Reviewing the Renewable Energy Case

Advisors know how the renewable energy investing movie played out over the past two years. Equities and exchange traded funds rallied in 2020, ranking among that year's best-performing assets, in anticipation of then candidate Joe Biden becoming the 46th U.S. president.

There was some carryover effect into early 2021 as Democrats swept the Georgia Senate races. From there, it was nothing but disappoint as clean technology and renewable energy assets tumbled in 2021 while broader markets rose.

That's a reminder that despite being young relative to other industries and sectors, renewable energy is gaining a reputation as being politically sensitive. Translation: Market participants expected Democrat control of the White House and both chambers of Congress to result in massive amounts of new spending on renewable energy.

To be fair, the Biden Administration is boosting spending on clean energy. The recent bipartisan infrastructure legislation contains plenty of green energy spending, but with the Build Back Better initiative stalled, at least for now, climate activists and investors alike are disappointed with domestic renewable energy expenditures.

On the bright side, there remains a compelling case for investing in renewable energy. It's simply a matter of reducing myopia focused on domestic political whims.

Yes, Earth Is Getting Warmer

Perhaps the biggest issue with the climate change debate is how it's framed. From the outside it often looks like it's one group comprised of fanatics willing to use hyperbole and scare tactics to convey their points pitted against another group that goes to the other extreme and too casually ignores the fact climate change is a legitimate issue that needs addressing.

Meeting in the middle would be nice, but that's a conversation for another day. In the meantime, data support the claim that temperatures are rising.

“Temperatures on Earth are reaching new heights. The past four decades were successively hotter than all preceding ones dating back to at least 1850, and the average temperature from 2011-2020 was ~1.09 °C warmer than that of 1850-1900 (preindustrial period),” says Global X analyst Alec Lucas. “Almost all of this warming is the direct result of heightened atmospheric GHG concentrations, primarily of CO2, irrespective of source (human-produced or not).”

With data suggest climate change is causing more weather events that were previously rare, warmer ocean temperatures and drought frequency, there's obvious climate change urgency and with that urgency comes investment opportunity. Not surprisingly, the opportunity is rooted in capital commitments and spending objectives that are simply stunning.

“Existing legislation, commitments, and targets would require $98T of total investment between 2021 and 2050, with $10T directed to renewable energy, $13T to renewable energy-enabling electric infrastructure for transportation and heat, $32T to energy efficiency technologies, and the remainder to fossil fuels,” adds Lucas.

Putting $10 trillion into context, that's more than three Apple's (NASDAQ:AAPL).

Hard-to-Ignore Growth Outlook

While renewable energy assets disappointed equity investors in 2021, there's no denying the industry is growing. As costs to produce clean energy fall, adoption rises. Consider this: Renewables accounted for 29% of global electricity produced in 2020, nearly triple the percentage seen just 10 years earlier.

“The levelized cost of electricity (LCOE) refers to the revenue required to build and operate a power source over a specified cost recovery period. Over the past ten years, the LCOE of solar PV and wind power decreased 80% and 55%, respectively, making them more affordable than fossil fuels in most of the world,” observes Lucas. “Correspondingly, solar electricity generation (by TWh per year) increased 27x over the same time period, while wind increased 4x.”

Solar and wind costs are slated to continue falling dramatically through the end of the current decade, potentially providing ballast for clean tech and renewable energy as satellite options to clients' core portfolios.