ESG investing – which focuses on environmental, social and governance (ESG) metrics – is the latest iteration of ethical or sustainable investing, whereby investors aim for returns without compromising their principles. ESG considers a company's impact on the environment and society and operational matters such as transparency over leadership decisions, executives' pay, diversity, and shareholders' rights, alongside typical financial metrics.

The rise and fall of ESG investing

ESG investing peaked between 2020 and 2022 with a surge of fund launches and record asset flows driven by huge subsidies for clean energy and ultra-low interest rates, which encouraged investment in alternative assets. Covid also fostered a re-evaluation of priorities and a growing emphasis on ethics and sustainability. Investments in global ESG funds topped $645 billion in 2021.

The bubble burst when central banks began hiking interest rates to squeeze out inflation after the pandemic. Higher borrowing costs made speculative clean-energy projects more expensive and risky, exacerbating the impact of the broader flight to safety.

It was feared that ESG investing could go the way of socially responsible investing (SRI), its precursor in the 1990s. That trend saw investors focus on growth stocks as they filtered out the likes of tobacco, alcohol and defence stocks, which tended to be value and income stocks. Then the growth bubble burst and SRI withered on the vine. “What I call ESG 1.0 is really a resurrection of that [SRI] movement,” Alec Cutler, manager of the Orbis Global Balanced fund, told Citywire in 2023.

The ESG boom was also interrupted by the energy crisis after Russia invaded Ukraine in 2022, which pushed many nations to prioritise energy security – a concern reinforced by the war in Iran – and by a political and regulatory backlash in the US that has spilt over into Europe. ESG has been dismissed as “woke capitalism”.

US president Donald Trump has announced further drilling to bolster fossil-fuel production in the US. He also withdrew the US from the UN Framework Convention on Climate Change and pulled the US out of the Paris Climate Agreement for the second time. At the COP30 climate-change conference in Brazil last year, many were disappointed by the lack of agreement on moving away from fossil fuels.

Recently, former prime minister Tony Blair urged the government to drop its commitment to net-zero and focus on North Sea oil and gas exploration to generate energy for AI. Trump has also pushed back against diversity, equity and inclusion initiatives, with large US companies such as Amazon, Disney, Google, and Meta following suit.

The challenges of ESG investing

Against this backdrop, many asset managers have scaled back commitments to ESG, while funds have dropped the term from their names amid large outflows. Larry Fink, CEO of the world's largest asset manager, BlackRock, perhaps sensing the change in the mood music around ESG, announced in 2023 that he would stop using the term, despite having previously advocated the investment strategy.

Another difficulty was that ESG, like SRI, had always struggled with ambiguity. The term is subjective, as ethics are personal. ESG strategies generally back companies developing renewable energy or prioritise capital-light firms with low carbon footprints. This could mean excluding tobacco, fossil fuels and defence companies to focus on firms tackling climate change.

However, as there is no universal, legal definition, ESG relies on differing interpretations of what it means to be ethical or sustainable. For instance, defence could be taboo for one investor or ESG-focused fund, but to another it could be deemed crucial to national security and social stability, and thus perfectly acceptable. Similarly, nuclear energy is considered costly and dangerous by some, as it produces radioactive waste. But to others, it is a vital source of low-carbon electricity and critical to the energy transition.

Furthermore, factors comprising ESG can change over time. For instance, governance was once the primary focus, but now environmental and social aspects, such as diversity, are more prominent. This subjectivity has led to differences in how rating agencies score a company's ESG characteristics and there can sometimes be conflicting scores and priorities.

This has triggered concerns about companies and funds “greenwashing” their environmental credentials: using marketing or advertising to make vague, misleading or false claims about their operational impact on the environment. In 2025, Environmental law charity ClientEarth filed a complaint against BlackRock, accusing the world's largest asset manager of calling its funds sustainable despite having invested over $1 billion in fossil-fuel companies, such as Shell and BP. BlackRock has since made changes to many of its funds.

According to a survey by Hargreaves Lansdown, 75% of its clients think it important that their investments reflect their values, with cybersecurity, anti-corruption, bribery and water security key issues. Meanwhile, 47% of women agreed that responsible investing, which includes ESG measures and companies that make a “positive, measurable impact”, is important, compared with 28% of men.

Other asset managers, such as Vanguard Investments Australia and UniSuper, have also been accused of mislabelling their funds.

Since 2022, markets have shifted towards AI or capital-intensive sectors, such as banks and oil. But ESG funds still manage $3.9 trillion in assets, says investment platform Morningstar.“While it may look like responsible investment is a busted flush,” says Darius McDermott, managing director at online research centre and fund ratings agency FundCalibre, “the reality is more nuanced. The atmosphere has changed, and... responsible strategies have had a difficult run of performance. But [the] urgent need to decarbonise our economy remains.”

Despite political scepticism over renewables in the US, the private sector is pressing ahead with investments, backing the energy transition. Several US Republican lawmakers still back the Biden-era Inflation Reduction Act, which provides $369 billion in spending and tax incentives to bolster clean energy and lower greenhouse-gas emissions. “Even if it is partially repealed, this won't necessarily affect the bottom line of all decarbonisation companies,” says McDermott.

