Green Gold Trumps Black Gold

By Julian Murdoch

A funny little thing happened in 2008 - investment in new power generation from renewable sources and technologies beat out investment in traditional fossil fuel sources by $30 billion. This fact has been brought to you by the recent UN report titled, "Global Trends in Sustainable Energy."

Great news for climate change, right? Well, kind of. Despite all the investment, renewable energy is only responsible for 6.2% of global power capacity, so the green "revolution" still has a way to go.

"Global Trends in Sustainable Energy" is a report from the U.N. Environment Programme [UNEP] put together by units of the UNEP and New Energy Finance. In it (it's a long read), you'll find discussion of all the different types of investments in sustainable energy technologies and companies, and a look at the health of the sector from the perspective of money flows. The official executive summary is available, as is the full report.

Total global investment in sustainable energy grew to $155 billion in 2008. The good news is that that number grew from the previous year. The bad news is that it only grew 5%. Previous years showed huge gains, like a 73% increase in sustainable investment in 2005 from the year prior, and 59% growth from 2006 to 2007.

It's easy to understand what happened. The financial crisis hit the sustainable energy sector hard. Public investment in the sector (via the stock market) fell by 51%. The market for IPOs had the floor drop out of it, with only 18 occurring in 2008 (down from 48 in 2007) and no new offerings as of yet in 2009. It's not a bad time for alternative energy; it's a bad time for venture investing, and everyone is waiting for greener pastures and better economic times.

Of course, the fact that oil crashed and cratered with epic Tom Cruise-at-the-bar-scene extravagance certainly took the wind out of these alternative sails.

But still, there are some standouts.

The award for most improved goes to solar, with a 49% increase in new investment since 2007 for a total of $33.5 billion. The award for most popular (by investment value) is still wind power - the new investment of $51.8 billion is only 1% down from 2007.

New investment in biofuels dropped 9% to $16.9 billion, and new investment into technologies and companies concerned with biomass and waste-to-energy dropped by a full quarter, to $7.9 billion.

That brings us to the big question for commodity investors, and investors everywhere:

How sensitive are investments in renewable energy to the price of oil?

Most people will say they understand how important it is to reduce the level of greenhouse gases globally. But how does that translate into real life when the price of energy - mainly oil - goes down? The recent push toward renewables seemed to take off when gasoline was over $4 in the U.S. and global oil broke the $100-a-barrel ceiling. High fossil fuel prices hit everyone where it hurt - their own pocketbook - and soon the public was clamoring for alternative fuel sources.

But if oil were to drop back to the $25-to-$30-a-barrel level, with corresponding diesel and gasoline prices, would the public still be on the renewable bandwagon?

The report doesn't go into that type of analysis, instead focusing on drivers beyond fossil fuel price; drivers like climate change, peak oil, government mandates, energy insecurity. Economic stimulus packages around the globe have earmarked a record $183 billion for sustainable energy. There is also this added bonus detailed in the report:

"Employment figures from UNEP and the International Labor Organization (ILO) for the renewable energy industry, suggest that it already generates more jobs than employment in fossil fuels."

All signs point to continued future growth in sustainable energy sources, even though the economic crisis was only truly felt in the sector in Q1 of this year, with a 44% drop in investments from Q4 2008 levels. There is hope that total investment in 2009 will recover and total something between $95 billion and $115 billion, with most of the investment coming later in the year. Already, investment in the second quarter has beat Q1 by 30%, according to a research note by New Energy Finance.

So who benefits from new investment? Directly, it's the companies that are out there either creating new technologies or implementing existing technologies. But indirectly, commodity investors - even oil loyalists - can look at this information and make some decisions. If you're a believer in long-term peak oil, alternatives offer one interesting way to play oil - removing the volatility and political insanity of a direct oil investment.

ETF investors have a wealth of green energy choices available. In 2008, four new sustainable energy ETFs were launched. Two of the more interesting: the Market Vectors Solar Energy ETF [KWT], which tracks the Ardour Solar Energy Index - an index of publically trading companies that derive at least 66% of their revenues directly from solar-power-related services and products; and PowerShares Global Wind Energy Portfolio [PWND], which began trading in July of 2008 and tracks companies that are involved in the wind industry - from manufacturers to distributors to installers of wind energy technology.

Like the iPath S&P GSCI Crude Oil Total Return Index ETN [OIL], both funds have bounced up since hitting lows for the year in March. Of the three, PWND was the best performer, not falling as far and showing higher recovery than both solar (KWT) and OIL (a positive laggard, which is really saying something).

There are many, many other ETFs out there to look at, and you're sure to find one that fits your strategy and shade of green. And who knows, as investment, and the economy, pick up, there may be more funds opening up for investors who want to go green. It's like peak oil without the oil.

Comments

[La Marque:]

Not having read the UNEP report, I can only think that the price of oil translates to transportation costs primarily in most of the developed world. That said, natural gas sets the price of electricity in most of the US. Nat gas generally follows the price of crude oil. Investment in alternatives will continue while concepts like the Pickens Plan will gain traction as oil prices rebound.

Being a visionary, ETFs will pay off as the alternative energy industry grows and consolidates. It will take consistent return on investment to increase investment in ae; governments are mandating the availability of ae choices. Julian Murdoch is such a visionary with the facts.

Jun 09 09:45 AM

[lbsterling:]

Interesting commentary.

I don't intend this as a petty (or paranoid) remark, but I don't trust the UN figures.

Something must be misleadingly or at least badly understated about how much is being invested in fossil fuel generation; the major oil companies alone spend more than $120B in investment annually on developing oil fields.

I understand the growth trend in sustainable energy investment is what's important here, but I think it's important to do a 'reality check' on a claim of such a major shift.

Jun 09 03:43 PM

[User 422955:]

The EU countries I'm familiar with heavily tax oil products. Germany (and probably other EU countries) also heavily subsidize renewable energy, particularly wind. Until the US, India, and China start increasing taxes on oil products, renewable energy will continue to lag. China, with its massive pollution projects, has more incentive, than the US and India, to invest in renewables.

The author doesn't tell us whether hydro power is considered to be a form of renewable energy.

Jun 09 07:10 PM

[mbkelly75:]

Nicely thought out - thanks for the links.

Jun 10 11:48 AM