Clean Energy Investing: How to Invest in Renewable Energy in Australia

This is Money Morning’s comprehensive guide to investing in renewable energy in Australia.

In it we cover:

  • What is renewable energy?
  • Australia’s change in energy generation
  • Drivers of investment in renewables
  • Are renewables a good investment?
  • Things to consider before you invest in renewable energy
  • How to invest in renewable energy
  • An introduction to ASX renewable energy stocks

What is renewable energy?

A very basic definition: Renewable energy is produced using natural resources that are constantly replaced and never run out.

So, just as there are many natural sources of energy there are many renewable energy technologies.

Here in Australia, we rely on an ever-increasing mix of renewable energy sources to power our homes and workplaces.

While renewable energy has been around for thousands of years — our ancestors, for example, harnessed wind to power sailboats or grind grain — most of our energy today comes from fossil fuels.

In 2019, about 84% of our primary energy came from fossil fuels: coal, oil and gas.

But this is starting to change.

The International Energy Agency (IEA) estimates that almost 90% of new electricity generation in 2020 will be renewable, with just 10% powered by gas and coal. According to the IEA, this trend puts renewables on track to become the largest source of electricity generation in the world, displacing coal.

We are in the middle of an energy transition that will change the way we power our homes, our transport and our industries.

The International Renewable Energy Agency (IRENA) claims the transition could bring in $95 trillion in investment by 2050. But that number could go as high as $110 trillion.

The shift from fossil fuels to renewables is already happening. But before we look at what’s driving the change, let’s take a deeper look at the types of renewable energy first.

Types of renewable energy

Solar Power:

Is probably one of the most well known renewable energy sources, though wind power is the most widespread in Australia.

Generally, solar power is generated by two methods: small-scale generation (think of solar panels on your roof), or large-scale projects like solar farms.

Wind Energy:

Our old wooden windmills have developed into tall turbines with long blades that harness wind energy, which then feeds into an electric generation to produce electricity. This is one of the main renewable resources in Australia, generating 9.5% of Australia’s total electricity and 35.4% of the country’s clean energy in 2019.

Hydropower or Hydroelectricity:

Hydropower captures the energy of running water to turn it into power. It is one of the oldest forms of renewable energy. Australia’s Snowy Mountains hydroelectric dam completed in 1974 is a great example of this.

Though there are just as many — if not more — renewable energy sources that fly under the radar when it comes to discussions on alternative clean energy sources.

Bioenergy:

Is a form of renewable energy that uses organic renewable materials to produce heat, electricity, biogas, and liquid fuels, and is the source of half of all renewable energy used globally.

While bioenergy emits greenhouse gasses, it’s far less taxing on the environment in terms of overall pollution in comparison to fossil fuels.

Geothermal Energy:

Converts heat from the earth into a power source; however, it is often not a commercially viable source due to its inherent restraints.

Ocean Energy:

Harnesses the energy of the tides and waves through a variety of developing technologies. Converting the temperature difference between the ocean’s surface water and deeper water into energy generates ocean thermal energy.

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Australia’s changing mix of energy generation

The growth of renewable energy as part of Australia’s energy mix has increased drastically over recent years, spurred on by government policy incentives, elevated electricity prices and declining costs of renewable generation technology.

Electricity Related Investments in Australia - Clean Energy

Source: Department of the Environment and Energy

As you can see from the graph above, there has been a steep increase in renewable energy use in Australia over the past decade.

In 2019, Australia met its 2020 renewable energy target of 23.5% of its energy share and 33 terawatt hours.

But perhaps the most interesting point to note about the graph above is the discrepancy between large- and small-scale solar energy production.

The rise of renewable technology has allowed people to generate their own electricity — namely rooftop solar panels — and even be paid to supply the grid.

This is important to note, as it will have a continued impact on the types of renewable energies that receive investment, as well as electricity grid and energy storage investment.

Households have been the main driver of small-scale renewable investment and as of March 2020 around one-quarter of dwellings had been fitted with rooftop solar panels.

Unsurprisingly, Australia’s rising energy costs have been a strong driver of this type of investment, which we’ll discuss in more depth later.

