Why investing in renewables is a win-win for all!
With the recent IPO of Sterling & Wilson in India, more awareness and interest has been generated in renewable energy within the investor community. Many investors approach me with questions on the technology, its future viability and how and where to take exposure, how to manage the investment and its associated risks. Hence, I thought of putting my knowledge as a Developer, Investor, 4th generation entrepreneur, Asset Owner and Operator into a series of articles. These articles aim to create awareness amongst the investor community on the viability, safety and financial returns from investing in Renewable Energy, as well as alert them of common pitfalls and how to navigate through them. This is the first in the series and should lay the foundation argument for investing in Renewable Energy
First of all…Climate Change is REAL !
Globally we have all felt the effects of climate change in the form of flash floods, intense heavy rains, drought and seen the effects of rising temperature levels with melting glaciers and rising water levels. Thermal power fueled by coal and Vehicular pollution are the biggest contributors to carbon emissions that raise the global temperatures. Mumbai, Shanghai, New York, Miami, Rio De Janerio are some of the cities expected to be submerged under water by the end of this century due to the rising sea water levels which is being fueled by the rising global temperatures that melt the glaciers.
Map of World’s cities most likely to submerged by 2100:
Fighting Climate Change with the Paris Accord
We can reduce the intensity of the disasters by limiting the global temperature rise to 2 degrees Celsius by 2100. If we do not achieve that target, it could lead to catastrophic and irreversible effects on our planet!
When scientists first brought the possibility of this existential crisis to light, global leaders got together to sign the Paris Accord, limiting the global temperature rise to 2C. On November 4th, 2016, 196 countries entered the Paris agreement and set it in motion. Member countries have pledged to tackle the threat of climate change by limiting global temperature increase to 1.5–2 degrees Celsius. Major superpowers like Russia, China, and India have all taken the pledge.
Renewable Energy and its importance in fighting climate change
Renewable energy is any energy source whose raw material supply is endless and renewable. Wind and Solar are the two most prominent and commercially proven technologies. Once installed, both technologies release zero emissions as they use the Sun’s rays and Wind to generate electricity. Each MW of Renewable Energy installed helps reduce 1100 Tons of CO2 and saves 4200 trees.
Government Commitment in India
Initially, the cost of producing power from Renewable energy were extremely high. These projects required government support in form of subsidies or lucrative tariffs to entice investment. With time and money, the technology improved, and costs dropped drastically. Slowly, most governments including India have removed subsidies or major financial incentives to the sector as the technology today is cost-efficient without any incentives. Moreover, countries such as India, have given renewable a “Must-Run” status which means that power must be first procured from Renewable sources mandatorily. This gives Renewable energy an unbeatable edge in the power mix.
The last decade has witnessed a lot of money has flowing into the renewable energy sector. There have been dedicated funding channels, “Green Funds” created for driving investment. Through special allocations from government budgets, increased contribution from Pensions funds, and increased interest from Banks, Global Renewable Energy funding for utility scale projects has doubled in last decade to $282 Billion USD. In India, renewable energy comes under priority sector which increase the supply of money from banks at attractive rates.
Chart depicting the funding of Utility Scale Renewable energy funding:
Even private companies across the globe have committed to reducing their carbon footprint. Global initiatives such as RE100 lists some of the world’s largest and most influential businesses committed to 100% Renewable electricity.
Globally, such initiatives have led to businesses shifting from coal-based power to using Wind & Solar as a source of power. Today, many large conglomerates such as Unilever have committed to bringing down carbon emissions from their operations to zero. What’s impressive is they have also imposed these rules on their suppliers!
Most importantly, renewable energy has now become more cost-efficient than Coal-based power. This change has led to an exponential increase in Corporates’ renewable energy installations as depicted in the graph below.
Chart depicting the finance of Corporate PPA’s globally:
Renewable energy vs Coal Price
Apart from being environmentally friendly, renewable energy has emerged as a low-cost source of power. In India, price of Solar power has dropped to ₹2.00 per unit compared to ₹3.05 for coal-fired power. Hence, the primary driver of renewable energy in this decade will be the cost advantage it provides against coal-fired power.
Chart depicting the trend of renewable energy power prices:
There are many levers that driving the growth of Renewable energy of which the key ones have been highlighted above. The last 10 years has seen Solar generation capacity grow ten-fold from 40,000MW in 2010 to 578,000 MW in 2019. While On-shore Wind capacity has tripled from 177,000MW in 2010 to 594,000 MW in 2019. With this capacity, the earth is savings 4.5 Lakh tons of CO2 which is equivalent to planting 16.5 lakh trees every year. Apart from the Technology sector, no other sector has witnessed this kind of explosive growth over the past decade. India has greatly participated in this growth and has the 4th largest wind capacity and 6th largest Solar capacity in the world today.
Chart depicting the cumulative global installed capacity of Wind and Solar:
Why is Renewable Energy here to stay?
Renewable energy is here to stay because it is having potent mix of Economic, Political and Social drivers.
There is a cost arbitrage in producing power from Utility scale Solar and Wind against power from Coal. Moreover, the renewable technology is getting better every year, and which will further reduce the cost of power from Wind & Solar.
Globally, large utilities such as Berkshire Energy, Engie and other global utilities have already announced reduction or freeze in thermal power capacity powered by Coal or Gas due to better cost economics offered by Solar & Wind and pressure from large clients.
Within this pandemic, I have personally witnessed most companies looking at Renewable energy as a tool to reduce costs.
Politically, climate change has become an increasing topic of discussion amongst voters in Western Countries. In India, climate change may not be high up on the political agenda while campaigning, but India is one of the worst affected countries by climate change. Hence, there is an inherent incentive to focus on renewables. Any new thermal capacity addition is being frowned upon and citizens have been voicing their concerns over the pollution created. Moreover, the national electricity plan envisages that a large chunk of the rise in electricity demand which will be increasingly met by Renewable energy.
Lastly, globally initiatives such as RE 100 is just the beginning. There are investment themes such as ESG (Environmental, Social and Corporate governance) that allocate funds for investment in only those companies that adhere to ESG guidelines of which procuring power from Renewable energy is an important criteria. This gives an additional incentive to companies to go renewable as they are also rewarded with higher valuations for being environmentally friendly.
Ok. I understand that renewable energy is here to stay, but how do you make money?
To know how Renewable energy projects make money for their investors, tune into my next blog!