Introduction
On 12/12, 196 countries at the UN Climate Change Conference (COP21) in Paris, France entered a legally binding international treaty on climate change. The treaty is a landmark agreement that binds all nations together to combat climate change. To achieve the target of limiting global warming to 1.5°C per year, the Agreement sets ambitious goals related to carbon emission reduction.
Scientific evidence demonstrates that global warming is a causal factor leading to more frequent and severe droughts, heatwaves and flooding. The treaty aims to meet its objectives through the development of new technologies, particularly by expanding renewable energy capacity. Investing in solar, wind, and geothermal power will reduce reliance on fossil fuels and lower greenhouse gas emissions.
Key policies announced in 2022, in the EU, US (inflation reduction act) and China accelerated renewable electricity deployment. In 2022, annual U.S. renewable energy generation surpassed coal for the first time in history. By 2025, domestic solar energy generation is forecasted to increase by 75%, and wind energy by 11%. “The United States is a resource-rich country with enough renewable energy resources to generate more than 100 times the amount of electricity Americans use each year.[1] The International Energy Agency predicts that global energy investment will exceed $3 trillion in 2024, with $2 trillion allocated to clean energy technologies and infrastructure”. [2].
Hemispheres Investment Management, through its Global Equities product, continues to identify investment opportunities in renewable energy throughout the world.
Solar Energy
Today, solar energy is the fastest growing segment of the renewable energy sector. In its July report, the EIA forecasted solar power would increase electrical generation in the 2H24 by 42% YOY. Solar energy is the most abundant of all energy sources. The IEA recently forecasted that together, solar energy and electric vehicles will provide one-third of the emissions reductions agreed upon in the net zero energy emission 2030 goal. By 2040, solar power will become the largest source of electricity globally.
Cost Assessment
The cost of manufacturing solar panels has declined significantly in the last decade. Furthermore, technological improvements are driving efficiency higher making solar the most cost competitive form of electricity. In a June 2024 article in the Economist, the levelized cost of energy (LCOE) in 2015 (measured on a global basis) was $122 per MWh, today it is in the low $40s. The calculation of the Levelized Cost of Energy (LCOE) relies on the assumption of how often the plant operates, known as the capacity factor. The higher the capacity factor, the lower the LCOE. The useful life of the plant, as well as cost of capital contribute to LCOE.[3]
Challenges Facing Solar Energy
Solar energy faces several challenges. First, solar plants generate the most electricity during daylight hours versus during hours of peak demand, generally in the evening. Additionally, solar power depends on sunlight availability. To counterbalance the intermittency issue in solar energy, batteries store power. Energy storage systems capture excess solar energy during peak sunlight hours, providing electricity during periods of low sunlight or high demand. This enhances the reliability and stability of solar power by ensuring a continuous energy supply. Advances in battery technology, such as lithium-ion and emerging solid-state batteries, are improving storage capacity, efficiency, and lifespan, making solar energy more practical and scalable as a primary energy source. To date, most batteries are lithium based which have a storage capacity limited to approximately 2-4 hours. Significant research and development investment dollars are striving to improve this limitation related to solar power.
China dominates global solar supply. After the US assessed tariff’s on Chinese products, many U.S. installers import low-cost solar panels from Southeast Asia. Unfortunately, many Chinese companies have shifted operations to this region to bypass U.S. tariffs. The goal of the Biden Administration is to stabilize the US supply chain and level the playing field for US manufacturers. Though over capacity in China remains an issue, we anticipate that this issue will resolve itself over time.
Wind Energy
Wind energy harnesses the kinetic energy of air flows on land (onshore) or in sea- or freshwater (offshore). While the concept existed for millennia, the technology has evolved over the last few years to maximize electricity production. Taller turbines and larger rotor diameters are the primary contributors to the increase.
Though average wind speeds vary considerably by location, the world’s technical potential for wind energy exceeds global electricity production. Ample potential exists in most regions of the world to enable significant wind energy deployment. Offshore wind power offers potential for larger sized turbines and results in higher MWH production. Construction and transmission costs for Offshore projects however, are higher than onshore wind power.
Cost Assessment
The Energy Information Administration estimates that by 2050, most electric generation will be sourced through wind and solar energy. For the 2H2024, the EIA forecasts a 6% increase in wind capacity. LCOE for onshore wind energy, according to the June 2024 Economist article, declined from $83 in 2015 to the low $40s today. Both solar power and onshore wind costs compare favorably to coal, with a LCOE of approximately $50-$75/MWh.[4] Offshore wind plants are bigger and more expensive to build, and therefore LCOE is higher than onshore wind.