Deregulation, such as changes to the US planning framework, could accelerate investment in renewable infrastructure, as occurred during Trump's first term. But McDermott's “biggest concern” is sticky inflation and interest rates that could stay high for longer than expected, potentially deterring the large capital investment needed to decarbonise economies.

ESG investing makes a comeback

Although the hype around ESG investing has subsided, “most mainstream fund managers integrate financially material environmental, social and governance risks and opportunities into their investment processes”, says Dominic Rowles, head of ESG at retail-investment platform Hargreaves Lansdown. Global sustainable funds enjoyed a modest recovery in the first quarter of this year, with $3.5 billion in net inflows thanks to a rebound in Europe, says Morningstar. The US, however, saw its 14th straight quarter of outflows at $4.3 billion. ESG investing is “not a fad, nor do the reasons for it delivering good long-term returns fade”, says Peter Michaelis, head of Liontrust's sustainable investment team. “The broad themes of improving resource efficiency, quality of life and resilience will persist, and companies delivering them will see strong growth.”

A source of future demand

There are also generational differences. According to a survey in April 2025 by Morgan Stanley, Millennials (those born between 1981 and 1996) and Generation Z (1997-2012) were more likely to be interested in sustainable investing than Generation X (1965-1980) and baby boomers (1946-1964). “As the largest living adult cohort, [Millennials'] preferences matter – and studies show that they are willing to change their buying habits based on their views of a company's sustainability credentials,” says Rowles.

Meanwhile, regulators are tackling greenwashing. The Financial Conduct Authority's (FCA) Sustainability Disclosure Requirements require claims relating to sustainability to be “fair, clear, and not misleading”. The EU has introduced the Corporate Sustainability Reporting Directive, which obliges 50,000 European companies to disclose information on a broad range of ESG issues, and the EU Circular Economy Action Plan to encourage capital toward green infrastructure.

FundCalibre's Darius McDermott says investors should not focus on labels when picking a sustainable fund, but consider holdings, exclusions, engagement policies, proxy voting records, and ESG metrics, as well as any third-party verification and the consistency of the fund's investment approach.

He points to the £623 million Janus Henderson UK Responsible Income Fund. “For investors seeking a sustainable yield, in both senses of the word, it remains an attractive option.” The fund avoids sectors it considers environmentally and socially harmful, such as alcohol, animal testing, weapons manufacturing, fossil fuels, nuclear power, gambling, and tobacco. Its top holdings include AstraZeneca, London Stock Exchange Group, HSBC, National Grid and Smith & Nephew.

“Most ESG themes are driven by long-term structural demand,” adds McDermott. The Regnan Sustainable Water and Waste Fund targets the need for improved water supply and waste management amid growing urbanisation and global wealth. The £240 million global fund consists largely of local operators that are less exposed to tariffs and geopolitical disruption than multinationals. Top holdings include Cia Saneamento Basico Do Estado de Sao Paolo, a Brazilian water and waste management company, and Watts Water Technologies, a US manufacturer of plumbing and heating products.

Liontrust's Peter Michaelis says that the challenge over the last few years has been that market leadership has been concentrated in the AI hyperscalers, defence, mining, and oil sectors, which Liontrust's Sustainable Future funds avoid completely, or are underweight in. “We have always favoured a multi-thematic approach focused on areas such as innovation in healthcare, renewable energy infrastructure, and cybersecurity.”

Although the heady days of ESG investing inflows are unlikely to return and political headwinds remain, the market is maturing. Demonstrating greater resilience than SRI, ESG remains a key tenet of the global investment landscape.

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You might expect the £219 million Guinness Sustainable Energy Fund to have performed poorly in recent years, given the dreadful performance of renewable-energy infrastructure funds. Far from it: the fund returned 18% in 2025 after losing 17% in the previous three years, but returning 150% in the three before that.

That is because its portfolio is much broader. While the renewable infrastructure funds invest in just a few energy-generation projects, the Guinness Sustainable Energy Fund is spread across quoted companies in the equipment, efficiency, electric vehicles, power generation, batteries and infrastructure sectors.

Last year's returns were due to improving policy clarity, lower interest rates and surging power demand, not just from data centres and digital infrastructure but also from transport, building, industry and the re-shoring to the US of manufacturing, says co-manager Jonathan Waghorn. “Global investment in clean energy in 2025 was $2.2 trillion, twice as much as in fossil fuels, reflecting the fact that renewable energy is the cheapest form of electricity in most situations,” he notes. “Growing power demand has taken over from decarbonisation as the central secular theme.”

Capitalise on the rising demand for electricity

The International Energy Agency forecasts that electricity demand will grow at 3.7% in 2026 – well above the 2015-2023 average of 2.6% – and at 4% per annum thereafter. AI and data centres currently account for 4%-5% of US power demand, but this will grow to around 12% by 2030. Electric vehicle (EV) sales are expected to increase by 4 million to 25 million in 2026 (when they will make up 29% of total sales). Battery prices fallen 93% since 2010, but are likely to drop significantly further by the 2030s. In China, which accounts for 60% of global sales, EV sales are already over half the total. In the US, they are just 10% (against 20%-25% in Europe) due to cheap gasoline and range anxiety in a country where driving distances are longer, but this is expected to increase to 45% by 2030. Policy support has been inconsistent but changes in Donald Trump's “One Big Beautiful Bill Act” last year were not as adverse as many feared.

