Renewable energy is a key focus area as the risks posed by climate change become more and more apparent. At the same time, investors are embracing environmental, social and governance (ESG) opportunities, searching for ways to find attractive returns while also doing good for society and the planet.
Renewables are an actionable opportunity today that checks both boxes for investors. There has been hype over clean technology and renewables for years but it feels like it is finally starting to shift toward reality. While renewables currently account for only 20% of energy generation in the United States, recent developments in enabling technologies seem poised to accelerate the transition of energy production from fossil fuels to sources like solar and wind.
In the past, one hurdle in implementing renewable power had been the lack of load-balancing technology. No one wants to have to stop watching their favorite episode of “Keeping Up with the Kardashians” because the sun stopped shining or the wind stopped blowing. Another issue is renewable curtailment, which is the opposite problem, where renewable power is abundant but demand is low.
There are several maturing technologies that can help solve these problems. One key development is the drop in battery pricing. As this week’s chart shows, the price of lithium-ion batteries has fallen over 88% since 2010, and this trend is expected to continue. It is one reason why we have seen a huge increase in the number of electric vehicles coming to market. Furthermore, many studies indicate that when the price of batteries drops below $100 per kilowatt-hour (kWh), electric cars will become cheaper than internal-combustion engines in many markets. This pivotal enabling technology is becoming increasingly affordable.
The levelized cost of energy shows that unsubsidized utility-scale renewables have become cheaper than fossil fuel alternatives. For example, utility-scale solar power is estimated to cost $29-$42 per megawatt hour (MWh) vs. $44-$73/MWh for gas combined-cycle generation, according to an analysis by Lazard. In addition to batteries, enhancements to the power grid and other load-balancing technologies, including software, can accelerate this transition.
The opportunity is even greater if we look beyond automobiles and see renewables powering our everyday lives. Converting the grid from fossil fuel-based to renewable-based is key. We can then use renewables to charge our cars, heat our water, power our computers and even watch “The Bachelor.”
Further electrification of buildings is one such opportunity. Replacing fossil fuel-powered space and water heaters with electric alternatives can also make a big impact and accelerate the energy transition. Hooking stationary battery storage into the grid is a key enabler of this transition. Stationary battery storage grew from just 76 megawatts (MW) in 2010 to 6,144 MWs in 2021. This growth is expected to continue, attracting hundreds of billions of dollars over the coming decades, while enhancing grid reliability and increasing the share of renewable generation.
These are just tiny windows into what is possible, but this transition will be very capital intensive. According to IRENA Global Renewables Outlook, the energy transition will drive trillions of dollars of investment by 2030.
Key Takeaway
With costs decreasing and new technologies emerging, the economic advantages and environmental benefits are clear, so investing in the renewable energy transition appears to be a win-win opportunity. Working with managers and management teams that have the expertise to identify investment opportunities in the sector and the ability to execute can lead to a healthy environment and healthy returns.
Note
The International Renewable Energy Agency (IRENA) serves as the principal platform for international co-operation, a center of excellence, a repository of policy, technology, resource and financial knowledge, and a driver of action on the ground to advance the transformation of the global energy system. An intergovernmental organization established in 2011, IRENA promotes the widespread adoption and sustainable use of all forms of renewable energy, including bioenergy, geothermal, hydropower, ocean, solar and wind energy, in the pursuit of sustainable development, energy access, energy security and low-carbon economic growth and prosperity.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
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