Ceres: Clean energy opportunities align with investment fundamentals

Savvy investors are starting to understand the expanding opportunities in clean energy

Now that clean energy has gone mainstream, there is an array of existing and emerging opportunities to scale up clean energy investments while also meeting investors’ risk-return requirements. Across asset classes, clean energy opportunities are available that align with investment fundamentals such as long-term risk diversification. Savvy investors are now moving to understand the expanding opportunities in the clean energy sector, recognizing that this market is growing in terms of the breadth and quality of available opportunities.

Taking stock of key clean energy market developments and diversifying investment opportunities, Ceres recently released a new report on the additional $1 trillion per year in clean energy investment through 2050 — the “Clean Trillion” — required to limit global temperature rise to no more than 2 degrees Celsius and avoid the worst impacts of climate change. The report, In Sight of the Clean Trillion: Update on an Expanding Landscape of Investor Opportunities, finds that achieving this goal is eminently feasible, and that the capital needed to support it is not extraordinary in the context of existing global capital flows.

As the report notes, a global clean energy transition to meet the objectives of the Paris Agreement by 2050 will generate tens of trillions of dollars in clean energy investment opportunities. While not yet on track to meet the Paris Agreement goals, global clean energy transition is well underway and irreversible — as renewable sources such as wind and solar power increasingly out-compete new fossil fuel and nuclear power projects around the world. Dramatic reductions in clean energy costs and technology improvements have rapidly changed the global market for clean energy.

Key indicators that this transition is well underway include aggregate global investment in clean energy at levels that have eclipsed power sector investment in conventional fossil fuels and nuclear power, as well as the recent proliferation of offshore wind in Europe and beyond — expanding the range of competitive large-scale clean energy infrastructure opportunities. Looking ahead, dispatchable clean energy is expected to be a major focus area, with clean energy storage infrastructure and technology estimated to experience a compound annual growth rate of more than 20 percent over the next 12 years.

In line with these new clean energy investment opportunities, a range of financing structures are available, including fund and co-investment, direct project investment, green bonds, securitized project debt, and more.In addition, green banks hold tremendous promise for catalyzing further investment in clean energy. The world’s largest green bank, the Clean Energy Finance Corporation (CEFC), has directed approximately half of its AU$5.8 billion in investment commitments to energy efficiency — one of the cleanest and most cost-effective energy resources. The CEFC notably has demonstrated successful models for crowding in private finance for clean energy investment, including energy efficiency opportunities, that otherwise might not have been accessible. Since 2013, each AU$1.00 of CEFC investment has helped catalyze additional private capital investment of AU$2.10.

Even as clean energy investment opportunities expand, there is still much more to be done to achieve the “Clean Trillion.” Fossil fuels continue to enjoy the lion’s share of global energy subsidies, while clean energy receives only a small fraction of such support. To enable a strategic, smooth and sustainable transition to a clean energy future, well-designed policies remain critical. Policy solutions include setting specific greenhouse gas reduction targets and placing a price on carbon emissions, among others.

Institutional investors can play a significant role spurring key policy reforms, with a focus on alleviating existing market distortions that historically have favored high-carbon fossil fuels and supporting clean energy transition at the speed and scale required. The recently released 2018 Investor Statement to Governments on Climate Change, calling for stepped-up action on climate change in the run-up to the 2018 G7 Summit, enjoys the support of nearly 300 investors with over $26 trillion in assets under management and is a compelling example of investors elevating their collective voices along these lines.

Investors should not wait on the sidelines as energy policy continues to evolve, however. With the fundamental and irreversible changes that already have occurred in energy markets, and as clean energy increasingly out-competes conventional fossil fuel power even on an unsubsidized basis, it is imperative for investors to actively manage risks associated with high-carbon assets while tapping low-carbon opportunities that meet their investment requirements. In doing so, investors should reassess their strategic asset allocation, acquire requisite skills and capacity, and engage with relevant service providers to ensure they are attuned to the expanding landscape of clean energy investment opportunities.

Sue Reid is vice president of Climate and Energy at Ceres.