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Will alternative energy go mainstream?

20 September 2019

7 minute read

This month’s attack on Saudi Arabia’s oil production caused Brent oil prices to surge by 10% to trade above $66 per barrel – a four month high.

The rising tensions in the Middle East, and the potential for supply shocks, together with the extension of “OPEC+” production cuts are expected to support crude prices in the near term.

Energy risks and opportunities

The Saudi strike is the biggest attack on the country’s oil infrastructure in more than a decade and highlights the vulnerability of the Kingdom’s network of fields, pipeline and ports. Saudi Arabia produces close to 10% of the world’s crude oil. Interruption to an estimated half of this production capacity, as a result of the attack, adds to questions about state and industry reliance on fossil fuels.

For investors, the attack provides a good moment to review and reconsider the risks, and opportunities, of allocating to energy-related assets in their portfolios.

Competitive renewables production costs

Putting aside the threat fossil fuels play to the health of people and planet, investors should be increasingly concerned about the long-term potential impact of holding fossil fuel companies on portfolio returns.

Why? Because the cost of producing renewable energy alternatives to fossil fuels are reaching competitive levels.

The fall in technology costs for renewables has been rapid and substantial. Since 2010, solar costs and battery costs have dropped up to 85% and wind costs by up to 49%1.

 

The costs of producing renewables, and their rate of decrease, vary by country, technology used and time at which large-scale commercial deployment began. However, it is impressive that such drops in costs have occurred in only ten years. Moreover, costs are expected to become even lower as technology and scale improves.

When reviewing their database of renewables projects, the International Renewable Energy Agency (IRENA) concluded “over three-quarters of the onshore and four-fifths of the solar PV project capacity due to be commissioned in 2020 should produce cheaper electricity than any coal, oil, or natural gas [power generation] option. Crucially, they are set to do so without financial assistance.”2.

Wind install costs
Solar install costs

Opportunties

In the short term, there will be opportunities and market plays that allow investors to benefit from both fossil fuel-linked companies and commodity prices.

Longer term, as renewables become the cheaper option, the energy industry and markets will gravitate even further in favour of this sector, and away from the fossil fuel sector. And this is without the acceleration that will come from the increased government commitments made in the Paris Climate Accords in 2016 and continuing favourable shift of public opinion.

Picking wining technologies and companies will be difficult given the early stage of industry development. There are a variety of renewable energy sources - solar, wind, hydro, geothermal and bioenergy. Moreover, there are variations in approach, say onshore or offshore wind, and technologies, say crystalline or thin film solar photovoltaics.

The supermajors 'like ExxonMobile and BP' are also investing billions of dollars to transition their mix of energy, and revenue generation, to renewables. That said, the largest growth opportunities among energy producers will tend to come from the renewables companies rather than the incumbents.

Sustainability: a growing investment preference

Finally, while the increasing strength of a pure economic argument is compelling, there are also social and environmental benefits of transitioning to renewable energy sources. As leading contributors to greenhouse gas emissions, fossil fuels are increasingly unsustainable – in the true sense of “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”

As we’ve seen in research we support by the Financial Times this year, the leading reason individuals, families and foundations were motivated to make impact investments was to “contribute to sustainable development and future.”

For investors who want to generate financial returns and make a positive contribution to our world, the alternative looks even clearer.

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