The world's energy industry is massive, touching everything from heating our homes and cooking our food to transportation and powering factories. And burning fossil fuels has been the primary way we've generated that energy for more than a century.
But investing is about looking forward, not backward, and all signs point to renewable energy sources continuing their slow but steady expansion and capturing ever greater shares of the market. Here are five reasons why you should be investing in renewable energy stocks.
1. Renewable energy has become practical
Generating energy from renewable sources is far from a new concept -- and like most innovative technologies, the systems that do it have improved remarkably over the years. Consider what computers in the 1950s looked like -- they took up entire rooms and were incredibly expensive. Over time, of course, they steadily got smaller, and more efficient.
Similarly, renewable energy has improved over time. The first solar cells in the 1950s were very inefficient -- they converted a small percentage of the sun's light into electricity, doing little other than proving the technology worked. Today, solar panels are approaching 20%, while wind turbines will average 24%-41% of their potential electrical output (the theoretical output if the wind was blowing at the ideal speed, 24 hours per day).
To compare, traditional powerplants operate at 50%-80% of potential output because they also need to stop occasionally for maintenance, etc. While conventional power generation remains more steady, renewable sources have become practical thanks to energy storage systems (batteries), and hydroelectric power, which uses falling water to turn power-generating turbines, is a reliable source of generation that has been used for a long-time.
2. It has also become price competitive
Renewable energy has become increasingly cheaper to produce over the years. From 2009 to 2020, the Levelized cost (the cost to build and operate) of wind and solar energy has fallen 71% and 90% respectively.
Costs of generation fluctuate based on a number of factors like geography and the specific technology used, but generally speaking, renewable sources are now competitive with gas-powered generation and are cheaper than coal-fired power.
|Source||Approximate Cost $/MWh|
Coal remains a prominent source of power generation across the world, used to produce roughly 36% of the world's electricity. However, in the United States, coal-fired power fell to a 42 year low in 2019. Over the years to come, this trend could eventually surface in emerging markets that are currently supporting coal demand. The global capacity of renewable power generation grew 45% in 2020 alone, despite the pandemic; its largest annual jump since 1999.
3. Political forces favor renewables
Regulators and legislators can be powerful influencers of change, and the political climates in the United States and much of the world favor efforts to speed up the long-term shift toward much greater use of renewable energy. The Paris Agreement is a joint pact among 191 countries, including the U.S., to commit to reducing climate-altering greenhouse gas emissions, which are largely caused by burning fossil fuels.
In the United States, President Joe Biden has also outlined a plan to reduce the nation's greenhouse gas emissions by 2030 to half of their 2005 levels. Political winds shift based on which party is dominant in Washington, but investors should keep this on their radar regardless.
Is this time different?
The concept of an evolving power grid isn't new, and investors may be wondering whether it will ever actually happen to the extent that many hope for. It's important to remember that the energy industry is massive, and our world has been powered a certain way for centuries; evolution can be a very slow process.
What I would point to is that while investors may have been "too early" years ago, and we still might be early today, the trends continue to point in the right direction. Renewable energy sources are cheaper than ever and could continue to improve over time.
Just a decade ago, the cost of solar energy was four-fold what it is today. Electric cars were hardly an idea a decade ago, and now automotive companies are investing tens of billions of dollars to make them the future of transportation. Investing in renewable energy should not be looked at as anything other than a long-term idea, but as the industry's evolution continues, it could be a lucrative one.