China added 430GW of renewable capacity in 2025, more than the rest of the world put together, and hit its 2030 target six years early. Approvals for new coal-powered plants have slowed – Waghorn says that global coal-fired generation is at a peak and expects it to halve by 2050. He expects gas-fired generation to continue to grow until 2040, then decline slightly. Renewable energy's market share of energy demand will increase from 15% to 40% as electricity's share of total energy increases from 25% to 40% in 2045.

“Given the growth in electricity demand, it is no longer about renewables or fossil fuels, but about both,” says Waghorn. “Not only is renewable capacity cheaper but costs are falling and lead times for installation are shorter than for gas, whose costs are rising. Gas-fired generation will still have a very important role, providing base load capacity and smoothing out the intermittency of renewable energy. Nuclear power will be slower to expand as expertise needs to be built up.”

“There is significant scope for energy efficiency gains, enabling overall demand growth to slow from 2% to 1% per annum long term.” Growth in electricity demand requires a doubling in expenditure to $600 billion per annum by 2030 and a further increase to $800 billion by the 2040s. “Much of the Western world's power grid is 40-50 years old, and over half of US grid transformers are 30 years old. Estimates point to a doubling of the global power grid by 2040.”

All this adds to the investment opportunity, reflected in the breadth of the fund's portfolio. It makes the funds focused solely on renewable energy projects – with high sunk costs and facing falling wholesale prices – look stuck up a cul-de-sac. Despite this, the portfolio still trades on a 12% discount to the broader market – with higher earnings growth, estimated at 12.7% per annum in 2024-2027 and above that of global markets, there is surely plenty more upside to go for.

An energy fund for a world that still needs oil

The oil and gas sector was a popular contrarian tip for 2026, largely because it had performed so poorly for so long. With the Brent oil price stuck at $65 a barrel, the dollar weakening, demand weak and plenty of potential additional supply visible, the argument for the sector did not look compelling. Yet the Gulf war changed all that, with the oil price surging to over $100 a barrel. Oil and gas companies are back in favour, with the Guinness Global Energy Fund returning 41% in sterling in the first quarter. So is it too late to jump in?

Oil looks expensive relative to recent prices but it was a “cheap commodity and at a 100-year low relative to the gold price”, says co-manager Will Riley. “The world was paying just 2% of GDP for its oil compared with a 30-year average of 3%, and 5% in 2012.”

The International Energy Agency has reduced its estimate for growth in demand from 0.73 million barrels per day (bpd) in 2026 to an average fall of 80,000 bpd. In the longer-term, oil demand, which stood at 104 million bpd in 2025, was previously forecast to peak at 107 million bpd in the 2030s. That peak may be brought forward if higher prices now provide an incentive to shift from oil at the margin, but demand is expected to decline only slowly.

The closure of the Strait of Hormuz theoretically prevents 20 million bpd of oil and 10-11 billion cubic feet of gas per day reaching markets. Alternative pipelines can transport some of this oil, but only some. While high prices will stimulate new investment – both in new production and new transport infrastructure – that will take time. There is no simple alternative to replace Qatar's 20% of global liquefied natural gas (LNG) production, for example. On a longer time scale, there is potential for additional oil and gas supply around the world, which can partly offset the depletion of existing fields. This includes Venezuela, which has the world's largest oil reserves and whose heavy (and costly to extract) crude has a breakeven point of at $80 a barrel, estimates consultancy Wood Mackenzie. However, “under-investment, infrastructure decay, sanctions and loss of technical capacity will take years to rebuild even if political stability and foreign investment returns”, notes Riley.

The Guinness Global Energy Fund had returned a respectable 9% in sterling last year, before oil prices rose – comfortably ahead of the sector, though it had lagged badly over five and ten years. This explains why the fund had shrunk to £125 million, though it is now up to £240 million. Last year's performance was driven by the focus of companies on cash flow and returns on capital, says Riley. Integrated European majors, notably BP and Shell, have been good performers “as they tilted away from renewable energy to fossil fuels”. Canadian companies have also done well as the government U-turned towards fossil fuels.

At the start of the year, the Guinness Global Energy Fund portfolio was trading on a trailing price/earnings (p/e) ratio of 12.8, a 40% discount to global equities, with little prospect of growth in earnings and cash flow if prices remained flat. However, an $80-$90 Brent oil price will add 65% to earnings, says Riley. Even after recent share-price gains, that will bring the fund's p/e ratio back down to about 13 times, compared with a long-run average of 15. Rising earnings also enable firms to pay down debt while distributing higher dividends, making share buybacks and still funding more investment.

The crucial consequence of the Middle East crisis is that the world has been reminded of the risks of supply disruption. This is likely to result in significant investment in new production to reduce dependence on the Gulf, actively encouraged by governments. That is good news for oil and gas companies with the necessary capital and expertise. Professional investors, who neglected the sector for so long, will be looking for an opportunity to invest. So should retail investors.

