Clean energy is an irreversible theme arising from the climate change megatrend that will radically reshape society and the business models of the future to achieve carbon neutrality – “net zero” – by 2050, writes Lyxor’s ESG ETF Product Specialist Antonio Celeste. The long term opportunity is huge, if investors look beyond the misconceptions.
Has the Covid pandemic accelerated the transition to renewable energy?
The shift from fossil fuel-based energy towards renewables is a structural one that has developed over several years, backed by falling costs. It has certainly been accelerated by the events of 2020, during which time demand for energy generated by coal and oil fell by 8.5% and 6.7% respectively, but demand for renewable energy rose by +1%, demonstrating the sector’s resilience, even in a recession.
Ultimately, renewable energies are on a declining cost trajectory, while fossil fuels have high and fixed costs, implying that renewables will soon be cheaper than fossil fuels, which is already true in many cases, with or without disruptive global events.
If we are to achieve the ambitious goals of the Paris Agreement, to limit temperature rises to 1.5 degrees Celsius, we need investors to play a central role.
What are the main misconceptions to overcome?
Firstly, renewable energy is being adopted because it makes financial sense. Over half the coal plants operating today cost more to run than building new renewable energy infrastructure. Meanwhile, the ‘levelized cost of energy’ (LCOE), which is directly linked to the cost of building and operating an energy generator, has fallen significantly for both wind and photovoltaic solar power.
Secondly, we don’t need to ditch fossil fuel power plants immediately, and we do not yet have enough power from renewables to cover all our needs. It is, then, more effective to improve the efficiency of the existing energy model, even as we manage the transition to the low-carbon model. Many energy companies have been moving towards ‘combined-cycle’ power plants that use both a gas and a steam turbine to produce energy, which drastically cuts greenhouse emissions.
Finally, it is wrong to think that new energy relies on subsidies. New energy has developed to such an extent that subsidies are no longer needed in most parts of the world, and the feed-in tariff system used by European countries to accelerate investment into new energy technology has largely come to an end. None of this would be possible unless new energy was inexpensive, reliable and profitable.
How can investors get exposure to new energy?
ETFs, investment vehicles that allow for rules-based and transparent selection, are increasingly the vehicle of choice for climate-conscious investors looking to invest in companies that are driving innovating in renewable and green energy solutions. These ETFs track a wide spectrum of companies at the leading edge of innovation.
For example, Nordic energy companies are pioneering a broad move away from fossil fuels to renewables, especially wind, capitalising on soaring demand for clean energy needs in Europe due to the emission reduction efforts in line with the Paris Agreement.
Other companies are innovating in the “distributed energy” model of global decentralised electricity production close to the point of consumption. This model will have a huge impact on the efficiency of renewables, especially when they are coupled with innovative alternatives to battery storage, such as “green hydrogen” fuel cells.
Significant headway is also being made in solutions that reduce energy consumption and improve efficiency, such as installing or retro-fitting of heat pumps and solar cells in private homes and public buildings, improving insulation, or designing more energy-efficient cars.
These are just a few examples of how companies are working towards building a cleaner future. At Lyxor, we believe that the emergence of a more sustainable economy, while it will take time, is inevitable and that investors will play a key role in the low carbon transition.