BNP AM

The official blog of BNP Paribas Asset Management

Clean energy investment: three myths to be aware of

When it comes to renewable energy, many investors are being put off by three myths that could lead them to miss out on the opportunities presented by a revolution in energy generation. That’s the view in a recent paper from David Richardson of Impax Asset Management, BNPP IP’s environmental market specialist partner.

When it comes to renewable energy, many investors are being put off by three myths that could lead them to miss out on the opportunities presented by a revolution in energy generation. That’s the view in a recent paper from David Richardson of Impax Asset Management, BNPP IP’s environmental market specialist partner.

Myth 1

Renewable energy is uncompetitive and depends on government subsidies to compete with traditional fossil fuel generation.

This assertion obscures a wider truth: almost all energy is subsidised in one way or another. The International Energy Agency has calculated that global oil, gas and coal generation was subsidised to the tune of USD 550 billion in 2013, compared with just USD 120 billion for renewables[1]. The International Monetary Fund says fossil fuel subsidies cost much more[2] – as much as USD 1.9 trillion a year if you include the failure of governments to price and tax fossil fuels to take into account the environmental and climate damage they cause.

Myth 2

Renewable energy projects are more vulnerable than other infrastructure projects to changes in government policy

The perception that renewable energy projects are more vulnerable is false.  As technology costs fall, unsubsidised renewable power systems are becoming directly cost competitive in major markets.  As that happens, the valuations of listed renewable energy companies – whether equipment makers, project developers or the projects themselves – look set to soar, and investors in public equities might be well advised to buy into the sector early.

Where longer term subsidies persist, governments can, of course, find ways to renege on these deals and expropriate from investors.  However, as we have seen in Spain, it would do so at the risk of permanently discouraging further investment.

Myth 3

Falling oil prices have hit the renewables market hard

This myth has deep roots linked to the 1980s rout in the oil market hitting a nascent alternative energy sector that had grown rapidly in response to the two oil shocks of the 1970s. Back then the relationship between the oil price and the price of electrical power was much closer. Now, oil accounts for just 5% of power generated worldwide, compared with 22% for renewables[3].

Many investors with long memories saw the oil price tumble in the second half of 2014 and rushed for the exit. In March 2015, some benchmark solar companies were trading 30% below their mid-2014 peaks[4].  Yet this misperception about the relationship between oil prices and renewables provides a compelling investment opportunity – to buy into a sector destined for massive growth, irrespective of where the oil price heads over the years to come.

Call to action

Forward-thinking investors should recognise the long-term opportunity as the world slowly but steadily transitions from fossil energy to renewable energy. It’s time to lay the myths to rest.

[1] http://www.worldenergyoutlook.org/resources/energysubsidies/

http://www.worldenergyoutlook.org/media/weowebsite/2012/WEO2012_Renewables.pdf (page 234)

[2] http://www.imf.org/external/np/pp/eng/2013/012813.pdf

[3]http://www.ft.com/cms/s/0/73087796-9e79-11e4-a37e-00144feab7de.html?siteedition=uk#axzz3TEJw1uXo

[4] Impax: FactSet

 

Related articles

Weekly insights, straight to your inbox

A round-up of this week's key economic and market trends, and insights on what to expect going forward.

Please enter a valid email
Please check the boxes below to subscribe