The green energy market is one of the most exciting sectors in the global financial markets. The global market for renewable energy is expected to grow to $1.5 trillion by 2025. The call for a shift to clean energy has boosted the rapid growth of the renewable energy market and this has made it a compelling option for growth investors.
This does not mean that clean power will replace fossil fuels any time soon. Experts have given figures that indicate fossil fuels are here to stay for the next 20-30 years. However, the demand for fossil fuels will continue to experience a gradual decline as that of clean power surges.
Factors that will drive the green energy sector growth
There are a number of factors that will continue to drive growth in the green energy sector for the coming years. Some of these trends are listed below:
- The campaign against climate change: President Biden’s win against Trump was a welcome boost in the green energy market. The first thing he did after the inauguration on January 20 was to recommit the US to the Paris Climate Agreement. He is readying a bill that will map the course for the US to become 100% dependent on clean energy. Whether Congress approves it is another question. But the important thing is that investors will be looking at this as a positive intention towards renewable energy.
- Demand for green energy in the emerging markets: Most of the developed world has either switched to green power or committed to their current energy sources. However, the emerging markets and especially third world countries barely have access to energy. This creates an opportunity for renewable energy companies to act on. One positive aspect of this opportunity is that these countries have received the idea of using renewable energy sources positively. Africa, for instance, is quickly becoming one of the leading importers of solar panels. Morocco and South Africa are among the top African renewable energy producers according to a 2017 report.
- Falling cost of green energy products: One of the biggest obstacles to adopting green energy over fossil fuels has always been the initial cost of production. Setting up a clean energy power plant to rival the output capacity of a gasoline power plant has always been a costly battle. However, according to statistics, costs are now coming down due to advances in technology. According to data compiled by the International Renewable Energy Agency (IRENA), the cost of solar photovoltaics has plunged by more than 80% over the last 10 years. The cost of setting up an onshore wind power plant is down 40% while offshore wind power has fallen by 29%.
- Government support and rebates: As demonstrated by President Biden, government support is key to taking the renewable energy market to the next level. This support can be in the form of building systems and infrastructure to encourage citizens to shift to renewable energy. For instance, in most developed countries, homeowners are allowed to connect their green energy production to the grid. This allows them to bank extra energy produced during peak seasons. They can also get units from the grid during off-peak seasons. If at the end of the year there is a positive balance based on units banked net of units borrowed, then they receive a check for the currency amount equivalent to surplus units banked. This has prompted more residents to switch to clean power as they look to lower energy costs.
Investing in green energy
Investing in the green energy market can be done via the stock market or private sector acquisitions. In the stock market, most of the pure-play clean energy stocks are small, which means that they offer a high potential for growth while at the same time presenting a high level of investment risk. This can be challenging for inexperienced investors looking to benefit from the expected growth of the industry.
To overcome this challenge investors can invest in the industry by targeting investment trusts that focus on small, green companies. A good example, in this case, would be Janus Henderson’s TR European Growth Trust Plc (LON:TRG).
The fund seeks capital growth by targeting smaller and mid-sized companies domiciled or quoted in the EU region. Since March, the fund has gained more than 122%. Judging by this gain, it is clear that Europe’s smaller companies can deliver big returns amid the challenges presented by the pandemic. Ollie Beckett, portfolio manager at Janus Henderson seems to concur as he points out that Europes smaller companies have grown at an annualized rate of 10% over the last 10 years.
In 2017, they were the best performing in the world, which shows the magnitude of the opportunity they present.
In summary, the green energy market appears to be growing at a rapid rate. This promises big returns for investors in the coming years. There are several catalysts to support sustainable growth as highlighted in this article.
To fully capitalize on this growth while at the same time avoiding substantial exposure to market risk, investment trusts provide a compelling avenue for inexperienced investors. Finding one that has a basket consisting of some renewable energy stocks could pay off big time.