How to Invest in Renewable Energy - Beginner’s Guide
A downturn in the oil and gas industry, bigger turbines, and a robust supply-chain in the UK have all been responsible for a decrease in the costs of alternative energy. Additionally, there has been an increase in global energy demand, and with the ill-effects of climate change, experts predict that renewable energy companies in the UK will see massive growth in the coming years.
Despite Brexit, the UK is still bound by the National Climate Change Act, which demands an 80% reduction in greenhouse gas emissions by 2050. Approximately £8.4 billion will be spent on renewable projects in the UK by 2020-21 according to a report published by the Office of Budgetary Responsibility (OBR). This marks a new era for renewable energy investments in the UK, with plenty of opportunities for traders to to secure lucrative investments.
Why Invest in Renewable Energy?
Beyond the growth in the sector, why might an investor be interested in investing in renewable energy?
There are a range of reasons to consider this investment path, including:
- Ethical investing: Investment in the renewable energy sector is a great choice from the ethical standpoint. With fossil fuels rapidly depleting, and global energy demand on the rise, investing in renewable energy makes more sense than ever before. Renewables can have a far-reaching impact in terms of energy access, environment protection, and climate change.
- Speed of technological growth: Technological advancements are taking place at a rapid pace in this sector. Renewable resources are becoming increasingly reliable, efficient, and cost-effective. The UK has a target to meet 15% of its total energy requirement from greener resources. The country is also bound by the National Climate Change Act, which means that research and progress will continue in the future.
- Increase in job creation: A large number of jobs will be created globally from increased investment in this sector. Across the world, there are more than 10 million people involved in the production of renewable energy, according to an article published by the MIT Technology Review. As more rural areas adopt these sources and create infrastructure for its support, local people will be provided with much-needed income. This is a boost for the global economy.
- Positive impact on trade: Renewable energy investments impact trade in a positive way. With lower fuel imports, a country's trade balance becomes stronger. Green sources of energy can reduce the burden of debt for a country, leading to GDP growth. Moreover, the demand for renewable energy equipment and services will continue to rise, thereby boosting trade.
How to Invest in Renewable Energy
How do you get started? There are several options for investing in green energy, which vary for investors with different levels of risk appetite.
Direct Investment in Renewable Energy Projects
Let's begin with the low-risk options. Individuals and companies can now directly invest in green energy projects; often in small amounts. These are low-risk investments; solar PV projects are unlikely to go wrong once the system is installed and operational. Community solar projects are quite popular, since they are good for the local economy, providing jobs in fields such as planning, construction and maintenance.
An example of this would be renewable energy bonds. The Mid American Renewable Energy Company offered $1 billion in bonds, with an interest rate level of 5.375% to help finance its 550 Megawatt Topaz Solar Farm, situated in California. However, you should know that while a retail bond is listed and regulated in the market, a mini-bond is not.
Companies often offer debentures too. These are regulated, tradable debt assets, and are similar to bonds. You can invest in individual projects through them, and they can be held for up to 20 years. Investing in renewable energy funds is another low-risk option.
Your money will be pooled with that of many other investors to purchase high-performing stocks, which are chosen by your fund manager. The Pictet-Clean Energy Fund is an example of such an asset. Other options include BlackRock Global New Energy and Guinness Alternative Energy. Investors should note that weather elements have a huge impact on this type of investment.
Choose to Invest in Exchange Traded Funds
This is a slightly riskier approach, albeit with scope for higher returns. While industries have always invested in stocks of other related companies, the advent of ETFs has made the strategy less risky than before. ETFs function like individual stocks, but they are actually a combination of dozens of different stocks. They mimic the performance of the major markets, but at a lower holding cost compared with funds.
ETFs will provide huge diversification across multiple green energy companies in the UK. You won't have to rely on the performance of an individual stock. A drawback of this method, however, is the fact that you would be more exposed to larger renewable energy companies than the small/mid-cap ones. Some examples of renewable energy ETFs include:
- iShares Global Clean Energy UCITS ETF USD (INRG)
- Invesco Solar ETF (TAN)
- First Trust Nasdaq Clean Edge Green Energy ETF (QCLN)
Increased government endorsement and consumer acceptance will hopefully increase the value of alternative energy ETFs. If you are skeptical about them, you can always trade in ETF CFDs. If you remember, CFDs are derivatives that allow you to take positions in both rising and falling markets, without actually owning the asset.
The MetaTrader 4 Supreme Edition MT4SE platform has features for volatility protection in emerging markets like this. If you're not quite ready to trade on the live markets, you can open a risk-free Demo account instead, and test out your strategies first!
Buy Shares of Renewable Energy Companies
Moving upwards in the risk trajectory, we turn our attention to shares of individual renewable energy companies. This is for those who have a higher risk appetite. Renewable energy stocks can be highly volatile, with huge price swings occuring in a short time span. This is characteristic of niche industries like this one.
If you are up for high risk and potentially high returns, choose companies that focus entirely on green energy. Remember, no matter what level of risk you are subject to, it is always important to exercise risk management in your trading, to ensure you are effectively aware of the risks and are handling them in the best way possible.
Some examples of the largest renewable energy companies include:
- Vestas Wind Systems (VWS)
- SMA Solar Technology (S92)
- Canadian Solar Inc. (CSIQ)
- Tesla Motors Inc. (TSLA)
To tone down the risk level, you could also consider investing in share CFDs of companies that delve into other aspects of alternative energy, such as:
- General Electric (GE)
- Siemens (SIE)
- SSE PLC (SSE)
- Cree Inc. (CREE)
- PG&E Corp. (PCG)
Shares and Share CFDs are a great way to tailor your own portfolio, but they are volatile. So, ensure that you do not solely depend on them for portfolio returns.
Are There Risks Involved?
Opportunities are many, but like all investments, here too you will need to consider your risk tolerance and your investment horizon. It is an emerging sector; and many technologies are still untested. Changes in regulations can also affect your investment profile. ETFs provide instant diversification across the renewable energy sector.
Moreover, these come at a low price and involve comparatively low risk, as you're not impacted by the failure of one project or one company. ETFs do limit your exposure to larger companies, reducing your exposure to mid-sized and small companies.
Buying shares of renewable energy companies gives you the flexibility of tailoring your own portfolio. Often people find it simpler to trade shares than invest in ETFs. Shares of renewable energy companies can be more volatile, as many are niche and reliant on new technologies. It's a good idea to gain some exposure to this sector and ensure to diversify your portfolio with assets of other sectors.
As the world becomes increasingly environmentally conscious, more investments in this sector will help solve many problems that plague us today. Supporting the innovators in this field could prove to be a winning strategy, with financial rewards; not to mention the ethical considerations as well.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.