The lure of renewables

After years of debate over costs versus rewards, has renewable energy finally come of age? Paul Flood surveys the market landscape.

In a world increasingly focused on environmental protection and ecology, renewable energy providers can point to some recent landmark achievements.

In a small but important step forward, 2017 saw UK renewables and nuclear energy generate more power than gas and coal for the first time since records began, in a move hailed as a milestone in the decarbonisation of the British power sector.1  An unusually hot summer also saw solar energy break the UK record for weekly output in June, producing 533 gigawatt hours of power.2

Renewable energy generation costs have been falling and it has since gained major traction across a range of developed and developing markets, including the US and China. As such, many analysts and investment managers see growing potential in this area, believing the sector has reached an important, economically-attractive tipping point.

In turn, the drive to limit CO2 emissions and slow global warming via decarbonisation is an ambition of many governments and dovetails neatly with commitments forged during the 2015 Paris Agreement on climate change.

Newton Investment multi-asset manager Paul Flood says renewables offer attractive returns and diversification, but while they seem environmentally friendly, in comparison to fossil fuels, their ESG credentials still bear analysing.

Flood points to concerns about bird strikes at wind turbines and wider ecological concerns about the noise and unsightliness of some large scale renewable energy plants.3

He adds: "With wind assets there has always been concern around the impact it has on the bird population. However, most companies active in this area tend to be environmentally focused and we know of at least one which has its own onsite ornithologist. Any dead bird that is found near its wind turbines is given a post-mortem to establish its cause of death. In most cases everyday pollution is identified as the cause."

While renewable energy production is often viewed as a developed market trend, it is also growing fast in some emerging markets such as China. Although itself often seen as a major polluter, China is significantly increasing its commitment to renewables. In early 2017, it announced it would invest US$360bn in renewable energy by 2020, while scrapping plans to build 85 new coal-fired power plants. 

Flood believes renewables can offer some ESG-friendly gains in developing markets. "From an ethical standpoint we are now seeing huge projects being built in Africa, bringing electricity to many who have never had access to it before. New business models are emerging where individuals can rent the solar panels. This important plank in basic infrastructure can now be applied more cheaply and easily to many parts of the developing world," he says.

Yet for all its potential benefits, the renewables sector continues to face mixed fortunes and a range of challenges. Critics point out that wind and solar power still need the wind to blow and the sun to shine to consistently generate electricity.

Question marks also remain over the sustainability and green credentials of biomass – essentially burning wooden pellets in a controlled environment. In turn, geothermal power has proved viable in markets such as Iceland and The Philippines, but its adoption is patchy, expensive and only suitable for certain geographies.

In contrast, hydropower has been used since ancient times and to generate electricity, yet the widespread development of more innovative and complex tidal schemes has proved more problematic.

Earlier this year the UK government shelved ambitious plans to build a new £1.3bn tidal lagoon in Swansea Bay, on cost ground,4 in what some described as a "kick in the teeth" for Wales. Nevertheless, the International Hydropower Association says about US$48bn of final investment decisions were committed to hydropower projects in 2017.5

While Flood believes it is too early to commit serious investment to such projects, he does see promise in tidal schemes and points to offshore floating wind turbines as a potentially worthwhile investment in future.

However, he sees the strongest potential in existing wind and solar technology and points to falling costs making both an ever more attractive rival to fossil fuel-powered alternatives.

"An industry once dependent on subsidies is giving way to the production of unsubsidised solar energy in Spain and a significant reduction in subsidies for renewables in China. The cheaper and more efficient solar panels and wind turbines become, the more attractive this energy is to end users," he concludes.

1 FT. Most of Britain’s electricity in 2017 is low-carbon for first time. 03 January 2018.
2 Guardian. UK heatwave helps solar power to record weekly highs. 02 July 2018.
3 World Economic Forum. How China is leading the renewable energy revolution. 29 August 2017.
4 FT. UK government pulls plug on Swansea tidal lagoon project. 25 June 2018.
5 POWER. Hydropower Grows but Industry Is Changing. 07 January 2018.

Issued by BNY Mellon

For Professional Clients only.  Any views and opinions are those of the investment manager, unless otherwise noted and is not investment advice. This is not investment research or a research recommendation for regulatory purposes. For further information visit the BNY Mellon Investment Management website. INV01384-001 Exp 17 Feb 2019.