How to profit from the renewable energy theme
However, very few green or renewable energy shares are big enough to warrant public listings on major exchanges, such as the FTSE 100 and FTSE 250. Infinis and Renewable Energy Holdings are perhaps the most prominent renewable energy shares listed on these markets.
There are more examples listed on the Alternative Investment Market (AIM) – Good Energy, and Renewable Energy Generation, for example. However, as YourMoney.com noted recently, investing in AIM comes with its own risks. (See: Tomorrow’s winners or toxic waste? The rewards and risks of investing in AIM)
So, should you invest in renewable energy?
For Matt Setchell, head of renewable energy at Octopus Investments, renewable provisions have become an entrenched facet of the energy sector – and the only way is up.
“The government is committed to ensuring that 15% of energy produced in the UK is sourced from renewable solutions by 2020, and there are also climate targets to hit,” he explains.
“We are entering a boom period for renewable energy. It has arguably already started. An investment in the sector is an investment in the UK’s energy future, helping us wean ourselves off our dependence on fossil fuels.”
Due to these targets, the government currently offers financial support for solar and other renewable energy projects. While this support continues, the renewable energy sector should continue to reward investors.
Mark Waters, investment manager at wealth management firm Skerritts, says the fact the sector is in in its relative infancy makes it attractive from an investment perspective.
“You have the opportunity to get involved with durable and proven technology, at a very early stage,” he notes.
Future developments in the renewable energy sector will certainly revolutionise energy generation and storage, perhaps permanently. Consumers will soon be able to buy rechargeable batteries powered by renewable energy, for example.
For Adrian Lowcock, head of investing at AXA Wealth, renewable energy is a global thematic trend that will become more and more prominent in years to come.
“Renewable energy is increasingly seen as necessary as dirtier fuels produce pollution, begin to run out or become harder to mine,” he says.
“The market already offers a number of opportunities for investors – from companies directly involved in producing renewable energy, to companies that supply them with equipment and materials, or stand to benefit from the theme.”
However, some experts are less bullish.
“Renewables are yet to demonstrate they represent a reliable investment opportunity,” says Patrick Connolly, a chartered financial planner at Chase de Vere.
“Part of this is attributable to their relative youthfulness, of course. But there have been some high profile flops and outright failures since the market’s inception – most of the companies operating in this area are still in the start-up or early stages and are therefore a risky bet for investors.”
Earlier this year, around 1,000 investors who placed a collective £7.5m into renewable energy bonds lost all their money when the issuer went bust.
Connolly’s misgivings are contested by Setchell, who believes that projects utilising established renewable energy solutions – particularly solar panels and wind farms – offer predictable cash flows.
“Banks and pension funds have an increasing appetite for this asset class as a result,” he explains.
“There are also areas within the renewables industry that are at an early stage of development, which may therefore mean taking on more risk – but in return, they offer significant potential for higher growth. Renewable energy is no different from any other asset in this regard.”
Waters believes the price of oil and gas represents the biggest risk to renewable investments. While oil prices may be rising, a return to consistent pre-2013 levels may be some time off – and gas prices are falling further.
“In this environment, the impetus for energy consumers to seek out, and energy providers to develop, renewable solutions isn’t particularly pronounced,” he explains.
“Although, you could make the argument that falling oil and gas prices make exploration and production less economically viable – actually strengthening renewable energy’s position.”
Mick Gilligan, head of fund research at stockbrokers Killik & Co, notes that much of renewable energy’s growth to date has been the result of government subsidy and incentives.
“The obvious danger with this is that the government could choose at any moment to withdraw these, turning a profitable business and wider industry into one that loses money in an instant,” he explains.
“While there are good arguments for investing in renewable energy – both economic and political – those who are seeking to invest in the sector purely because of these incentives should think twice.”
How to invest
Lowcock suggests that investors wanting a taste of renewable energy do so via funds.
“Even then, you’ll probably want to consider a diversified fund, which invests in all forms of energy – or, perhaps, an ethical fund that has some renewable holdings,” he says.
“The Fidelity Multi Asset Balanced Income fund, for example, invests in renewables, as part of a wider exposure to energy. You may also want to consider the Pictet Global MegaTrends fund, which invests around eight global themes – megatrends – of which renewable energy is one.”
Waters recommends a renewable energy tracker, such as the iShares’ Global Clean Energy exchange traded fund (ETF). It tracks the performance of the S&P Global Clean Energy Index, offering exposure to 30 global clean energy companies and yielded 9.4% last year.
Gilligan notes that investment trusts have been the most popular vehicle for renewable energy investment in recent years.
“There are several renewable energy trusts, and often a number per energy source,” he says.
“For those attracted to solar energy, I recommend the Bluefield Solar Income Fund, which currently has a yield of around 6%. For wind energy, Greencoat Wind, which yields at 5.6%. For a combination of both, John Laing Environmental Assets yields at 5.5%.”
Another more general product is the Renewables Infrastructure Group trust. “This covers most major renewable energy sources, and the companies that supply the industry equipment,” Waters says.
“It enjoyed a strong 2014, yielding 5.4% – although hasn’t performed too strongly this year to date.”