Challenges facing Wind Energy
Challenges faced by the wind energy sector include that the timing of electrical generation is uncertain. Energy production is literally dependent on the wind. As a result, storage, with its increased costs, is necessary to enhance the reliability of onshore wind generation.
Trade tensions also exist between China, the EU and the US in respect to China’s alleged unfair government subsidies of wind turbines. China insists it does not unfairly subsidize the wind energy industry in the country. The European commission has launched an investigation.[5] Tariffs would result if the findings do not support the Chinese view.
Geothermal Energy
Geothermal resources are reservoirs of hot water located at various temperatures and depths below the Earth’s surface. Drilling wells, ranging from a few feet to several miles deep, accesses these underground reservoirs to extract steam and very hot water. The steam turns the turbine and generates electricity, as well as to provide building heating through heat pumps.
Geothermal power plants produce electricity consistently. They can run essentially 24 hours per day seven days per week, regardless of weather conditions. They can also ramp generation up or down to respond to changes in electricity demand. Compared to plants with similar output capability, geothermal is compact. Adding additional benefits, beyond the steam, there is not fuel in use.
Geothermal energy sources made up only 1% of electric capacity in 2019. In 2022, the Department of Energy confirmed the potential for up to 90 gigawatts of electric-generating capacity by 2050 if the technological enhancements yield the cost reductions currently anticipated. Based on a conversation with staff at the Energy Information Administration, the LCOE for geothermal is approximately $100/MWh.
The one area of risk may surround construction of geothermal plants in areas that do not have naturally occurring reservoirs of heated water. Hydraulic fracturing techniques, widely used by the oil and gas industry, now crack open relatively solid rocks at depths much greater than existing geothermal wells. Water injected into these rocks generate steam, which then drives turbines to produce electricity. This technology, primarily in the oil/natural gas industries, faces scrutiny regarding increased seismic activity and requires further evaluation.
Smart Grid Technology
Smart grids are electricity networks that use digital technologies, sensors and software to better match the supply with demand of electricity in real time while minimizing costs as well as maintaining the stability and reliability of the grid.
Clean energy transitions entail large increases in electricity demand. The widespread rollout of variable renewables like wind and solar, place greater demands on power grids. Smart grid technologies can help to manage this transition while reducing the need for costly new grid infrastructure, and can also help to make grids more resilient and reliable.
Financing
The world will add at least 1,600 GW of renewable capacity over the next decade. According to the DOE, renewable energy will account for over 50% of total installed capacity by 2030, up from 30% today. Public, private, and multilateral entities will fund this shift. The initiatives promote a more sustainable economy and deliver identifiable climate, environmental, or other benefits.
Green bonds, also known as climate bonds, fund projects with a positive environmental impact. Like traditional bonds, green bonds offer investors a stated return and a promise to use the proceeds to finance or refinance sustainable projects, either in part or whole. The bonds may have tax incentives, in the form of credits and exemptions, that make them more attractive to investors. Investors seeking assets that align with their environmental values should be sure to verify the claims of sustainability made by bond issuers.
Investors can effectuate investment in renewable energy through direct stock and bond purchases, theme ETFs, or ESG funds.
Conclusion
The global renewable energy space is growing rapidly. Technological advancements are both improving plant efficiency and reducing the cost. While the sector is vulnerable to political setbacks in the United States, globally support is solid. In the US currently, many of the tax incentives currently face challenges. [6] [7]
Recently, US and Global developers of renewable energy face challenges from higher interest rates, queues to gain access to transmission and supply chain constraints. Resolution of these challenges provides significant opportunities for investors.
Hemispheres Investment Management’s team of seasoned professionals have a 35-year track record of successful investment strategies, including deep proficiency investing in US, international developed and emerging markets. Hemispheres can assist you diversify your renewable energy investments globally. The Global Equities product is Hemispheres flagship product.
Please contact Hemispheres Investment Management for a free consultation. We provide guidance and strategies to assist you optimize your investment policy and help you achieve your investment goals. Book a meeting.
[1] Renewable Energy | Department of Energy
[3] Sun Machines | The Economist
[4] Sun Machines | The Economist
[5] Chinese wind turbine-makers move into Europe as trade tensions flare | Reuters
[6] Energy Stocks Took a Hit. Some Are Still Worth Buying. – Barron’s (barrons.com)
[7] US court will not halt power plant emissions rule as states’ challenge it | Reuters
