Looking to invest in an asset class that relies on resources that will last for millions of years? Here is how to invest in renewable energy the right way.
Renewable energy is nothing new. It’s been here for centuries. Remember those beautiful Dutch windmills? Remember when electricity wasn’t even a thing?
People had to rely on the constant renewable resources around them to live a sustainable life. Now, it’s not that it’s become more prevalent. It’s simply occurring at a larger scale.
Why’s that? It’s primarily been driven by the massive declines in the cost of main renewable energy resources like solar and wind. So, you may want to know how you, too, can play a part in renewables, and I’ll provide as much information as you’ll ever need about renewable energy in this guide.
I’ll answer the following questions about renewable energy investing:
- How does it work?
- How can I invest?
- How do I get started?
- How much does it cost?
- How are the returns on investment an investor expects from renewable energy investments calculated?
After working 10+ years in renewable energy private and public equity investing, I’ve got all your questions answered! Investing in renewable energy is the best way to combat climate change and protect our planet. Many different types of investments, such as stocks, bonds, commodities, and funds, invest in a mix of assets.
For example, green mutual funds or exchange-traded funds (ETFs) invest in companies such as Tesla Motors (TSLA) or First Solar (FSLR). At the same time, solar power plants produce clean electricity from sunlight to meet your needs for heat and power.
Renewable energy provides you with an investment opportunity that can be profitable and environmentally sustainable simultaneously!
Every day, we get closer to running out of oil, which means we need other fuel sources like coal, natural gas, and renewables because fossil fuels release harmful greenhouse gases into the atmosphere when they’re burned.
By investing in renewable energy, we can all do our part to reduce harmful emissions and help preserve the planet for future generations.
The Basics of Investing in Renewable Energy
Renewable energy investments can be classified as either renewable power or renewable fuels. Renewable power is generated from wind, sun, and water, producing electricity and heat. Renewable fuels are converted into energy through chemical reactions, such as those that take place in fuel cells or combustion engines.
Both renewable power and renewable fuels provide investors with profitable investment options that also help protect our planet for future generations. These investments can be categorized as:
Solar Energy – Generating electricity from the sun
Solar energy works by converting sunlight into electricity as a natural resource that can be used as a carbon-free alternative to fossil fuels. A solar panel, or photovoltaic (PV) panel, comprises sections of silicon cells that convert photons from the sun into an electric current.
The panels are composed of semiconductors and will turn direct sunlight into both current and voltage. Likewise, a battery converts chemical energy to electrical energy through a chemical reaction. PV panels convert solar energy from the sun to electrical energy like DC and AC.
Electrons convert with solar panels due to the photovoltaic effect, which is how they generate electricity without moving parts and emit no greenhouse gases.
Solar Investment Opportunities:
Ground-mount solar power plants generate the most energy and require the least maintenance, making them popular. It can be seen as a large PV array with panels on the ground facing east-west (a fixed tilt) or inverting the array to face south (a tracking tilt).
These arrays are typically installed on commercial or industrial properties but can also be placed on residential rooftops.
A rooftop solar system is a cost-effective way to generate solar power for your home or business and can reduce your electricity bill by 50% to 85%. Companies like SolarCity (SCTY) specialize in offering affordable rooftop solar power options to homeowners.
Solar companies like SunPower (SPWR) provide the funding, installation, and support for residential PV systems that produce electricity. The company offers No Money Down financing with an investment-grade Power Purchase Agreement (PPA).
Sunrun (RUN) is another solar company that provides residential PV systems with No Money Down financing and allows you to choose how much electricity your system produces with a Power Purchase Agreement (PPA).
Sunrun also offers a Roof Diagnostics program where a representative will inspect your roof for free and help you determine if installing solar panels would be a good investment based on how much sun exposure your roof gets.
Solar Power Plant Investment Opportunities:
There are three types of solar power plants: utility-scale, commercial rooftop, and residential rooftop solar power plants. Utility-scale solar power plants are large arrays that require much space to produce the most energy, making them an economically viable option for commercial or industrial properties with open space.
Commercial rooftop solar power plants are the best choice to reduce your carbon footprint, increase your property value, and save money on electricity costs without installing an entire solar power plant.
Residential rooftop solar power plants are installed in residential homes, allowing homeowners to generate electricity and sell any excess power back to the grid. Pair this with battery energy storage, and you can isolate and distribute a generation resource from a centralized utility.
See Related: Overharvesting & Overexploitation of Natural Resources: The Effects To Know
Wind Power – Generating electricity from the wind
Wind turbines use kinetic energy from the wind to convert it into electrical energy. The wind turns the turbine blades, then rotates a shaft connected to an electrical generator. The generator then produces an electrical current.
Wind turbines come in various shapes and sizes, from large wind farms that can be seen from miles away to small wind turbines used to generate electricity for individual homes.
Wind Energy Investment Opportunities:
Wind energy is the fastest-growing source of energy in the world and accounts for more than 22% of all electricity generated in the United States.
