The Future Is Looking Green For Renewable Energy

In the past three decades, research and development in green energy has exploded, yielding hundreds of promising new technologies that can reduce our dependence on coal, oil, and natural gas. Green energy comes from sustainable sources such as sunlight, wind, rain, tides, plants, algae and geothermal heat.

These energy resources are renewable, meaning that they are naturally replenished. In contrast, fossil fuels are finite resources that take millions of years to develop and will continue to diminish with use.

Renewable energy sources also have a much smaller impact on the environment compared to fossil fuels. Fossil fuels produce pollutants such as greenhouse gases as a by-product, contributing to climate change. Gaining access to fossil fuels typically requires either mining or drilling deep into the earth, often in ecologically sensitive locations.

Green energy, however, utilizes energy sources that are readily available all over the world, including in rural and remote areas. Advances in renewable energy technologies have lowered the cost of solar panels, wind turbines and other sources of green energy, placing the ability to produce electricity in the hands of the people rather than those of oil, gas, coal and utility companies.

Green energy can supplement or replace the use of fossil fuels in all major areas of use including electricity, water heating, home appliances, and fuel for motor vehicles. Types of green energy include solar power, wind power, hydropower, geothermal energy, and biomass.

But despite this optimism for green energy, many investors still remain cautious. As the U.S. is becoming more reliant on electricity, there is still no perfect model for providing renewable energy power to meet the demand on a national scale.

The U.S. power grid is evolving to support more renewable energy and the emerging demand for power for electric vehicles is imposing intense pressure on the energy supply. Further, many climate scientists expect increases in extreme weather events, which would further test the system’s vulnerabilities. As the 2021 Texas Power Crisis suggests, major structural changes and innovations in the production of renewables are still necessary for the future of green energy.

In its newly released International Energy Outlook 2019, the U.S. Energy Information Administration (EIA) projects that world energy consumption will grow by nearly 50% between 2018 and 2050, led by Asia.

Global Primary Energy Consumption by Region (2010-2050)

President Joe Biden plans to invest $2 trillion in clean-energy initiatives over the next four years, with a loftier goal of making America a net-zero-emissions country by 2050. Just how much progress he can make remains largely up to the composition of Congress, but most analysts expect a much more accommodative Washington for green energy over the next few years.

China has now committed to reaching carbon neutrality by 2060, putting the world’s biggest market for solar and wind power on the path to ramp up installations as it begins its next five-year plan.

Bloomberg New Energy Finance’s recent report shows that the sector will receive nearly $5.1 trillion worth of investment in new power plants by 2030. Given the anticipated spending spree in the sector, investors who choose to "go green" could see their holdings grow along with the demand for energy.

There is still a long path to meet carbon-free targets globally, but decarbonation by 2050 is a global objective. Simply put, net zero carbon is an equilibrium achieved when the amount of greenhouse gas emissions that humans create is offset by the amount of carbon removed from the atmosphere, producing a balance between emissions and decarbonization. Although there is no guarantee that any of these targets can or will be met, the global commitments to decrease carbon emissions are driving further interest in renewable energy investments as governments strive to reduce their carbon footprint.

Corporations have announced their ambition to be carbon negative by 2050 by setting targets aimed at significantly reducing their absolute emissions and removing or offsetting more carbon than they emit.

Renewable energy is the cheapest source of new power generation for more than two-thirds of the world and has no fuel costs. It can reduce the economic burden of energy bills by eliminating fuel charges —especially when coupled with energy-efficiency upgrades in our homes and businesses.

When you think of clean energy, you typically think of solar and wind, which have the biggest market share by far. They also have the distinction of being two of the fastest-growing employment sectors in the past decade, according to a 2020 Deloitte report.

The International Energy Agency (IEA) projects that the total of installed wind and solar PV capacity is on track to overtake natural gas in 2023 and coal in 2024. "I see solar becoming the new king of the world's electricity markets," IEA Executive Director Fatih Birol said in a statement.

Despite the optimism for green energy, however, many investors have reasonable doubts that renewables can sufficiently meet our increasing energy demands. While the U.S. power grid is evolving to support more renewable energy, the emerging demand for power for electric vehicles is imposing intense pressure on the energy supply. Further, many climate scientists expect increases in extreme weather events, which would further test the system’s vulnerabilities--as the 2021 Texas Power Crisis suggests.

The 2021 Texas Power Crisis left millions of people in America’s second-most-populous state without power for days. A severe storm paralyzed almost every energy source, from power plants to wind turbines, because their owners had not made the investments needed to produce electricity in subfreezing temperatures.

Texas has what is known as an “energy only” market. Producers are paid only for the power they generate. If they were paid to be on standby for all weather conditions, that would encourage investments to ensure they are ready to go, electricity-market veterans say. “With everything there is a trade-off,” said Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School. “More resilience is potentially more expensive, but electricity is an essential service. These are hard decisions.”