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The UK renewable energy sector cannot catch a break. At the end of October, the government launched a consultation on changing the Renewables Obligation Certificate (ROC) scheme that subsidises some renewable-energy production. At present, the subsidies are linked to inflation using the retail price index (RPI) measure, but they may now be switched to the consumer price index (CPI). RPI usually rises faster than CPI (the gap varies, but one percentage point is a rough rule of thumb), and so this would mean that subsidies rise more slowly in future.

The government has proposed two options for this. One is to switch to CPI in 2026. The other is backdate the change to 2002 (when ROCs were introduced) by freezing the current price until a new “shadow price” linked to CPI since 2002 catches up with today’s RPI-linked price, and thereafter increase with CPI. Neither are good, but the latter option is clearly worse. Hence shares in listed renewable energy investment funds (REIFs) slumped further, having already been battered by a series of setbacks and problems in recent years.

The changes would have no direct impact on new investments – the ROC schemes closed to most new applications in 2017. However, existing wind and solar farms have been promised subsidy payments until 2037 in some cases, so the changes will affect their earnings. More broadly, making retrospective changes undermines the assumptions on which existing investments have been made. That will erode investors’ confidence in committing future capital.

While the subsidies are ultimately paid by users as part of their energy bill, the change from indexing on RPI to using CPI is likely to mean a minimal reduction in the average household bill. At the same time, it will probably raise the cost of capital for future projects, making it ultimately self-defeating, argue infrastructure funds. Certainly, one has to feel that the government’s Clean Power 2030 (CP30) plan – which assumes £40 billion of private investment a year in green energy between now and 2030 – now seems wildly optimistic.

Losing patience with renewable energy funds

The direct impact of the change on listed REIFs will depend on which option is chosen (and on how much ROCs contribute to their income – typically 40%-50%). For many investors, this may feel like the final straw – yet more evidence that the sector is both unlucky and dysfunctional. While the government is clearly to blame for this particular shock, the way that the REIF sector has developed in recent years hasn’t encouraged investors to give it the benefit of the doubt. One can’t treat all REIFs as exactly the same and I’m going to focus largely on the solar funds here, but many of the problems apply more widely.

Bluefield Solar Income Fund (LSE: BSIF), Foresight Solar Fund (LSE: FSFL) and NextEnergy Solar Fund (LSE: NESF) put out statements saying that the impact on net asset value (NAV) would be around 2%, 1.6% and 2% respectively under option one and 10%, 10.2% and 9% under option two. This sounds manageable. However, we immediately get onto the question of how much investors trust these reported NAVs, which are based on fair value accounting and “mark to model” assumptions. The fact that most REIFs trade on 30%-40% discounts to NAV implies some scepticism about these valuations, while the fact that dividend yields are in the 10%-15% range suggests some concerns about their sustainability.

The original sin in the REIF model is that it was built around being able consistently to issue shares at premiums to NAV to fund new projects. REIFs were marketed as a growing income story in a low-yield world, with the added bonus of a green angle during the economic, social and governance (ESG) boom. Yet they were always paying out cash with one hand while taking it in with the other (hence NESF’s shares outstanding have doubled from 278 million 10 years ago to 555 million currently). This model only worked when the shares traded at a premium to NAV – now that they don’t, the REIFs no longer have access to cheap equity. Debt is no longer cheap either. It might make sense to cut dividends and reinvest the cash, but that would alienate investors who bought for income.

While this explains their growth problem, the opaqueness of returns explains why many investors are wary of them even as a limited-life income asset. In theory, the NAV represents the current value of future expected cash flows. The focus on this – and on paying steady dividends – makes it look as if REIFs have very simple, predictable economics. Reality is more complicated. Projected revenues depend on power price forecasts that come from third-party forecasters. When these change, so do NAVs. Meanwhile, actual performance has plenty of real-world complications.

For solar, there’s the amount of sun that falls on the panels. There’s whether it all gets used or whether grid outages means some gets wasted (FSFL had UK production 8.9% above budget in the first half, but would have been 13% higher without outages). On sunny summer days, there will be points when a surplus of solar power floods the system and sets the marginal price (at extremes the unsubsidised price can even go negative). Hence the “capture price” that solar farms get can sometimes be less the base load price (the price for steady, always-on power) – this summer, capture rates have frequently dropped to 80%. And if the grid physically can’t cope with the power being supplied, producers may be curtailed (turned off) by the system operator, meaning lost revenue.

Since the REIFs’ lenders and shareholders prioritise stability, the managers fix prices for much of their output in advance with power purchase agreements (PPAs). However, this means that they don’t capture much upside from spikes in spot prices (driven by higher gas prices, which set the marginal UK power price most of the time). All these factors come together in a bewildering series of assumptions. To take just one example, NESF’s short-term power price assumptions have fallen 56% from £139 per megawatt hour (MWh) in September 2022 to £61/MWh in September 2025. Longer-term power price assumption has risen 22% over the same three-year period. Yet its 20-year average price forecast has halved since it floated in 2014, pointing to long-term downward pressure.

