The future of energy investment looks green, but should you invest now?

Author’s note. This is the first of a series on the future of green energy investment.

With global energy demand rising steeply as a result of new demand by emerging economies, the good news for environmental advocates is that the expected rise of about 40 percent in the next 20 years will not be supported only by fossil fuels. Although fossil fuels will continue to be the major source of energy, renewable energy will contribute an increasing amount to meeting global energy demand.

For instance, in 2013, renewable energy, including solar and wind but excluding hydropower, contributed about 8.5 percent of global power generation, compared to 7.8 percent in 2012.

Much of the pressure generating the solar and wind renewable energy trend, which has seen a total investment of about $1.5 trillion since 2006, comes from tightening government regulations, especially in the developed economies of the West. However, the increase in exploitation of shale gas resources in the US will be accompanied by a growth in gas-powered plants considered more environmentally friendly than other fossil-fuel plants. On the other hand, the increasing cost of liquefied natural gas will help Europe focus more on developing its green energy capacity, spending about $67 billion by 2030.

Coal-powered plants will be the hardest hit as global green energy capacity grows under a regime of increasingly tighter emissions standards. Only Asia will see a growth in coal. However, it is encouraging that about 50 percent of green energy investments in the next few decades will be in Asia, where we expect to see a rapid increase in power capacity to meet the growth in energy demand pushed by sustained economic growth.

The anticipated growth in renewable energy will have implications for the investment portfolios of the near-future as the trends impose pressure on individual and institutional investors to go green. Already, we see a growing trend of divestment from fossil fuels, with institutional investors, such as insurance companies and pension funds, taking more interest in wind and solar investments.

Recent news reports that the Rockefeller family is divesting from fossil fuels have helped refocus public attention on the fossil-fuel divestment movement and its prospects. The family’s wealth has its origin in oil: The family patriarchs, John D. Rockefeller and William Rockefeller, founded Standard Oil. The announcement by the Rockefeller family that it is divesting some of its fortune from fossil fuels, especially coal and tar sands, has added a push to the fossil-fuel divestment movement.

Optimism is rising that a concerted shift toward green investment portfolios will help push renewable energy’s share of global power-generation capacity and help halt the dangerous trend of climate change.

Bloomberg New Energy Finance estimates that the shift will help limit growth of global carbon dioxide emissions. Global CO2 emissions are expected to peak by the end of the 2020s. The peak could have been reached earlier if emerging economies were not increasing their consumption of fossil fuels even while they add renewable energy to their overall power capacity.

Even while the nascent renewable energy sector struggles to gather momentum, advocates of green energy are full of optimism, predicting that the future of energy investment is green.

The disturbing decline in clean energy stocks in recent years showed the first signs of reversal in 2013, with clean energy stock indexes, such as the WilderHill New Energy Global Innovation Index, rising significantly in 2013. after reaching a nine-year low in July 2012. However, despite the sharp rise in clean energy stocks in 2013, there was a 14 percent decline in global renewable energy investments due partly to uncertainties about government energy policy and cheaper technology, according to the Global Trends in Renewable Energy Investment 2014 report published by United Nations Environment Programme and Bloomberg New Energy Finance (BNEF).

According to BNEF. the renewable energy sector could receive nearly $5.1 trillion out of a total of $7.7 trillion in new investments in power generation capacity by 2030; about $2.5 trillion in Asia, nearly $1 trillion in Europe, $816 billion in the Americas and over $818 billion in the Middle East and Africa.

In the same period, the fossil fuel contribution to total power generation will decline from 64 percent to 46 percent. BNEF estimates that of the 5,000 gigawatts of additional annual power generation capacity, fossil-fuel plants will contribute only 1,073 gigawatts, most being in developing economies going through a rapid phase of energy-demand growth.

Although hydropower will continue to contribute the main share of non-fossil-fuel-based power-generation capacity, significant growth is expected in solar power, with solar and wind increasing their combined contribution to total global power output from 3 percent in 2013 to 16 percent in 2030.

The growth in energy will not be driven primarily by government subsidies but by declining costs due to improved technology and economies of scale as production expands.

Cheaper ultra-high-capacity batteries and solar power from photovoltaic systems technology is a major development expected to drive the divestment from fossil-fuel energy. The declining cost of ultra-high-capacity batteries and solar PV systems threatens to make today’s large fossil-fuel power stations obsolete as people have the option of an off-grid source of power in their homes.

It is projected that by 2020, the cost of ultra-high-capacity batteries will have dropped to the extent that electric automobiles will be just about as cheap as combustion engine automobiles, leading to a boom in electric car production and sales, especially in Europe, where gasoline is relatively expensive.

This is one reason automobile companies are under pressure to consider strategic placement in the renewable energy sector.

The increase in competitiveness of renewable energy relative to fossil fuels as costs decline will encourage further investment as return on investment (ROI), which has for long remained unimpressive, improves.

The improvement in ROI in the green energy sector is the key factor in considering the question of divestment from fossil fuels with a total stock market valuation of $5 trillion. and also in considering whether green energy is good investment now.

If Horace Greeley were alive today would he advise, Go green, young man?

We shall consider this question in the next installment of this series.