In his big speech to last week’s Conservative party conference, Boris Johnson promised a ‘green industrial revolution’ to drive Britain’s economic recovery.
In pledging £160 million towards wind power, the prime minister made it clear he sees a big future for renewable energy in Britain.
And it isn’t just Boris who’s backing wind farms. Across the world, governments are pouring billions of pounds into wind and solar – and markets are starting to take notice.
Off-shore: Wind turbines. Across the world, governments are pouring billions of pounds into wind and solar – and markets are starting to take notice
This year, shares in the Danish energy giant Ørsted – which produces a third of the world’s offshore wind energy – have risen by nearly 50 per cent.
Even before Boris’s announcement, more UK investors were going green. This summer, British savers ploughed some £2.5 billion into ethical and sustainable funds, a fourfold increase on last year.
So will renewable energy be the next boom for investors, or is it just a load of hot air? Here, Money Mail explains what you need to know:
Energy for change
For all its political popularity, renewable energy itself remains a reasonably niche market.
With the exception of Copenhagen-based Ørsted, much of the growth in wind and solar has been driven by the traditional energy companies looking to go green.
But while the likes of EDF and E.On might be doing more for the environment, their stock-market performance is hardly impressive.
Instead, investors wanting a decent return have looked to specialist investment funds who put up the capital for large renewable energy projects.
One example is The Renewables Infrastructure Group, a publicly-listed investment trust with a stake in more than 70 large wind and solar projects in the UK and Europe.
The trust has performed reasonably well in recent years, with a £10,000 investment in 2015 rising to about £13,000 now.
A sure bet?
With Boris’s ambitious vision likely requiring about £50 billion of private investment over the next ten years, these funds won’t be short of opportunities.
But would-be investors should be aware that wind power still depends heavily on generous Government subsidies.
In order to persuade companies to build and operate wind projects, the Government has guaranteed to buy their energy at a minimum price.
More hot air? In pledging £160m towards wind power, prime minister Boris Johnson made it clear he sees a big future for renewable energy in Britain
This has provided a much-needed boost for the industry, and made investments seem like a sure bet. But has it also distorted the market?
Of the dozen or so UK-listed renewable energy funds, almost all now trade at a significant premium – meaning they’re priced higher than the value of their underlying assets.
This isn’t necessarily a red flag in its own right, but it could be a sign of an over-excited market.
There are also big uncertainties about the commercial sustainability of wind power in the long-term, which could see investors’ returns vanish, too.
Up in smoke
Funds such as The Renewables Infrastructure Group rely on the price of energy in order to turn a profit.
But with Boris Johnson pledging dramatically to boost wind production, there’s a chance this will drive down prices.
A surplus of wind energy could even lead to something economists call ‘price cannibalisation’, where a sudden onset of windy weather leads to prices falling below zero.
It could even lead to negative prices, where producers end up paying buyers to take excess energy away.
Investors wanting a decent return have looked to specialist investment funds who put up the capital for large renewable energy projects
This is what happened with U.S. oil contracts in April. Needless to say, this kind of market shock would play havoc with renewable energy investments.
Given these uncertainties, investors should be wary about putting too much of their portfolio into renewable energy.
But environmentally conscious investors need not worry, as there are plenty of other green options out there.
Laith Khalaf, investment analyst with financial firm A.J. Bell, says that this year has seen a huge drive in planet- safe investment.
It probably helps that environmentally friendly funds have performed well this year, avoiding the dramatic losses seen elsewhere.
Specially designated ethical funds managed to record positive returns (an average of 2 per cent) in the first quarter of 2020 – even as the FTSE 100 plummeted by 25 per cent.
So where should savers look for the best environmentally friendly return?
Khalaf highlights Liontrust’s Sustainable Future Global Growth fund, which focuses on companies across the world doing their bit to drive ‘sustainable growth’.
A £10,000 investment five years ago would now be worth an impressive £23,000.
He also picks Royal London’s Sustainable Leaders investment trust, which looks for environmentally friendly companies on the UK stock market.
Though not quite as good as Liontrust’s global option, £10,000 invested five years would now be worth more than £16,000.
By choosing these options, savers will also have the advantage of a knowledgeable fund manager to make decisions on their behalf.
Investors looking to climate-proof their portfolio may be as well to stick with these more mainstream options, and leave wind power to the experts.