Can renewable energy funds win back nervous investors?

What is the result of trying to distil such complexity into a single NAV that constantly changes? It is doubt about whether management are trying to mask poor economics with financial engineering, unconsolidated statements, fair value accounting and unverified assumptions. The accounting might technically be correct, but it is opaque and hard to compare between funds. Each time forecasts prove too optimistic and NAVs get downgraded, scepticism grows. This is why the REIFs now trade at huge discounts to NAV. (Policy risk – as demonstrated by the government’s proposed ROC change – may be another factor.)

Most of the REIFs seem to have little idea of how to get investors to trust them. They have tried to address the discount to NAV with share buyback programmes, but these have been too insignificant to counter the wave of selling. What’s more, buybacks often increase leverage: in May this year, NESF had to pause its buyback as leverage would have increased beyond its 50% debt-to-gross asset value policy limit. Rising debt is exactly what nervous investors don’t want to see.

Many have tried to sell assets, which would raise cash to pay down debt and fund buybacks while also validating NAV through real-world selling prices. This process has been slow, suggesting it may be hard to achieve prices respectably close to NAV. For example, in April 2023 NESF said it would sell 246MW of UK subsidy-free solar capacity across five separate projects. At present, there are still two project with 100MW yet to be sold. Last year, FSFL said it would sell its Australian portfolio (170MW across four sites), but the process has now been paused. A small number of bids for the portfolio were received, but none were deemed deliverable. In March this year, it earmarked a further 75MW for sale, with no results so far.

More recently, Bluefield proposed merging with its manager to focus on developing a 1.4GW pipeline of projects. However, that model implied a cut to the dividend and was quickly rejected by shareholders (if they were sceptical about the potential returns on capital, it is not surprising given the sector’s record). The fund was forced to ditch this and put itself up for sale. This has not steadied the decline in the share price, which has fallen to new lows below 70p, with a yield of 13% and a discount to NAV of 39%.

Until now, REIFs that have faced continuation votes have largely won them despite these woes – probably because investors are sceptical that they can sell their assets, pay back the debt and achieve a decent return for shareholders. This detente may be changing as investors get more anxious. The chairs of NESF, FSFL and BSIF have all stepped down in the past year and new brooms may be minded to sweep clean.

We could be reaching the point of maximum pessimism, as seems to have happened with battery funds. I have a position in NESF, bought on the basis that the dividend could well be cut, but that much of the bad news was already in the price with a yield in the mid-teens. Still, if the REIFs’ accounts clearly told us how much cash is being generated per pound invested per MW and whether it is declining, it would be much easier for investors to decide whether they still want to back these “sustainable” investments.

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What happened at COP30?

Last month’s climate jamboree in Brazil, COP30, was a damp squib – and not just due to the torrential rain that poured through the venue’s leaking ceilings. The UN’s 30th Conference of the Parties had been touted as the moment when there would be a move from pledges to implementation. But action was little in evidence.

For the first time, the US boycotted the conference. China was there, but studiously avoided stepping into the leadership vacuum. The summit ended with a watered-down resolution that made no direct mention of fossil fuels, the main driver of global warming. And at a summit held in the Amazon rainforest city of Belém, delegates failed to agree the hoped-for road map to a global deforestation accord.

Did COP30 achieve anything?

The summit adopted a set of 59 global indicators to track progress toward the Global Goal on Adaptation (GGA) and agreed on the next round of National Adaptation Plans, bureaucratic scorecards that represent an important and growing recognition that adaptation and mitigation – not just emissions cuts – must be part of global climate action. These were backed up by national commitments to triple adaptation finance by 2035 to roughly $120 billion a year.

But the defining feature of COP30 was the failure to even mention fossil fuels in the final resolution, even while explicitly acknowledging – for the first time – that the world is now likely to “overshoot” the 1.5˚C warming target in the 2015 Paris Agreement.

Is it time to scrap the COPs?

Many think so. The COPs have long been attacked as talking shops that spew a lot of hot air about hot air – issuing countless warnings about the cost of inaction but rarely managing to agree solid proposals for how the world should halt dangerous rising temperatures. In the 30 years since the first congress in Berlin, greenhouse gas emissions have risen by 34%. That’s slower than the 64% increase over the three previous decades, but not nearly enough to stop temperatures breaching the thresholds that scientists say will cause irreversible damage to the planet.

Looked at another way, though, without the Kyoto (1997) and Paris (2015) COPs, the situation would be far worse. Simon Stiell, head of the UN’s Climate Framework, calculates that, without the COP process, world temperatures would now be heading for a truly catastrophic 5˚C of heating, instead of the 2.5˚C increase – merely disastrous – that is now projected.

What’s happening to temperatures?

They are going up. This COP had an inauspicious run-up, in that early last month the UN’s Emissions Gap report confirmed what had long been known: that the steady increase in carbon emissions since Paris means global temperatures will rise beyond 1.5°C above pre-industrial levels. Global temperatures have surged past that mark in some recent years, with 2023 and 2024 ranking among the hottest on record. The 30-year rolling average – the benchmark used by the Paris deal – is still just below that level, at about 1.37˚C.

