Renewable Energy – are there opportunities for universities?

For more information, contact Charlie Crole, Head of Institutional at Guinness Asset Management.

Why is the Energy Transition happening?

The transition to a global sustainable energy system is one of the great developments of our age. Over the next thirty years, the world will continue this transition, with the driving factors being:

• Population and GDP growth putting a significant strain on today’s energy supply
• Economics as sustainable sources of energy will be cheaper than the incumbents
• Climate change leading the world to reduce carbon emissions via cleaner energy
• Pollution forcing governments to drive air pollution out of cities via cleaner energy
• Energy security as sustainable energy sources, which are more evenly spread across all countries, facilitate lower reliance on energy imports

The most important driver in the energy transition, in our view, is economics – that sustainable sources of energy are becoming cheaper than the incumbents. It is obviously vital for investors that the companies or physical infrastructure in which they invest are participating in and contributing towards long-term trends that are economically viable.

Which areas will benefit?

In terms of power generation, we believe coal will be the main loser – with demand expected to fall by over 70% by 2050.  We see natural gas demand growing initially before steadily declining by 2050 to around 90% of 2018 levels. Renewables, meanwhile, are set to make up a rapidly increasing proportion of global energy demand, with wind, solar, geothermal and biomass expected to grow from 4% in 2018 to 40% in 2050.  Whole new industries and opportunities are being created by these changes, ranging from power generation to industrial materials, electric vehicles, energy efficiency systems, battery technology and measuring and systems technology. Investors can access these areas indirectly, via public markets, or directly via investment in physical infrastructure.

Actual and forecasted global energy demand, 1965–2050E

Source: BP Statistical Review of World Energy, IEA historic data to August 2020; Guinness Asset Management ‘base case’ estimates beyond August 2020

What makes Renewables particularly attractive?

A key driver of the rise in ‘Renewables’ generation has been its rapidly falling cost across all technologies. Nowhere has this fall been more dramatic than within solar power generation, driving rapid growth as annual solar installations have grown from 1 GW in 2006 to an estimated 129 GW in 2020. The continuing reduction in the cost of generation opens up possibilities for organisations both to generate and invest in solar installations.

Source: IRENA; Guinness Asset Management, July 2020.
*LCOE – The levelized cost of energy, also referred to as the levelized cost of electricity or the levelized energy cost (LEC), is a measurement used to assess and compare alternative methods of energy production. The LCOE of an energy-generating asset can be thought of as the average total cost of building and operating the asset per unit of total electricity generated over an assumed lifetime.

Source: BNEF; Maycock; Guinness Asset Management, December 2020.

UK Rooftop Solar – why and where?

There are now a variety of opportunities for property owners to install roof-mounted solar panels and either benefit from a predictable revenue stream – with a low correlation with other asset classes – or cheaper electricity, or both. Technology improvements have made the sector competitive even without subsidies, with low variability in terms of output. Below we examine the advantages in economic terms of opting for “Roof-Mounted” versus “Ground-Mounted” solar panels.

Source: Guinness Asset Management, May 2021.

How large is the potential UK solar market?

As the market grows it is becoming large and liquid enough to attract mainstream interest.

Source: Ofgem; Guinness Asset Management, May 2021.

The opportunity for universities

As the global energy transition continues to accelerate, Renewables have a bright future ahead. Opportunities are opening up for universities, both as landlords and endowment investors, to benefit from the falling costs and exponential growth of renewable energy generation across the globe and the revolution currently underway in UK solar generation. These opportunities will enable universities to meet stakeholder concerns regarding the efforts being made towards facilitating global decarbonisation through a positive environmental solution. Taken together, this should make investment in the areas highlighted above an attractive proposition.