Renewable power investment continues to outperform fossil fuel investment across the globe, according to the latest research. This provides a strong signal regarding the decline of fossil fuel investment. Given that IRENA has projected achieving Paris targets will require $4.4 trillion a year into low carbon energy, this can only be a positive for achieving 2050 goals.
How renewables outperforms fossil fuels
Renewable power has a superior risk/return profile over fossil fuels both in periods of volatility and under normal conditions. The report, Clean Energy Investing: Global Comparison of Investment Returns said that listed renewable power portfolios have outperformed listed fossil fuel portfolios in all markets and that the cost of capital remains lower for renewable energy companies than fossil fuel companies.
The report just published by the Centre for Climate Finance at Imperial College Business School and the International Energy Agency says that renewable power generated significantly higher total returns over the last ten years, at 422.7% against 59% for fossil fuels or over 7 times the return. Over five years the performance is lower but still more than 3 times higher than fossil fuels. Annualised volatility was lower than fossil fuel portfolios in the Global and Advanced economies and higher than the fossil fuel portfolios in China and Emerging Markets & Developing Economies.
The findings show a superior risk/return profile for renewable power portfolios in both typical market conditions and during global economic imbalances. This was for a number of reasons: firstly that the global renewables portfolio is less correlated to the wider market than fossil fuels; secondly the existing correlation fell during the recent economic downturn, highlighting the potential for diversification opportunities; recent economic volatility has resulted in deteriorating fundamentals within the energy sector – with renewables showing greater resilience.
That is a trend that is likely to continue as increasing numbers of countries set net-zero targets for 2050, and growing concern amongst investors and the public about the negative impacts of energy generation. Climate risk, both physical and in terms of policy possibilities – especially around a carbon tax – are only going to affect the sector further. But there is a long way to go.
Renewables investment still lags need and evidence of performance
Dr Charles Donovan, Executive Director of the Centre for Climate Finance & Investment at Imperial College Business School, said: “Our research demonstrates that all over the world renewable power has outperformed fossil fuels. It’s been the same story for more than a decade, yet total investment is still lagging. National regulators, particularly in the United States, must get to work on the reforms needed to level the playing field for clean energy investors.”
There is less capital in the renewable energy sector, and many investors have only part of their portfolio as renewable. This clearly limits the scope of the research, as do variations in sample size across regions, lower market cap and liquidity for renewable companies. This lack of capital also raises concern as to whether investment can be realigned sufficiently quickly to achieve 2050 goals.
Tim Gould, Head of Division for Energy Supply Outlooks and Investment, International Energy Agency, said: “This report points to clear financial benefits from investing in clean energy transitions, an important step towards mobilising higher levels of investment from the capital markets. But much more still needs to be done to link sources of sustainable finance with the areas of greatest need, especially in emerging markets and developing economies.”
Energy investment needs realignment
The International Renewable Energy Agency (IRENA) warned earlier this week that investment in the energy sector is going to need to be realigned in order to reach the 2050 targets. In its March report World Energy Transitions Outlook: 1.5 C Pathway, the agency said the world would need to shift energy investments to low carbon alternatives if the world is to reach its 2050 targets. That would mean not only an increase of 30% from current investment flows but a move from existing investment patterns – requiring a total of $131 trillion by 2050, or an annual investment of $4.4 trillion.
Those funds will need to be invested not just in renewables but in other low carbon energy technologies, and the enabling technologies that underpin the energy transition. These include energy efficiency, end-use electrification, power grids, flexibility innovation (hydrogen), and carbon removal measures. In the 1.5°C Scenario, fossil fuel production should decline by more than 75 percent by 2050, with total fossil fuel consumption continuously declining from 2021 onwards. The report also said, in anticipation of the coming energy transition, financial markets and investors are already directing capital away from fossil fuels and towards other energy technologies including renewables.