Climate change is occurring earlier and more rapidly than anticipated, calling for urgent changes over the next decade to combat the impacts of extreme heat, drought and floods that could result from rising temperatures.(1) But while the world is heating up, so too is investment in the renewable energy sector, as consumers begin seeking new, clean resources with which to meet their needs.
The global transition towards renewables is underway – and by 2040, solar could represent almost one third (32%) of the world’s total power generation capacity.(2) The significant growth of the solar industry has established a (now) mainstream infrastructure investment class available to Australians: large-scale, stable, cashflow-producing solar power plants that generate emissions-free power. However, considerable investment is still required to realise this important movement. So, what should investors know about solar power plants and why might they consider investing in this space?
Achieve the twin goals of financial returns and positive social impact
An investment in solar power plants could offer investors the opportunity to not only achieve an attractive, risk-adjusted financial return but to also cultivate positive social impact.
Current fossil fuel-based electricity generation has various negative impacts that need to be managed, including waste production, increased carbon dioxide and other pollutant emissions. Fossil fuels not only have a finite supply, but have also been proven to cause significant environmental damage and health problems in humans.
By investing in the transition towards renewable energy, investors could contribute to the decrease of the energy sector’s reliance on fossil fuels and help displace greenhouse gas emissions. And, as global electricity demand continues to increase off the back of population growth and economic development, solar could offer a potential solution for meeting the world’s future energy needs.
Exposure to an expanding global sector
According to findings from Bloomberg New Energy Finance, coal will shrink to just 11% of the world’s total electricity generation by 2050.(3) As fossil fuel divestment progresses, renewable investment increases.(4)
Solar generation capacity is expected to increase globally from 5% to 32% by 2040, growing far more than any other resource.(5)
By investing in solar, investors could gain access to a global market brimming with opportunities.
A fundamental shift to low-cost solar is anticipated to underpin solar’s growth trajectory.(6) In fact, solar has become more cost competitive with fossil fuels in many countries,(7) even without the assistance of government subsidies. For example, the US has a well-established solar industry that continues to experience growth. Many state governments across the country have substantial control over directing energy policy, offering a number of subsidy programs to incentivise renewable energy generation. In the first half of 2018 alone, more than 8.5 gigawatts (GW) of new projects were announced, growing the US utility pipeline to 24 GW – its highest level in history.(8)
Secure, long-term and risk-adjusted returns
Historically, Australian wholesale electricity prices have been volatile. For example, power prices surged more than 5% in early October, as government inaction on energy policy and low Snowy hydro water levels fuelled volatility in the wholesale electricity market. As a result, Australian corporates and electricity retailers are increasingly turning to renewables to secure reliable and cost-effective electricity supply. In July, BlueScope Steel signed the largest solar power purchase agreement (PPA) ever by an Australian industrial energy user to help reduce mounting electricity costs. Jim Nowlan, Bluescope’s head of Australian steel products, noted the seven-year contract to purchase electricity from a solar farm to be built in the New South Wales (NSW) Riverina would “help keep downward pressure on energy costs and support the gradual transition to renewable energy”.(9) In fact, Bluescope joins a number of other industrial energy users who have also signed deals with solar producers to help reduce their energy costs.
For the owners of utility-scale renewable generators, securing long-term agreements to sell electricity to creditworthy counterparties could result in attractive, risk-adjusted returns. New Energy Solar is one such utility-scale solar investor. In July, the team agreed to purchase the 108.4 MWDC Beryl Solar Plant located in regional NSW. Once operational, the plant is expected to generate an 8.2% gross five-year average yield by selling electricity to the state government’s statutory authority Transport for NSW for a period of 15 years. The combination of a long-term PPA, AAA credit rating of the customer and strong yield could therefore make utility-scale solar a stable, long-term investment, as well as a means of diversification in one’s portfolio – particularly in the current low-interest rate environment.
While the growth of renewable energy remains to be seen, current trends and market projections suggest a bright future for solar. And although investing in large-scale solar power plants may carry a number of risks, investing in this space could offer investors the unique opportunity to invest in a fast-growing sector – not only for their financial futures, but for the betterment of all.