To keep even a 50% chance of limiting warming to 1.5°C, the world must cut emissions roughly 55% by 2035, compared with 2019 levels. But the national plans submitted within the COP process offer a fraction of that, putting the world on track for roughly 2.5°C of warming.

Are emissions now falling?

No. Global fossil-fuel emissions hit record highs in 2025, with the world emitting roughly 39.1 billion tons of planet-warming carbon dioxide, according to the Global Carbon Project. That’s 1.1% more than in 2024. A relatively small number of big countries account for most of the world’s emissions, with China responsible for 32%, the US 13%, India 8% and EU nations 6%.

Though emissions are still rising in the US, one promising sign is that they are now flatlining in China, after years of surging. Even so, the International Energy Agency projects that demand for coal, for example, will remain at around record highs until 2027. Demand is still rising in China, India and other developing countries, offsetting falls elsewhere.

So climate diplomacy has failed?

It may be becoming less important. It’s a “COP cliché to say the pavilions where countries host talks on green projects, technologies and trends are more interesting than the formal negotiations”, says Pilita Clark in the Financial Times. What became clear in Belém is that things are changing in the real world regardless of what gets agreed at COPs. In developing countries, from Ethiopia to Nepal, sales of electric cars are surging exponentially. Renewable energy is booming everywhere from Ukraine to Pakistan.

The economics of energy continue to shift decisively in favour of decarbonisation, agrees Paul Polman, the former CEO of Unilever, in Time. Meanwhile, the “centre of gravity is shifting” at COPs – with much of the most important progress happening “around the formal process and despite its limitations”.

What's changing?

In Belém, for example, the Action Agenda – a non-negotiated process – saw businesses, investors and city authorities set out investment plans totalling $1 trillion for clean energy and grid expansion by 2030. And the Netherlands and Colombia jointly announced a non-COP international conference in 2026 to develop an equitable, science-based road map for phasing out fossil fuels.

The institutions of multilateralism still matter greatly, but “may no longer be the primary engine of climate progress”. Businesses – organisations that plan far beyond political cycles – will increasingly be at the forefront, while the COP process must evolve to become simpler and implementation-oriented, or risk losing all credibility.

Indeed, last month’s jamboree may be “remembered less for what it resolved and more for what it exposed: that ambition is outpacing architecture, and that the world is ready to move faster than the institutions designed to guide it”.

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Renewable energy trusts were already struggling before the government decided to kneecap them at the end of October. In a major shock, it has launched a consultation on changing the inflation linkage on the subsidies they receive from the retail price index (RPI) to the consumer price index (CPI) in April 2026, three years sooner than expected.

Even worse, the government has floated a second, complex option that would backdate the switch to 2002. This may have been thrown in mainly to make a April 2026 change sound like a concession, but if actually implemented could reduce the income received by generators by billions of pounds over the coming years. The market reacted accordingly and the sector as a whole lost about 5% of its market value on the day.

Why is the renewable energy trusts industry struggling?

The proposals have created yet another cloud of uncertainty over a sector that was already unloved by investors. The industry has been caught in a “perfect storm” and is ill-equipped to deal with its current challenges, says Pietro Nicholls of RM Funds, an activist that has been battling battery-storage fund Gore Street Energy Storage Fund (LSE: GSF). Many of the trusts’ boards lack the experience required to address these problems, he argues. So instead, they’ve turned to easy ideas such as share buybacks.

Part of the problem is uncertainty over reported net asset values (NAVs). “An infrastructure or renewable investment trust NAV calculation is generally based on a number of different asset-specific (eg, output, power prices or project cash flows) and macro (eg, inflation or foreign exchange rate) assumptions, with individual trusts using different inputs to calculate the NAV value,” says Ashley Thomas of broker Winterflood. For example, if Greencoat UK Wind (LSE: UKW) were to use the same power price assumptions as Renewables Infrastructure Group (LSE: TRIG), its NAV would be lower than currently reported, estimates Winterflood. Since these are just assumptions, it is hard to say which numbers are more appropriate, but with so many variables, NAVs are undoubtedly highly subjective and volatile. Across the sector over the past 18 months, NAV changes have ranged from +8% to -7%, says Winterflood.

Feuding with renewable energy trust managers

It is regrettable that many managers were paid fees based on a percentage of NAV rather than performance. This became increasingly controversial once shares traded far below NAV. In the past year, many trusts have belatedly shifted to levying fees on a 50/50 mix of NAV and market value (or in UKW’s case, entirely on market value). Dealings with managers are becoming a common point of contention. Take Aquila European Renewables (LSE: AERI), which has agreed to sell assets to another fund advised by Aquila at a large discount to the current NAV, says Nicholls. How can the same manager assign two different values to the same assets? Or take a plan by Bluefield Solar Income Fund (LSE: BSIF) to merge with its manager, saying this would make to easier to invest in new projects. The trust has instead put itself up for sale after a backlash. Or just this week, TRIG has said it will merge with HICL Infrastructure (LSE: HICL), run by the same manager.

These developments show a lack of concern for investors, says Nicholls, which is clouding the real value of the assets. “If boards were more respectful of shareholders, the share prices would be a lot higher.”

