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Renewable energy: investment opportunities among the headwinds
The government has revealed plans to invest £110 billion in electricity generation in order to ensure we meet our 15% renewables target by 2020. Should you get involved?
By 2020 the UK needs to generate 15% of its energy from wind, wave, solar and other renewable sources. And by 2050 we need to have reduced our carbon emissions by 80%.
How can investors capitalise on these developments?
Renewable energy is the future
In a white paper earlier this month the government revealed plans to invest £110 billion – more than double the current investment – in electricity generation in order to secure affordable and low carbon electricity.
Around a quarter of the UK’s existing electricity capacity – mainly coal and nuclear – are scheduled to close within the next decade, deepening our dependence on imported energy and leaving us open to volatile fossil fuel prices, secretary of state for energy and climate change Chris Huhne said.
Given that demand for electricity is expected to steadily increase to nearly double by 2050 due to electrification of carbon intensive sectors such as transport, ‘business as usual is not therefore an option’, he warned.
The UK is miles behind the rest of the world
The UK is so far behind that it needs to play catch up very quickly, said Clare Brook, fund manager at WHEB Asset Management, which runs a sustainability fund . Developing countries such as India and China as well as parts of Europe, Germany for example, and Latin America are soaring ahead.
The UK has the capacity to produce enough offshore wind to power every single home in the country and then some. In fact according to the Department for Energy and Climate Change (DECC) we have the best wind, wave and tidal resources in Europe and largest market for offshore wind in the world. Take into account solar energy, biomass and ground and air source heat pumps, for example, and we have an abundance of green energy available to us.
‘The problem is transportation of the energy, storage and regulation of supply,’ Brook said. Huge investment still needs to be made in the infrastructure and distribution of this type of energy.
Where should you invest?
Power generation and energy efficiency – technology designed to help reduce the amount of energy we use – are the two main types of investments in the renewables sector, Gurpreet Gujral, clean tech equity analyst at Ambrian Capital, said. ‘We like certain parts of both’.
Looking beyond UK shores, Gujral said: ‘Power generation in emerging markets like India is interesting. India has a thirst for power and has introduced financial incentives to reward independent power producers'.
In the UK, however, ‘waste to energy’ power generation is one area to watch, he said. We are behind the continent in terms of recycling, Gujral explained, and increasing landfill taxes means that in three or four years companies will need to seek out cheaper alternatives for disposing waste.
On the energy efficiency side, Gujral highlighted companies in LED lighting, though warned that this sector is becoming increasingly commoditised. ‘We are seeing a lot of products from Asia which are low cost and difficult to compete with,’ he explained. Investors therefore should look at companies which target niche areas in which technology requirements are high, Gujral said. Dialight (DIA) for example, which targets specialised lighting markets that are difficult to penetrate, has performed well.
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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
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