As of September 2020, we’re on track to add 6.3GW of new renewable energy capacity this year as the rooftop solar market keeps growing despite the pandemic.

So, what will drive investment in green energy in the future?

Drivers of renewable energy investment

There are a number of factors that will drive investment into renewable energy in the future.

Some of these include high electricity prices, lower cost of renewable energy, government policy, and lower costs of finance.

Investment in large-scale renewable energy projects increased significantly between 2016 and 2019.

Drivers of Renewable Energy Investment

Source: Reserve Bank of Australia

Investment in large-scale projects was completed almost entirely by the private sector, with large-scale renewable projects driving much of the strong growth in private sector electricity-related investment during this period.

Let me explain…

Investment in renewable energy generation has been supported by a significant increase in wholesale prices in the National Electricity Market (NEM).

National Electricity Market - Wholesale Prices

Source: Reserve Bank of Australia

Before we get into it, note that the NEM is the electricity grid that covers the east coast and southern states of Australia.

WA and NT both have separate grids.

Like in any market, electricity prices are driven by supply and demand.

Over the past five years Australia has not experienced tremendous population growth, or a boom in manufacturing activity.

Meaning the demand-side for electricity has been pretty stable, thus supply-side factors appear to have been the main driver of higher wholesale electricity prices.

Australia’s electricity supply has tightened considerably since 2010 as a number of generation plants, primarily coal-fired, have been retired.

In particular, the closure of two brown coal-fired plants, Northern in South Australia (2016) and Hazelwood in Victoria (2017) produced a notable impact on supply.

These plant closures removed over two gigawatts of relatively cheap generation capacity, which was equivalent to 5% of total NEM capacity in 2015/16.

In fact, the coming closure of Australian coal-fired power plants is expected to be a significant driver of medium- and long-term investment in clean energy.

Around 63% or 15 gigawatts of capacity are expected to be removed from the NEM by 2040 through the retirement of coal-fired plants.

As this capacity is removed from the NEM, new generation will be required to replace it, much of which is likely to come from renewable sources as the economics make sense.

What I mean is that a big factor driving the shift to renewables is that they are becoming cheaper.

In the last decade, solar costs have dropped by 82% and costs for onshore wind fell by 39%. Solar PV costs could drop another 59% by 2025.

In fact, the IRENA recently crowned solar as ‘the new king of electricity’. As they wrote:

Supportive policies and maturing technologies are enabling very cheap access to capital in leading markets. With sharp cost reductions over the past decade, solar PV is consistently cheaper than new coal- or gasfired power plants in most countries, and solar projects now offer some of the lowest cost electricity ever seen.

Battery costs have also declined quite quickly.

Since 2010, the cost of a lithium-ion battery per kilowatt-hour (kWh) has fallen almost 90%, from US$1,183 to US$156 in 2019. Bloomberg New Energy Finance expects battery costs to halve in the next decade as energy storage installations increase.

But it’s not just about costs.

Government policies are also expected to contribute heavily to future investment in renewable energies.

While Australia hasn’t set a carbon neutral goal, every Australian state and territory has set a net zero by 2050 goal. Some states and territory governments are targeting at least 40% renewable generation by 2030.

Among them, NSW has released their Electricity Infrastructure Roadmap, where they are looking to build 12GW of new large-scale solar and wind with $32 billion in private investment and reducing annual electricity bills for businesses by $430 and $130 for households.

But pressure could also come from abroad.

Some of the major economies around the world like France, Germany and the UK are preparing multibillion-dollar stimulus packages that will benefit the shift.

Our largest coal markets China, South Korea and Japan have said they’ll go carbon neutral by 2050 or 2060. President-elect Joe Biden is also committing the US to net zero emissions by 2050. This is 70% of our major trading partners that are looking at shifting the way they produce energy.

Also, investment is starting to shift, and much of it is coming from within. Investors are moving away from fossil fuels and/or pressuring companies to change their ways.

Some superannuation funds are already moving away from fossil fuels and the Big Four banks have also been reducing their financing of coal.

One difficulty clean energy sources face is that the power plants, which generate the electricity, are quite expensive to construct.

