Clean Energy: Investing Essentials

What you need to know before investing in clean energy.

Aug 4, 2014 at 12:00AM

Clean energy has been a hot topic over the past decade as reliance on foreign oil and climate change have become hot button political issues. But today, the clean energy industry is driven more by economics than politics, and investors who haven't looked at the industry recently may be surprised at how far it's come in a short time.

Subsidies for everything from solar to wind energy are falling around the world, and despite that, companies are growing installations and increasing profits. But not every company with a clean energy portfolio will emerge as a winner, so knowing the landscape is vital for investors trying to profit from clean energy trends.

First Solar Cimarron Project Image

A solar power plant built by First Solar in New Mexico. Plants like this are now over half of the new generation built each year. Source: First Solar.

What is clean energy?

Energy that is "clean" is simply energy produced from non-hydrocarbon sources that do not emit byproducts. Wind and solar energy are often thought of as the main sources of clean energy, but in reality, hydro provides far more clean energy to the world today than either of those. Filling in smaller niches are energy sources like geothermal, wave power, tidal power, among other sources.

The key difference between clean energy and renewable energy is that clean energy production doesn't give off carbon dioxide or other gases as a byproduct, whereas biofuels that may be renewable do emit byproducts.  

How big is clean energy?

According to Bloomberg, the clean energy industry currently has revenue of $80 billion, but that's just scratching the surface of the industry's potential.  

The U.S. alone spends more than $1 trillion per year on energy, including gasoline, natural gas, and electricity. Globally, the figure grows to more than $3 trillion annually.

Clean energy isn't a big competitor to an energy source like gasoline, but clean energy is already a player in electricity generation, which is a $372 billion market in the U.S.

Chart

Source: U.S. Energy Information Administration.

When it comes to building new electricity generating plants, clean energy is starting to take the place of fossil fuels. Clean energy, particularly solar, now accounts for more than half of the new generation added to the grid each year in the U.S., and non-hyrdo renewable fuel electricity generation has grown 258% from 2001 to 2013.

Despite this incredible growth, clean energy as a percentage of the electricity produced in the U.S. is still a small player. All clean energy sources only accounted for 13% of the electricity supplied to the U.S.

Chart

Source: U.S. Energy Information Administration.

Clean energy is already a big industry, but it has incredible growth potential as costs come down and it becomes more competitive with fossil fuel energy sources.

Wind Farm Image

Wind energy has become a major energy source in the Midwest where wind resources are strong.

How does clean energy work?

Most clean energy is in the form of electricity that goes straight into the grid and is delivered to consumers along with energy from fossil fuels. Similar to a fossil fuel plant, a clean energy power plant is built, and then power is sent to the grid through transition lines to demand sources.

Where solar energy differs from fossil fuels as well as other clean energy sources is the ability to create distributed energy from residential or commercial building. What's novel is that energy sources can now be built right into the heart of the demand load and even give homeowners and businesses the opportunity to own generating assets. It's this model that's upsetting the status quo in energy and will cause a shift in the way power producers, utilities, and customers look at energy.

What are the drivers of clean energy?

Whether you're talking about clean energy for electricity generation or electric vehicles, there are two drivers of the industry: cost and innovation.

Like it or not, clean energy won't be a sustainable long-term business or profitable investment if the economics don't work. The good news is that costs have fallen below grid prices in some locations for clean electricity from sources like wind and solar. As economics improve, demand for the industry will grow exponentially, creating an incredible opportunity for investors.

Companies who can innovate to create lower-cost energy, attractive financing options for consumers, and aesthetically pleasing products will be able to create long-term value for consumers, power plant owners, and investors. Whether you're looking at wind, solar, geothermal, or any other source, efficiency and cost competitiveness are key. 

Clean energy will be a growth industry for decades to come, and investors who get in before the market figures out this massive potential have a huge opportunity for profits. 

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