The U.S. Department of Energy’s Wind Program helps coordinate the efforts of various federal agencies to ensure that wind energy research, development, and deployment are done effectively.
The DOE’s Offshore Wind Research and Development Consortium, spearheaded by the National Renewable Energy Laboratory, provides funding for research, development, and deployment of offshore wind energy technologies.
The DOE’s Wind Energy Technologies Office provides funding for research and development of wind energy technologies to lower the cost of wind energy and make it a more economically viable option.
See Related: Best Portable Solar Panels for Home
Hydropower – Generating electricity from water
Hydropower is the most widely used type of renewable energy in the United States, accounting for nearly 60% of all electricity generated by renewables.
The U.S. Department of Energy’s Hydropower Program helps coordinate federal efforts to ensure that hydroelectricity, including generating electricity from conventional and unconventional hydropower sources, is used responsibly and effectively.
The DOE’s Office of Electricity Delivery and Energy Reliability provides funding for research into how hydropower can integrate with other forms of energy generation to deliver reliable, resilient, low-cost power while ensuring public health and safety.
See Related: How to Store Solar Energy for Later Use
Geothermal Power – Generating electricity from the heat inside the Earth
Geothermal energy is generated by extracting thermal energy from the Earth. This thermal energy can generate electricity, heat homes and businesses, or cool buildings. Geothermal energy dates back to the 1800s when people used geothermal hot water to heat their homes.
The U.S. Department of Energy’s Geothermal Technologies Office provides funding for research and development into how geothermal energy can be used in electricity generation and direct heat applications to make it more economically viable, opening up new opportunities for its use.
See Related: Best Solar Energy Stocks to Invest in Today
Biofuels – Converting organic matter into fuel
Biofuels are fuels that are derived from organic matter. The most common biofuels are ethanol and biodiesel. This is generally known as alternative energy, given the novel form of generation this asset class offers.
Ethanol is a biofuel that is made from corn. It is used to power vehicles and can also be used as fuel for heating or cooking. Biodiesel is a biofuel that is made from vegetable oil or animal fat. It can be used to power vehicles, heat homes, or cook food.
Biofuels offer a number of benefits over fossil fuels, including:
- They are renewable, meaning they can be replaced over time.
- They are biodegradable, meaning bacteria and other organisms can break them down.
- These fuels produce lower emissions than fossil fuels.
- They can be found domestically, reducing U.S. reliance on foreign oil.
The DOE’s Alternative Fuels Data Center provides information about how to use and produce biofuels, reduce their environmental impact, and how the transportation sector uses biofuels.
See Related: What is the Environmental Impact of Geothermal Energy?
Financing Options for Renewable Energy Projects
Investing in renewable energy can take a few different forms, including:
- Power Purchase Agreements – These are long-term contracts that allow the buyer to purchase energy from a company that develops, owns, and operates renewable power plants.
- Renewable Power Projects – Investing directly in the development of new solar, wind, or geothermal projects
- Green Mutual Funds – Stocks that invest in companies involved with renewable energy, such as Tesla Motors or First Solar stock.
- Renewable Energy Certificates (RECs) – These account for all energy generated from renewable sources. By purchasing RECs, the buyer supports the development of clean power plants and reduces their environmental impact.
- Solar Renewable Energy Certificate (SREC) Program – These certificates represent 1 megawatt-hour of electricity generated from a solar photovoltaic system and can be traded on a commodities exchange.
There are a number of financing options for renewable energy projects. The most common way to finance a renewable energy project is through a power purchase agreement (PPA). In a PPA, the buyer agrees to purchase all or a portion of the energy generated by a renewable power plant over a set period.
This allows the buyer to purchase energy from a company that develops, owns, and operates renewable power plants without making a large up-front investment. Another way to invest in renewable energy is through renewable power projects. These are projects where the investor provides the capital.
See Related: How to Start Investing With Purpose
The Investment Process – How to Invest in Renewable Energy Projects or Companies
Investing in renewable energy is not too different from how you would normally invest your money, but there are some things you should know before getting started. There are more options for investing in renewable energy, but the most common ways are through an online broker or a company.
An online broker is used to buy stocks that are part of an index fund, which means you take advantage of economies of scale by buying into companies that have already done all the research and development for you.
When you invest in a company directly, you buy shares of that company and become a part-owner. This type of investment usually comes with more risk and the potential for greater returns.
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Calculating Returns on Renewable Energy Investments
Returns on renewable energy investments can be calculated differently, but a common method is using the Internal Rate of Return (IRR).
The IRR is a metric investors use to measure how good an investment is. It considers the cost of the investment, the amount of money you make back on the investment, and how long it takes to get your money back.
For example, if you have an investment that costs $1,000 and makes you $1,200 after one year, how much of a return did you make on your money?
An annualized rate of return is how much your total returns are worth after multiplying it by how many years the money was invested. In this example, if you invest $1,000 and it makes you $100 a year for 5 years, your annualized rate of return is 20%.