It isn’t clear what it will take to shift sentiment towards the sector. The government’s consultation certainly won’t help. Still, there needs to be a substantial change in the way these trusts are run, with a primary focus on the interests of shareholders. Only then can investors begin to trust NAVs are what managers say they are.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

It’s been a tough two decades for UK-listed firms. BP, Shell and HSBC have dropped out of the ranks of the world’s largest listed companies. Britain’s current largest firm, AstraZeneca, doesn’t even make the global top 40. At the same time, the reputation of British universities has gone in the opposite direction. “We now have more universities in the global top 10 than we had 20 years ago,” as Robin Bagchi, chairman of the London Technology Club, points out. UK universities “continue to punch well above their weight in terms of producing world-leading research”, which is an important economic asset, says James Witter, head of Sarasin Bread Street. More than 2,000 active start-ups have been spun out of UK universities. Little wonder that a sovereign-wealth investor has said that British academia is “our equivalent of Gulf oil”.

The cutting edge of the 'golden triangle' UK universities

Such economic excellence is built on a foundation of “incredible institutions that are focused on applying science and technology to solve fundamental problems”, says Ed Bussey, CEO of Oxford Science Enterprises. He puts Oxford University at the top of the list of such institutions, pointing to the fact that every year Oxford comes up as one of the leading research universities, with a history of more than 70 Nobel prizes in a wide range of disciplines. “When I go out to lunch, I’ll be standing in a queue and the person behind me will be a world leader in this, and then I’ll be walking back to the office and another will walk past me and they’re the Nobel winner in another area.”

Such a concentration of elite academics can help create an environment that ends up being worth more than the sum of the individual academics involved. Having a “cosmopolitan and multinational” atmosphere “attracts other great minds” – and a lot of investors willing to put money into early stage enterprises stemming from Oxford research. This in turn creates a “virtuous circle” where the quality of research attracts capital, which in turns encourages more talented academics to move to Oxford.

Andrew Williamson, managing partner of Cambridge Innovation Capital, emphasises Cambridge’s reputation and heritage as a major competitive advantage in attracting the best scientific talent. “We’ve existed for nearly 800 years, which means that we’ve been doing this for longer than almost anyone else in the entire world,” he says. It has leveraged its infrastructure and culture of “cutting-edge science” to create links between “the academic world, the start-up world and the biggest global technology companies”.

Oxford and Cambridge are not the only points of excellence in British academia. Commentators increasingly talk about the “golden triangle” of Oxford, Cambridge, and Imperial and UCL, rather than just “Oxbridge”. Indeed, as Bagchi notes, when it comes to science, technology, engineering and mathematics (STEM) subjects, “some recent rankings put Imperial College London near the very top of the global table, ahead of Oxford, Cambridge and Harvard”. University College London has also had a lot of success when it comes to creating interesting spin-outs – DeepMind is one example.

UK universities beyond the golden triangle

The golden triangle may be the most visible sign of British scientific excellence, but there is “some really great science coming out of the other UK universities” too, says Doug Quinn, partner at DSW Ventures. As Quinn’s colleague, Mira Androniciuc, notes, there are key specialised laboratories in other UK universities that outperform the general laboratories in the golden triangle institutions. “There are clearly opportunities out there.” But sadly, these are not yet producing a strong pipeline of new firms. There were around 600 early-stage investments in the golden triangle in 2024, but only 250 in other universities. The regions get around a fifth of the total investment that the golden triangle gets, says Quinn. But the gap is mainly due to inexperience and should narrow as the teams outside Oxbridge and London do more deals. Already, there have been more than 100 spin-outs from Manchester University, which now has a well-established technology transfer office.

Indeed, a “Northern arc” is starting to emerge as a serious challenge, led by the four universities of Liverpool, Leeds, Manchester and Sheffield, says Duncan Johnson, CEO of Northern Gritstone. Johnson notes that these four institutions alone employ around 16,500 researchers and have the UK’s largest research budget at around £770 million, which is bigger than those of Oxford, Cambridge and London. Northern Gritstone, which has first refusal on the commercial opportunities from research produced by the Northern arc, has been able to raise £362 million from individuals and institutions.

Henry Lane Fox, CEO of Founders Factory and chairman of the Creator Fund, singles out the University of Southampton as particularly strong when it comes to quantum and high-performance computing; the University of Glasgow as a leader in chemistry; and Edinburgh when it comes to robotics. Overall, around half of the deals that Lane Fox and his team evaluate, and around a third of those that they end up investing in, come from outside the golden triangle, "and both numbers are growing”.

Lane Fox is so enthusiastic about the quality of academic research in the UK as a whole that, in an attempt to grab the most interesting idea at an earlier stage than his competitors, his Creator Fund is now targeting doctoral students at universities across the UK. Similarly, Chris Wiles, Director of Private Equity and Venture Capital at Foresight Group, has set up a network of regional offices, including in Edinburgh, Leeds, Manchester, Cardiff and Exeter. Another source of world-leading research comes from the various research institutes that are funded by the UK government, but not affiliated with any specific university – the nuclear research facility at Culham Campus, for example, run by the UK Atomic Energy Authority (UKAEA), as well as the Harwell Science and Innovation Campus in Oxfordshire.

