(28 October 2019 ) DAILY MARKET BRIEF 1:A green "game changer" for investors?
The global average cost of generating electricity from offshore wind energy is on track to fall 40% by 2030, making the energy source competitive with fossil fuels, according to a report by the International Energy Agency (IEA). Investment in offshore energy, which currently only accounts for 0.3% of global power supply, could reach around USD 840bn over the next two decades, the IEA forecasts.
The energy watchdog sai d the energy source could be a "game changer" over the coming decades, alongside cheaper energy from solar panels and shale gas. Technically, the IEA said, offshore wind had the potential to generate 36,000 terawatt hours of energy per year, 50% more than the world's total power consumption today, the Financial Timesreported.
The report underlines our view that renewable energy presents an opportunity for investors. We see several main drivers:
The political pressure for action on climate change has been mounting. In October, for example, Green parties in Switzerland made large electoral gains, nearly doubling their share of the ballot since the last election in 2015 to take 21% of the vote. This is in line with recent advances made by green parties elsewhere in Europe. Such parties now account for 74 out of 751 seats in the European Parliament, based on over 20% of the vote in Germany, 14% in Austria, and 13.5% in France. Other governments have been putting forward more ambitious emissions reduction targets, including the UK's goal of achieving net zero emissions by 2050.
The commercial appeal of the major sources of renewable energy is increasing, and not just in offshore wind.Between 2009 and 2017, prices of solar panels dropped 76% and wind turbines 34%, making them competitive with, or cheaper than, fossil fuels in most major markets, according to data from the IMF. Falling costs also explain why the growth of installed capacity for renewables has continued to rise, even though the dollar value of investment in green energy has been falling.
The range of investment options has been increasing. Issuance of bonds used to finance clean energy projects—green bonds—has surpassed USD 200bn so far this year, which is a record. Green bonds as an asset class have grown from nonexistent to a USD 660bn market in just over a decade, and issuance of higher yielding green bonds from emerging markets has also been rising. Liquidity has been improving as well. Over half of the emerging markets' green bond issuance last year was benchmark-sized, at USD 500m or more.
The shift toward renewable energy also supports numerous UN Sustainable Development Goals, including improving access to affordable and clean energy (Goal 7) and combating climate change (Goal 13). Cumulative investment by our estimates looks likely to exceed USD 9trn by 2050.
Green bonds, meanwhile, are becoming an established asset class and have so far been offering comparable returns to conventional bonds, while allowing investors to align their portfolios with their ethical values.
By
UBS
