Posted inESG

How investors are tapping into clean energy

This ETF may provide value for those looking to invest in a range of global companies which produce energy from solar, wind and other renewable sources. It fell 12% after Donald Trump won the US presidential election and although it has since returned to its pre-election price, it is still 11% cheaper relative to the iShares MSCI World ETF than it was in November last year. While recent rumours of a ‘Solar Wall’ along the US-Mexican border have helped boost the share price of US solar companies, it remains to be seen whether that actually happens. The ETF is also pretty expensive, with a total expense ratio of 0.65%.

Every day that I sit down to work, I am encircled by my mobile phone, an iPad and a laptop.

I am increasingly (and somewhat unsettlingly) reliant on these devices – all of which require power.

So, when people suggest that society’s energy demands are only ever going to increase; I’m not in much of a position to argue.

If there is anything positive to take from the covid pandemic, it is that the green revolution was ratcheted up a gear.

Governments around the world are eyeing up environmentally friendly ways of powering their nations.

But is there a single clean or alternative source of energy that can meet the needs of the world’s ever-growing population?

To find out, Expert Investor sought the views of seven investors to understand how they are tapping into the green energy transition.

Energy storage

Ben Guest, investment manager of the Gresham House Energy Storage Fund plc (GRID):

“The importance of renewable energy is well understood by environmentally conscious investors. However, the need for storing this intermittently produced energy remains underappreciated. Without the ability to store renewable energy, it is difficult to balance supply and demand effectively – meaning excess wind and solar generation produced at off-peak times of the day is essentially wasted.

“Largescale batteries using lithium-ion battery technology are a reliable, cost-effective, and proven way to store energy. Battery energy storage also provides the opportunity to buy energy when it is cheap, store it and sell it back to the market at a higher price, when demand is higher, or supply is lower – or both.

“National Grid is keen to support the greater use of batteries in Britain’s power system. Since May, it has run three successful trials to test whether batteries can better replace gas-fired electricity generation for system balancing.  The results so far are encouraging, with batteries having safely replaced gas at a fraction of the cost.

“As the UK’s largest battery storage business, GRID is well positioned to profit from the expected surge in energy storage demand.

Hydrogen

Jacob Mitchell, chief investment officer and lead portfolio manager at Antipodes Partners:

“European policymakers realise the need to push towards a more technically advanced economy and higher productivity, with a greener electricity grid and attempts to level-out geographic income inequality through investment.

“Under Europe’s current carbon emissions trading scheme, emissions must be cut by a further 27% by 2030, versus the level set prior to 2018. The latest policy hopes associated with the European Green Deal look to make the EU a net-zero continent by 2050.

“The core target of the emissions trading scheme is power generation. Already, there has been significant adoption of renewables and this will continue. Here, the game-changer for renewables is likely to be hydrogen. In our view, decarbonisation will result in a 50-year supercycle for carbon-free electricity.

“Investors should be thinking about how to position portfolios for this eventuality, as electricity increasingly replaces fossil fuel based primary energy. Currently, Antipodes global portfolios have roughly a 12.5% exposure to this investment cycle.”

Jon Mowll, responsible investment analyst at EdenTree Investment Management

“Hydrogen is now seen by many experts as crucial to a zero-carbon future. For the transport sector, the hydrogen fuel cell may have a revolutionary impact.

“Nikola Motor Company now offers three hydrogen-powered truck models, with impressive range figures of up to 1,200km. The company is also working with partners to roll out hydrogen refuelling infrastructure – one of the most significant hurdles facing hydrogen-powered road vehicles.

“Hydrogen-powered cars only take a few minutes to refill, but carmakers are almost universally pursuing the battery electric vehicle model, despite the practical and ethical challenges it presents in terms of lithium, nickel, and cobalt sourcing. In the public transport arena, the Aberdeen Hydrogen Bus Project, which comprises two European-funded initiatives, has grown to encompass a fleet of ten vehicles, which just recently racked up their millionth mile collectively.

“In a zero-carbon future, there is room for both battery-electric and hydrogen-electric modes of transport. Practicality and cost will likely determine which is used in specific contexts. For now, investment opportunities in a hydrogen economy remain thin on the ground for all but governments and private equity firms.”

