Green is the New Black in Energy Investing: How Clean Power is Beating Fossil Fuels at Market
Alex "Solar Girl" Steele
You don’t have to be an expert economist to know that the invisible hand of the free market guides the natural fluctuations of prices and trade. It’s a staple of our society to approach the economy with a “laissez faire” attitude, letting things naturally adjust depending on the diverse array of individual market forces interacting at any given time. In this economic system, the price of a given good will fluctuate until it reaches a point where the quantity demanded by buyers is equal to the quantity supplied, at which time the price and quantity is said to reach economic equilibrium. Presently, we are witnessing this phenomenon unfold in the energy market. As the old guard of the fossil fuel industry struggles to hold its place in the global economic system, renewables are skyrocketing past them. There are a number of variables at play in this situation. The acceleration of anthropogenic climate change and the falling demand of fossil fuels as renewable energy technology improves, coupled with the declining value of oil and the growing risk associated with investing in it, is setting the stage for the overall value of the planet’s remaining fossil fuel reserves to plummet by nearly two thirds, according to Carbon Tracker, an independent financial research firm that specializes in analyzing the impacts of energy transition. This topic is especially interesting to those of us in the clean energy sector, so we will be tracking the fluctuation of the energy market regularly!
To get an accurate picture of renewables’ growing advantage over fossil fuels, we have to look at the entire issue from a multinational, geopolitical perspective. According to Carbon Tracker’s report published in June 2020, there are four major factors driving down the value of fossil fuels:
- Lower rents: Oil rent is defined by the United Nations as “the difference between the value of crude oil at world prices and total costs of production”. As the value of oil at world prices falls, total return on investment is lower because production costs aren’t dropping like world prices are. This translates to losses for states where oil production is a critical part of the GDP.
- Lower profits: As the new equilibrium price for fossil fuels is so much lower than the full cost, the profit margin declines. This impacts every industry dealing with petroleum products, and the economy as a whole.
- Totally stranded assets: As new equilibrium prices fall below variable costs, assets that were once considered valuable become “stranded”, meaning they are no longer able to yield profitable economic returns.
- Lower capital expenditure: As companies come to terms with the fact that fossil fuels will no longer bring them sustainable profits, they reduce the amount of money they spend to procure, upgrade, and maintain physical assets. This is also known as reducing “capex”.
Expert economists see this decline in the fossil fuel industry as a threat to the global economy, because so many assets are tied to dirty energy resources. Instead of attempts to artificially boost or rebuild an unsustainable market, they recommend that investors “increase discount rates, reduce expected prices, curtail terminal values and account for the clean-up costs,” and that policymakers “put in place an orderly wind-down of assets”.
This worldwide economic shift away from fossil fuels is significant, but even more noteworthy is the alternative energy boom! As the technology associated with producing renewable energy improves, scalability and acquisition costs have dropped dramatically. In fact, solar is already much more affordable than coal and gas in most major countries! This change has not gone unnoticed. As energy strategist Kingsmill Bond states:
“This is a huge opportunity for countries that import fossil fuels which can save trillions of dollars by switching to a clean energy economy in line with the Paris Agreement. Now is the time to plan an orderly wind-down of fossil fuel assets and manage the impact on the global economy rather than try to sustain the unsustainable.”
While some fossil fuel giants are claiming to project growth in demand, others are writing off billions in stranded assets and declaring bankruptcy. Meanwhile, the world renewable energy index, called RENIXX, tracks the 30 largest renewable energy companies in the global economy, more than doubled in 2020, with a remarkable 9% gain in November alone! As renewables soar, the S&P 500 energy sector index, which includes fossil fuel assets, dropped 41%, foreshadowing the inevitable end of profitability for hydrocarbon resources. The force of the invisible hand is clearly at play here, but policy changes have also impacted the economic transformation.
President Biden has pledged to gear the United States’ economy towards confronting climate change, rejoin the Paris Climate Agreement, and achieve net-zero carbon emissions by 2050, among other ambitious environmental goals. As you might expect, a change in the dialogue around clean energy has also encouraged investors to reallocate their funds. Energy funds that meet environmental, social, and governance compliance standards reached a new record with $1.79 billion in October 2020, while traditional energy funds hit only $871 million. Don’t make the mistake of assuming this spike in renewable investment is all based on hearsay, though. As explained by Guillaume Mascotto, head of ESG at American Century Investments, renewable energy assets will continue to grow as attractive investments regardless of which political party is in control, because the technology and public awareness associated with clean power are improving daily.
Whether you’ve been keeping up with the news about the viability of renewables since their inception, or you’re new to the game, the writing is on the wall. Clean energy is coming for dirty fuel’s brand, and it has never been more obvious that it’s time to invest in solar! Solar energy isn’t just a smart choice for managing your home’s utility expenses anymore; it’s now becoming one of the most lucrative assets on the planet. The proliferation of renewables will improve global equity, public health, and ecological resilience. Our team here at Solar Wolf Energy is excited to be part of the industry at such a momentous time, and the sky's the limit!