting processes. 

“The reason renewable stocks became so successful this year is because they are no longer dependent on financial support,” says Carzana. “In most countries, renewable technologies are now the most cost-effective way of generating electricity. As demand goes up and old technology generation closes, the new capacity will support renewable.”

Green Deal 

Perhaps the biggest new asset for renewables has been government stimulus packages designed to aid battered economies, and a renewed focus on the European Union’s pioneering Green Deal that looks set to enshrine in law the goal to reach net zero emissions by 2050.

“It’s an exciting time,” says Purohit. “I really like the way the European Green Deal has approached this, and I think it will really have a significant impact on how the renewable investments will go forward.”

Alongside the Green Deal, governments have included aid for renewables in packages designed to kick-start flagging economies. In July, EU member states agreed a recovery deal that includes 550 billion euros for green projects over 7 years — the largest climate pledge ever made. 

State handouts will remain an important part of sustaining investor interest in renewables in the decades to come, according to Carzana. The Green deal is “one of the biggest reasons why renewables have been so successful in recent years,” he says. “Most important from a longer-term perspective is what governments have put in place to fight COVID and accelerate the move towards a more sustainable economy.” 

Renewable recovery

Many experts point out that the current economic problems, which do not look likely to end anytime soon, are an opportunity for governments to go much further in the battle to reduce climate change and invest massively in renewables. 

As well as the environmental impact, there is evidence that such an approach would also have economic and health benefits. A recent report by Wärtsilä states that up to 500,000 jobs could be created in the US if funds allocated to legacy fossil fuels were switched to high-renewable power systems, while there would be 120,000 new jobs in the UK if private funds are leveraged toward renewables. The International Renewable Energy Agency (IRENA) estimates that transforming energy systems based on renewables could lift global GDP by $98 trillion by 2050.

The pandemic has also focused attention on air pollution and its role in fostering respiratory illnesses that make people more vulnerable to COVID-19.

For many, the pandemic is nothing less than a unique opportunity to re-think our economic priorities. “It’s important to take a pause and think about how we rebuild the world,” says Purohit. “Do we want to rebuild by putting money into an old way of doing things, or should we be investing in renewable capacity and flexible generation to enable renewables? We will only get one chance, let’s get it right."

Written by
Howard Amos