Regardless of the model, all power markets face a common challenge: how to prepare for the possibility of extreme events that are statistically unlikely and difficult to predict. Within the competitive Texas power market, there is a strong incentive for generators to keep costs down to recoup their investments. The rapid buildout of wind and solar power, which are now among the cheapest sources of electricity, have pushed prices even lower in recent years, making it more difficult for gas and coal plants to compete and provide power when renewable energies fail or are insufficient.

Steve Wolens, a former Democratic state representative who helped lead the effort to deregulate the Texas power system, said lawmakers are ultimately responsible for stepping in to fix any problems emerging in the market they created. “Their duty is to find out why it happened and keep it from happening again, and ensure that Texas is prepared for future growth, which means enormous demands for electricity,” he said.

Major structural changes in the production of renewable energy are still necessary, including more regulatory oversight not just for Texas, but for America and the rest of the world. The ability to adapt and navigate extreme weather events along with the increasing demand for electricity will be critical for the future success of green energy.

The impact of COVID-19 and the resultant demand destruction, followed by fossil fuel divestment by international governments, financial institutions, and investors, are threatening to push oil and gas companies into bankruptcy.

Norway’s Government Pension Fund—the world’s largest sovereign wealth fund at over $1 trillion in assets—made headlines last year when it announced it would divest from oil and gas companies. What makes this particularly notable is that the Fund was set up in 1990 specifically to invest in Norway’s prolific oilfields. College endowments have followed suit, with Georgetown University and the University of California among the biggest to divest. Harvard and the Massachusetts Institute of Technology (MIT) are under considerable pressure from students, faculty, and alumni to sell all shares of fossil fuel companies. In January, BlackRock, the world’s largest fund manager, said it would begin shifting out of fossil fuels.

Private equity has been a critical partner for businesses investing in sustainable energy projects, both large and small. The industry recognizes the critical role that these investments will play in mitigating the growing effects of climate change and moving the economy in a more sustainable direction.

In 2019, Private Equity International examined how “private equity and infrastructure funds are increasingly focusing on wind, solar, and other renewable energy assets — an exciting and rapidly expanding new asset class that has the added advantage of furthering sustainability and green investing goals.”

Private equity invested more than $11 billion into renewable energy projects in 2020 alone. Copied below is a graph from Pitchbook showing how private equity has steadily increased support for renewable energy investments in the last decade.

Capital Invested & Deal Count

Some notable investors such as Blackstone, Carlye, Apollo, KKR, EnCap, and Warburg Pincus are leading this trend in responsible investing. Learn which institutional private equity funds on our platform can bring your clients exposure to renewable energy.

Hedge fund managers are also responding to growing investor demand for ESG investments, according to research by Alternative Investment Management. “The traditional risk-return equation is being rewritten to include ESG factors” said Anthony Cowell, KPMG’s head of asset management in the Cayman Islands and co-author of the report. “In the hedge fund industry, ESG has gone from being a nice-to-have to a must-have.”

The social and economic inequities magnified by the spread and treatment of Covid-19 and the global movements in support of social justice will be the catalyst; pension funds, endowments foundations and sovereign wealth funds that make up approximately 48% of hedge fund industry assets are making their voices heard on these issues. ESG principles will have a meaningful and growing impact on the companies in which hedge fund managers can invest.

It's clear that the energy transition is a structural—not cyclical—change driven by emerging technologies that are causing some older legacy technologies to become obsolete. Everyone wants clean energy, but reliability is what really counts in a crisis. As renewably sourced energy captures a larger share of the power grid, outages become inevitable. Renewable energy is great, but it may not be able to compete with traditional sources.

Texas just became the poster child for the consequences of change that happens too rapidly. The ramifications of changing our current electric grid from carbon and nuclear based sources to wind, solar and other more environmentally and politically correct sources are not esoteric; they are real, consequential, and life threatening. The events happening right now in Texas illustrate the importance of a well-rounded, multi sourced energy infrastructure that’s built out slowly, methodically, and intelligently with multiple redundancies in anticipation of extreme events.

Looking ahead, market uncertainties will undoubtedly continue and likely translate into more volatility in 2021, but the long-term technology, policy and social trends currently point toward more favorable conditions for accelerating the energy transition. We are on the cusp of a massive disruption of the energy sector, and decisions made solely by looking at historical sector performance may not yield actions that effectively manage transition risks or capture associated opportunities.

Regulatory backing, significant investor interest, competitiveness with traditional power sources, and technological innovations suggest a constructive market for clean energy IPOs in coming years. Given the anticipated financial and government backing in the sector, investors who choose to "go green" could see their holdings grow if the future of renewables can sustainably meet the ever-increasing demand for energy in the U.S. and the world.