Thomas Sørensen and Henning Padberg, portfolio managers of the Nordea 1 – Global Climate and Environment Fund:

“Clean hydrogen and the ‘hydrogen economy’ are gradually taking centre stage, gaining strong political and business momentum. It is also emerging as a cornerstone of many governments’ net zero emissions plans – such as the European Green Deal.

“With hydrogen gaining momentum on the back of lower renewable electricity cost, it can make the dream of carbon-free energy a reality. However, a key challenge comes from the fact hydrogen has low energy density, making long-distance transportation and storage complex and costly. But this could change in future.

“The cost of electrolyser technology, which enables hydrogen to be produced from renewable power, has fallen by 40% in the last five years in both Europe and North America. This has encouraged industries such as steel, heavy vehicles, shipping, cement, fertilisers and power generation to explore measures to replace natural gas usage.

“We have recently added hydrogen equipment supplier Chart Industries to the portfolio, as we believe it is a way to gain exposure to the emerging hydrogen opportunity without taking too much risk. Chart does not have to take a position on a particular technology, geography or application, as the producers and users of hydrogen will likely need to use Chart equipment.”

Biomass

Joe Mares, portfolio manager of the Trium ESG Emissions Impact Fund:

“We are focusing engagement on the UK utility sector ahead of a series of upcoming regulatory announcements. Drax, which has a distinct strategy from the typical UK and European utility, provides a successful case study in energy transition – switching the UK’s largest coal-fired power station to biomass over the last decade.

“It will fully complete this transition in 2021 and no longer use coal. Its biomass is sustainable, coming from waste rather than dedicated forestry. Despite this, Drax has under-performed in the utility sector due to concerns on future government regulation and subsidies for biomass.

“We are interested in the broader international adoption of this de-carbonisation model into countries with large legacy coal power stations, which need continued baseload power. We are also interested in the UK government policy related to bioenergy carbon capture storage, which provides one of the few negative emissions technologies globally. This would be a game-changer for Drax if approved by the UK government next year.”

Solar

Liam Thomas, chief investment officer of the US Solar Fund plc

“The US solar market is booming – the large land area of the US allows investors to take advantage of cheap cost of land and carry out land diversification. Although the US tax credit based on the total value solar projects is set to fall in the coming years – to 22% in 2021 and 10% from 2022, the rapidly declining cost of solar means it is cost competitive in many parts of the US, even without the tax credit.

“Given this cost-competitiveness, the country is projected to require more than $59bn for building and replacing existing solar infrastructure over the next six years. Solar energy is popular with Republican politicians as well as Democrats, who praise the environmental benefits of renewable energy.

“Once energy output is contracted to offtakers via a power purchase agreement (PPA), new solar projects will provide long-term stable cashflows to investors for the length of the contract. PPAs generally range from ten to 25 years. These longer-term PPAs reduce investors’ exposure to short-term fluctuations in power prices and allow assets to be financed with competitively priced debt over the PPA term.

“Because most US offtakers are of investment-grade quality, the steady cash flow resulting from offtake agreements is similar to the long-term income generated by an investment grade bond. With interest rates at record lows around the world, this offers a compelling alternative for income-seeking investors.”

Wind/solar

Alex Cobbold, head of equity research at Sarasin & Partners:

“The last months have been nothing short of turbulent for the oil and gas industry, with the physical producers of these commodities and its derivatives frantically reducing supply. Unlike oil, gas is not readily stored.

“As the US kickstarts its economy, we are likely to see power demand bounce back, with gas supply remaining subdued. This is negative for the US consumer, which is likely to be impacted by rising utility bills. We anticipate US renewable utilities will benefit from higher wholesale prices. In the US renewable energy sector, we have invested in NextEra and Orsted.

“These trends point to even greater support for renewable energy. Renewable assets have shown uncorrelated performance to the oil and petroleum market during the covid-19 environment. Renewable power generation remains a highly attractive investment area, despite some somewhat extended valuations.”

Kirsten Hastings

Kirsten is international editor of Expert Investor and International Adviser. She joined Last Word Media in October 2015. Kirsten has a Masters in Financial Journalism from the...

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