The other factor that will drive renewables is that low interest rates make renewables more competitive.

Because you see, solar assets have high up-front costs, and then they deliver savings overtime as they generate energy. Low interest rates help this.

Are renewables good for retail investors?

One of the things to consider when investing in energy is risk and the sustainability of investing in fossil fuels.

Let me explain…

The shift to renewables from fossil fuels has really accelerated since the pandemic with the oil collapse. At the same time, as I mentioned, many of our major trading partners are ditching coal too and setting energy goals, so expect those markets to get smaller. For a country like Australia where coal is one of the major exports, this represents a major risk in your portfolio.

But the main point here is that the shift not only represents a threat, but an opportunity to capitalise from renewables.

In fact, while fossil fuel companies have been plagued by asset write-downs and lower share prices, renewables have held up quite well during the pandemic.

But this was happening even before the pandemic.

One study from May 2020 looking at returns in the US, UK, and Europe, suggest renewable energy investments are delivering massively better returns than fossil fuels.

Researchers from the Imperial College London and the IEA analysed stock market data to determine the rate of return on energy investments over a five- and 10-year period.

They found renewables investments in Germany and France yielded returns of 178.2% over a five-year period, compared with -20.7% for fossil fuel investments.

It was a similar story in the UK with returns of 75.4% compared to just 8.8% for fossil fuels.

In the US, renewables yielded 200.3% returns versus 97.2% for fossil fuels.

What might surprise you the most is that green energy stocks were also less volatile across the board than fossil fuels.

Technology is improving, the costs of renewables are getting cheaper, low interest rates, and government policy changing is rounding up to build a decent case for investment in renewables.

But that doesn’t mean they are without their fair share of risk.

Things to consider before you invest in renewable energy

Let’s consider some of the risks investment in renewable energy stocks might expose you to.

In many industries the risks posed by nascent technologies is considered to be some of the most significant.

In the renewable energies sector, understanding the risks emerging technologies provide is particularly relevant.

While the basics of capturing energy from renewable sources is well understood, some firms trading on the stock market develop or manufacture emerging renewable technologies that are for the most part untested.

Understanding government policies and regulations is also imperative to making informed investment decisions.

As we discussed earlier, government policies have been a key driver for investment in renewable energy and without it some firms or projects may cease to be.

In fact, regulatory risk and policy uncertainty are cited to be the leading factors for investment in Australian renewables from a record $10.7 billion in 2018 to $4.5 billion in 2019.

There are several other risks germane to energy production to also be aware of.

In terms of generation capacity, there was a drop from 6,375 megawatts in 2018 to 2,319MW in 2019, largely stemming from issues around the power grid, including grid connection and congestion.

Analysts from investment firms like Macquarie and Blackrock have warned in the past that investment in renewable energy could flat line unless the country’s choked power grid is better managed.

However, as planned battery storage begins to come online, with NSW promising two gigawatts of storage by 2030, infrastructure risk could be lessened. In fact, Bloomberg New Energy Finance is predicting energy storage installations around the world will increase exponentially from 9GW/17GWh as of 2018 to 1,095GW/2,850GWh by 2040.

This is not an exhaustive list either, so it is important you do adequate research before deciding on any specific investment.

How to invest in renewables and green energy

There are several ways to invest in renewable energy, namely through direct investment in clean energy projects (though these are not commonly available to retail investors), buy shares in green energy companies, or choose to invest in renewable exchange traded funds (ETFs).

Direct investment in renewable projects is often considered the most ‘low risk’, though this is debateable.

Why would some consider them ‘low risk’? Take a large-scale solar project for example, once it is up and running there is very little likely to go wrong.

For a retail investor, the most likely form of direct investment could be through the purchasing of corporate bonds.

For example, the MidAmerican Renewable Energy Company offered $1 billion in bonds, with an interest rate level of 5.375% to help finance its 550-megawatt Topaz Solar Farm.

However, bond investing is not without its risks, particularly if the bond is not investment-grade rated.

Here in Australia, you have a much smaller renewable bond market to choose from.

Although, in 2016 Australian Unity with the backing of the Clean Energy Finance Corporation (CEFC) created the Australian Unity Green Bond Fund, Australia’s first dedicated green bond fund.

