What was once a lofty idea is now a staple in many regions of both developed and developing countries. Renewable energy was initially accepted as an alternative to prevalent energy generation options and was also lauded for being eco-friendly, but it is a lot more than that now. In some areas it is the only option available, while in others it is the most economical and most reliable option. The question is: has investment into the sector finally become a viable option? There may not be a clear cut answer, but the Wizard of Omaha certainly thinks so.
Warren Buffet announced that Berkshire Hathaway Inc. will be investing $15 billion into renewable energy in the next few years, which is double what they have done already. These investments will be aimed at wind and solar power in the United States. Mr Buffet favours investing in this sector not because of the immediate returns but because of the reinvestment potential and scope for acquisitions. The world’s most famed investor is certainly a good indicator as to what to expect in any market. In the world as a whole, investments into renewable energy have dropped for a second straight year. The total figure for 2013 stood at $214 billion, fourteen per cent lower than what it was the year before. But the fall wasn’t as a result of poor returns however. A major reason was because of the sharp decrease in the price of solar systems, which mean that solar power generation was much higher than in 2012. Another reason for the fall in investments was policy changes in some countries. Though this was a big blow, it wasn’t entirely unpredictable.
Renewable energy generation is still relatively new and it is a highly regulated sector, so it will take some time until most governments establish permanent policy safe-guards. It should also be noted that most governments are in fact in support of it and many are still funding research and subsidising implementation. And this is expected to keep growing. The price improvement of solar systems is also a good indicator that previous investments into R&D are yielding positive results, which should translate to more profit from the consumer side. But it’s not just solar systems that saw a price improvement. Onshore wind turbines has also benefitted from technological advancements leading to lower costs.
Every Reason for Optimism
The market share of clean energy went up by more than 50% last year, reflecting the growing interest of investors in the sector. Renewable energy output is also much higher than before, rising to 8.5% of global electricity generation from 7.8% in 2012. This led to a reduction of global CO2 emissions of roughly 1.2 gigatonnes. So despite the lower investment figures, there are plenty of positives. The impact on the environment, the lower costs and government support are all very encouraging. The market is finally getting into a comfortable place where the effort going in is matching the returns coming out.
Previous years have been marked by investor and consumer uncertainty as to the reliability of the technology. Understanding of the market and the technologies in use was limited and so was confidence. Renewable energy has now been around for long enough to no longer depend as much on government support. Investors now have a clearer picture of what to expect in terms of time-scales and development. Though government regulation is still to be finalised in most countries, it isn’t for want of trying. As a result investments should begin to yield higher returns in the coming years.
Taking out the Competition
Over the past few years, the cost of goal and gas powered electricity generation has gone up, while renewable energy has gone down. This has brought the two closer to a level of fair competition, in which clean energy generation will no longer need subsidies. Renewable energy is already the preferred choice for large populations in US and Europe, but the technology and the price has kept them reliant on traditional mediums. If this trend continues then renewable energy will have significantly more than the approximately 10 per cent of the energy market share it currently has.
The impact on global warming is another cost of fossil-fuel generation that consumers and governments will be looking at. As awareness of global warming spreads to less-developed countries and grows within developed nations there would be an increased push for renewable energy, even with the higher prices. But these changes are not expected to be immediate.
The investors that are confident in the market such as Warren Buffet, have taken into account the time dedication for such new projects to gain a proper footing in the market and for complimentary assets and legislation to be in place. Long term investors such as pension funds, insurance companies and wealth managers are increasing their dedication to the market. This also came as solar companies returned to profit after a rough 2011 and 2012. Governments continue to invest in the market, though mainly in the research side, as countries lacking fossil-fuels are seeking viable alternatives.
It came as no surprise that China had the single highest investments for any country, as the nation pushed for energy independence. The US was the second biggest recipient. The Asian continent as a whole continues to attract the most investments in renewable energy, thanks in large part to the demand in China and India. Europe is next in line and then North America. Africa and the Middle East saw only $9 billion of investments last year, but this was to be expected, as they are oil and gas rich regions.
There is no saying when renewable energy investment will begin to yield large returns, but it is clear from current market conditions that this is as good a time as any to invest. The market is ready, the technology is constantly improving and the world is in need of clean energy. Might not be perfect conditions at the moment, but it may be as good as it gets.