Photo: Kenueone from Pixabay
Investors in renewable power continue to outpace fossil fuel across the globe, according to the Imperial College and IEA. Total return has been 367% higher over the last ten years.
The investment case for green energy is clear and the global renewables portfolio is less correlated to the broader market than the global fossil fuel portfolio, especially so since the start of the economic downturn caused by the coronavirus pandemic, a report revealed. The Centre for Climate Finance and Investment at Imperial College Business School of London and the International Energy Agency found the ratio of risk and return for renewable power is superior in both typical market conditions and in crisis.
Profits from green electricity were 367% higher than from fossil fuels in the last ten years, the authors said. At the same time, annualized volatility (a measure of investment risk) for renewable power was lower than for fossil fuels in the global and advanced economies, but somewhat higher in China and in emerging markets and developing economies.
Energy companies should provide more data on their activities in green energy
The document examines the performance of publicly traded renewable energy and fossil fuel companies. Unfortunately, some of the largest renewables developers are not included due to the dilutive impact of their non-renewables activities, so the report highlights the need for standardized data and information on divisions within firms.
Producers of electricity from renewable sources have recently been flocking to stock markets to raise funds
The authors also concluded that there are no tools in the market for investors which would be equivalent to the portfolios developed for the purpose of the study. According to the document, the recent spike in initial public offerings appears to be a logical reaction to increasing investor demand for exposure to renewables.
More investment is necessary to catch up with demand
Under any scenario, energy investments will need to rise from 2020 levels to meet growing demand, it adds and points to growing evidence of the affordability of a transition away from reliance on fossil fuel for power generation.
There is growing evidence of the affordability of a transition away from reliance on fossil fuel
“Our research demonstrates that all over the world renewable power has outperformed fossil fuels. It’s been the same story for more than a decade, yet total investment is still lagging. National regulators, particularly in the United States, must get to work on the reforms needed to level the playing field for clean energy investors,” said Charles Donovan, Executive Director of the Centre for Climate Finance & Investment at Imperial College Business School.
Of note, a coalition of environmentalist organizations have just revealed in a report that the 60 largest banks on the planet still financed fossil fuel companies with USD 3.8 trillion from 2016 through last year, peaking in 2019 with USD 824 billion.
Internal rates of return (IRRs) – the standard commercial measure of an investment’s profitability – are around 15% to 20% on hydrocarbons, or higher. Typical IRRs on renewables today are around 5% to 6%.
That’s a major problem that’s going to require a paradigm shift level of change.
One could ‘pain’ the hydrocarbon industry to transition i.e. add a massive carbon tax that reduces the logic of following the IIR. Or hit their investors who strive for the better rate of return with a carbon tax on dividends .
Or maybe a carrot. Encourage via funding, tax breaks and the like for a transition and hard target approach i.e. if you miss the 2035 target you get hit for x% charge.
I’m sure there are many options, all very MECE but its quite a Fundamental challenge to say we want you to do something that’s inherently far less lucrative than what you’re currently doing. And sorry just because it’s the right thing to do just won’t cut it