Hello sunshine – why solar will power the future of investing

The sun does more than wake us, warm us and nurture our planet. Every hour the sun beams more than enough energy to satisfy global needs for an entire year1. Choosing socially responsible investments may now actually be as good for your financial future as they are for your conscience. Why? There is unprecedented political and community support for renewable energy technologies while solar infrastructure assets are presenting a new asset class sitting between cash (lowest risk) and equities (highest risk). 

The rise of renewables

Fossil fuels remain the world’s dominant source of energy, but renewables are on the rise – for the first time the cost of generating electricity from the sun is competing with traditional sources in a number of key markets2. It is predicted that the demand for solar power will grow by an average of 47 gigawatts per annum from 2014 through to 2020, with 39 gigawatts attributed to the US, Europe, China, Japan, India and Brazil. Given its government’s backing of the solar industry, China alone is forecast to account for 27 per cent of that demand3.

A solar revolution

Electricity generation has become more efficient, but at the same time we are using more of it thanks to a growing population and our ever-increasing reliance on electronic devices. And it is coming at a significant cost. Sustainable investing is no longer about protecting the future, it is about managing today – and for heavily polluted countries like China there is arguably a much greater urgency around developing renewable energy.

Technology has transformed the economics of solar energy. The capacity costs for solar photovoltaic (PV – the solar panels that directly produce electricity from the sun) have dropped around 80 per cent over the last five years, largely due to the massive investment in production capacity in China4. Further falls are expected as technology and manufacturing processes continue to evolve. The combination of technological change and policy support underpins the Deutsche Bank prediction that electricity produced from solar will be at grid parity in up to 80 per cent of the global market within two years5.

A sustainable investment

This dynamic is creating more opportunities to invest in the sector than ever before. Until recently, investments in solar energy were largely limited to high growth, technology-oriented, early-stage companies. But today, grid parity is driving an ever wider adoption of solar power generation, and investors are able to invest across the full solar value chain including lower risk, cash-flowing solar assets that produce power with zero direct carbon emissions.

In our view there is a very real opportunity to make investments that generate positive social and environmental impact that also have the potential to produce attractive financial returns. Solar energy investors can gain exposure to assets that can respond positively to sustainability changes. They can also benefit from minimal operating costs once the solar panels are producing energy (fuel for a solar asset is free and unlimited) and be part of the response to the challenges presented by global climate change. For all these positives, sustainable investments (just like any other type of investment) remain subject to risks and uncertainties. 

The future looks bright

We believe that solar energy represents one of the biggest opportunities in sustainable investments, led by the development of solar plantations and advances to energy storage technology. Innovations in hybrid and electric vehicles and the work behind the scenes to develop small, long-lasting, fast-charging batteries will further shape the future of power generation by resolving storage solution issues. The transition from traditional resources to sustainable renewable energy sources is made possible by rapid technological improvements driving cost competiveness. On the back of this, solar energy is emerging as a new asset class where stable cash flows can provide strong yields, forming an important part of a diversified portfolio. The problem has never been the potential of this sector, rather its commercial viability. We believe that we are at the very beginning of a revolution in solar energy that will transform the energy landscape to make a sustainable future a reality.

Walsh & Company is a wholly-owned subsidiary of Dixon Advisory Group.

As a general recommendation, this strategy does not take into account your objectives, financial situation or needs. As always, your personal circumstances are critical when considering any financial strategy and seeking professional personal advice is highly recommended.

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Alex MacLachlan

Chief Executive Officer, Walsh & Company

Alex joined Dixon Advisory in 2008 to lead the then newly formed Funds Management division.

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