See Related: How Much is a Wind Turbine? Here’s What to Know
Benefits of investing in renewable energy
Renewable energy investments can offer investors several benefits, including:
- A potential for stable and predictable returns
- Diversification of a portfolio away from traditional fossil fuels
- The potential for tax breaks and subsidies
When assessing a renewable energy investment, potential investors should consider how competitive the source of renewable energy is to other forms of generation currently in use how much support there is for development, and how quickly adoption rates are increasing.
Investors can also assess how valuable assets tied to renewable energy projects are likely to be given how popular they are becoming or how much competition there is for a particular project.
See Related: How to Invest in Verticle Farming
Things to Know About the Renewable Investments
There are also a few things you should keep in mind before investing in renewable energy:
- Returns on investment for renewable energy investments vary and should not be your main motivation for investing in this space
- Choosing an investment strategy that makes sense for how you invest
- Projects still depend on the other projects around them, so it’s important to diversify your investments
Renewable Energy Investments Are Profitable and Sustainable
Investing in clean energy is a great way to protect our planet against climate change while earning a healthy investment return. The returns on renewable energy investments vary but are typically more stable and predictable than other investments. In addition, many clean energy projects offer tax breaks and incentives that can make them even more profitable.
Investing in clean energy is good for the environment and can also be a great way to secure your financial future.
The future of renewable investing
The future of renewable energy looks bright as more and more people become aware of the benefits of investing in renewable energy.
Renewable energy investments offer investors several benefits, including stable and predictable returns, the potential for tax breaks and subsidies, and the chance to diversify their portfolios away from traditional fossil fuels.
Investors can assess how competitive a particular form of renewable energy is by looking at how quickly adoption rates are increasing, how valuable assets related to renewable energy projects are likely to be, and how much support there is for development.
When choosing a renewable energy investment strategy, it’s important to consider how you invest and how comfortable you are with taking on some risks. It’s also important to remember that not all renewable energy investments are created equal and that it’s important to diversify your portfolio.
Investing in renewable energy is a great way to protect our planet against climate change while earning a healthy return on your investment. The future of renewable energy looks bright, so don’t miss out on the opportunity to invest in this growing market.
See Related: Important Pros and Cons of Electric Vehicles
FAQ
Are renewables a good investment?
Generally speaking, yes, given the isolated nature of the generation and, thus, the revenue stream from macroeconomic events.
However, the answer depends on how much you are willing to put in, how long, how likely the government is to go ahead with their plans for each renewable energy source, your risk tolerance, and how rapid they are in rolling out these plans.
How do I invest in renewables?
Investing in renewables is quite simple! There are two important factors to focus on when investing in renewable energy: how much money you have available for investment and how risky you want your potential returns to be.
The first step is likely the hardest– deciding how much money you will invest. Evaluating your finances can provide a good starting point. Julie has $5,000 in her savings account and $10,000 in credit card debt with 18% interest rates.
Given those numbers, Julie could put all her $15,000 into any type of renewable energy or half ($7,500) towards this goal and use the other $7,500 to pay down her high-interest credit card debt.
When it comes to how risky your investment should be, remember that there are different levels of risk associated with renewables. For example, investing in a company that manufactures solar panels is likely less risky than investing in a startup developing new wind technology.
The important thing to remember is that there are renewable energy options for everyone, no matter how much money you have to invest or how risky you want your investment to be.
How do I get started?
Once you’ve decided how much money you want to invest and how risky you want your investment to be, the next step is finding an appropriate renewable energy investment. This can be done in a few different ways:
– through a financial advisor
– through an online investment platform
– through a mutual fund or exchange-traded fund (ETF) that focuses on renewable energy
Each option has its own pros and cons, so it’s important to do your research before deciding which route to take.
How much does it cost?
The cost of investing in renewable energy can vary depending on your chosen option. Financial advisors typically charge fees for their services, and online investment platforms may have a range of fees associated with different types of investments.
Mutual funds and ETFs also have different costs depending on how the fund is structured.
For example, in some cases, the cost of an ETF may be lower than that of a mutual fund with similar holdings because no advisor is managing the ETF.
However, there are also advantages to having an advisor manage your investments for you! For example, an advisor can help diversify your portfolio by investing money into different companies within the renewables space.
Overall, how much it costs to invest in renewables depends on how you choose to invest. However, there are ways to lower the cost of investing in renewable energy, so it’s important to look at your options.
What is the most profitable renewable energy source?
Without a doubt, the most profitable renewable energy source is wind power. Wind power yields very low up-front installation costs and requires no fuel costs. In other words, there are no operating or maintenance expenses after initial installation. For this reason alone, wind power projects represent excellent value for money from the investor’s point of view.
But there are more reasons – how about all those tax benefits? Wind farm owners not only take advantage of exemptions from local property taxes but also enjoy a generous production tax credit worth 30% or more back on their investment in some cases. And then there’s how much you get paid per megawatt-hour your facility generates – how does $50 sound?
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