However, this is a slightly different product than your typical corporate bond, which we won’t discuss here.

Perhaps the most popular method for investing in renewable energy is through simple exchange traded securities — stocks.

There are several renewable energy-related stocks currently trading on the ASX.

They aren’t just manufacturers or installers of renewable energy technology either.

These stocks can range from miners that produce minerals specifically for use in clean energy technology, to wind and EV related companies.

But keep in mind that this is very much a global story so it may be worth looking at stocks outside the ASX too.

A third option is to invest in ETFs.

These tend to have lower risk than investing in individual stocks, but also have the capacity to produce good returns.

ETFs function like individual stocks, but they are actually a combination of dozens of different stocks.

Unfortunately, there are not many specific renewable energy ETFs that trade on the ASX, with the lion’s share trading on US and UK exchanges.

That said, these Australian ETFs do not focuses exclusively on renewable energy, rather they index leading companies that are focused on sustainability.

Intro to ASX Renewable Energy Companies

If you have an appetite for risk, ASX-listed sustainable energy-related stocks offer a good entry point into adding sustainability-focused stocks to your portfolio.

The table below is just a sample of some of the renewable energy-related stocks that currently trade on the ASX.

Ticker Code

Company Operation
MPR mPower Solar and alternative energy systems
GXY Galaxy Resources Lithium Resources
ORE Orocobre Lithium and other resources
BLG Bluglass Developing materials for LED and Solar manufacture.
VPR Volt Power Waste heat recovery
CWE Carnegie Wave Energy Wave Energy

Source: Market Index

However, with the push into renewable energy continually gaining momentum, some of Australia’s largest energy companies now provide some exposure to renewables.

Energy Companies Australia - Clean Energy Investing

Source: TheBull.com.au, figures from May 2020

Both Origin Energy Ltd [ASX:ORG] and AGL Energy Ltd [ASX:AGL] are integrated energy providers with diversified sources of electricity generation.

While both have diversified renewable energy sources from solar to wind to thermal, both also still operate coal-fired electricity generation plants.

However, New Zealand-based rival Tilt Energy Ltd [ASX:TLT] has operations in Australia as well, focusing exclusively on wind and solar.

Tilt has six wind farms in Australia and four in New Zealand, with multiple additional farms under development, as well as three solar farms in Australia with additional projects under consideration.

Infigen Energy Ltd [ASX:IFN] has seven operational wind farms in Australia, as well as one energy storage site along with eight additional wind sites and nine solar sites under development.

However, as of November 2020, Infigen is no longer trading on the ASX after private firm, Iberdrola Renewables Australia, purchased it.

The following table includes stocks at the more speculative end, with none yet returning a profit and only Genex Power Ltd [ASX:GNX] currently generating revenue.

Renewable Energy Companies ASX

Source: TheBull.com.au, figures from May 2020

Both Genex and New Energy Solar Ltd [ASX:NEW] are focused solar companies, however Genex also has a wind project under development and is developing an abandoned Queensland gold mine as a hydro renewable energy generating and storage project.

ClearVue Technologies Ltd [ASX:CPV] is a speculative stock operating in a niche sector — glass panels with the capability of producing electricity to supplement a residential or commercial building’s main source of electricity generation.

Note: None of the stocks we’ve mentioned are official recommendations. Just examples of renewable energy-related stocks for your consideration.

What to make of renewable energy investments

We hope you’ve enjoyed this comprehensive guide to investing in renewable energy in Australia.

Getting in earlier can offer investors nice returns, but also exposes them to significant risk.

As the sector develops and becomes more mainstream, the riskiness of renewables will likely wane.

Remember, if you want to stay clued up on all things of interest within the investment landscape, including renewable energy-related stories, be sure to subscribe to Money Morning. It’s a unique publication that exists to cut through the hype to help you make sense of the stories that really make a difference to your wealth — aiming to make you a more informed, enlightened and profitable investor.

PS: How to Find Promising Energy Stocks — Discover why the energy market is ripe for massive disruption and how to identify innovative energy stocks. Click here to learn more. 

Money Morning Australia