Rethinking commercialisation in UK universities

As well as producing some of the best research in the world, British universities are generally much better at turning their research into companies and products than they were even a few decades ago. “Every university around the world is on a journey when it comes to commercialisation,” says Williamson. Over the last 20 years, the UK government has made a particular effort to encourage universities to make commercialisation and “knowledge transfer” key to their mission. This began with universities setting up knowledge-transfer offices, principally focused on the licensing of technology. Over the past 10 to 20 years, that model has evolved and is now creating spin-out companies based on the technologies that the academics have created. Academics and students have become more entrepreneurial and “want to set up their own firms to commercialise their tech, rather than stay as academics and simply license it to third parties”.

Arnab Basu, founder and CEO of Kromek, which specialises in radiation-detection technology, agrees that things have changed for the better. When he set up Kromek two decades ago from research he pioneered at Durham University, “spin-outs were not the flavour of the day, and we had to do everything ourselves, from agreeing a licensing agreement with the university, to finding investors and then raising additional funds”. Today, the support system for entrepreneurs, in terms of both money and advice, is much more developed. Many smaller universities have also realised that forming partnerships with similar institutions is a good way to gain experience quickly.

There has been a change in attitude within academia over the past 15 years, says David Grimm, a partner at AlbionVC. Launching start-ups was previously seen as “a bit grubby and commercial”, but now founding a start-up has almost become a precondition for becoming a professor. The latest report into spin-outs, produced in conjunction with analytics firm Beauhurst, reveals that investment in UK spin-outs reached the record level of £3.35 billion in 2024. This compares with £1.16 billion in 2019, as Moray Wright of Parkwalk Advisors points out.

Lowering the “university tax”

But just because UK universities have upped their game doesn’t mean that there isn’t plenty of room for further improvement. MoneyWeek spoke to several venture capitalists, and nearly all of them pointed to universities’ desire to cling on to as much of the company spun out as possible as a big problem. It is, of course, reasonable for institutions to try to get the best return for what is, after all, their intellectual property, says James Paton-Philip, partner in the corporate team at law firm Hill Dickinson, but too often this “university tax” can make investing unattractive for investors and for those founding the company in the first place, especially given that the founders’ stake will end up being diluted further as they raise more cash.

Universities do have a tendency to be too aggressive in negotiations, agrees Grimm, and to take too long to reach an agreement, which can be a major problem in the fast-moving world of technology, where multiple firms are trying to bring similar products to market first. “I’ve known of several major cases where ideas for start-ups have failed on the launch pad because the negotiations got so involved that by the time they were settled the opportunity had passed.”

The good news is that this is becoming much less of an issue thanks to pressure from the government to reduce the share institutions demand and to standardise terms. The 2023 Independent Review of University Spin-outs has helped speed up the process, says Grimm. AlbionVC has, for example, an agreement with UCL where the university agreed to take just a flat 5% stake in any software start-up spun out of it. The first company AlbionVC spun out under the new conditions took much less time to set up. UCL isn’t the only university to do this, says Bagchi. Imperial now takes a flat 10% share from its spin-outs, and Oxford has reduced its share by more than half from 50% to 20%.

The British Microsoft is coming

The UK may be “world class at research, and very good at creating early stage companies, but there is still room for improvement when it comes to scaling up”, says Greg Smith, CEO of IP Group. Northern Gritstone’s Johnson agrees that our tech sector still “struggles” when it comes to raising large sums for expansion. From his own experience, he’s found that raising amounts in the region of £200 million is still a big ask for British tech firms, whereas those in Silicon Valley can raise such sums with a single phone call.

The lack of domestic capital willing to back tech firms means that too often UK start-ups are either forced to rely on overseas investors, or sell themselves to larger US tech companies, says Wright. He emphasises that such investment represents a vote of confidence in the capabilities of the UK research base, but such external investors and larger tech companies also “have their own agendas, which don’t necessarily align with the interests of the UK”. He points to DeepMind, the AI company spun out from UCL that was acquired by Google in 2014 for £400 million, and which “would now be worth more than £10 billion – maybe even more than £100 billion – if it had remained private”.

Google’s purchase of DeepMind may have deprived Britain of its very own OpenAI. Yet the fact that it, and others, such as OrganOx and Oxford Ionics, have fetched “significant sums” will “undoubtedly draw more interest into this area, and encourage more university researchers to launch commercial enterprises”, says Sarasin’s James Witter.

Such successes are also helping to build the necessary environment in the UK “of investors, lawyers and financial services intermediaries”. So, provided pension funds and institutions are willing to invest more, “there’s no reason” why we can’t build a British tech company on the scale of Microsoft, says Paton-Philip. Smith believes “unequivocally” that several large British tech firms will emerge within the next decade. We look at some of the most promising places to put your money below.

Spin-outs from UK universities: where to invest

Companies such as Oxford Capital, Parkwalk Advisors, Foresight Group and AlbionVC all offer investors with deep pockets access to venture-capital trusts. Those of more modest means might like to consider IP Group (LSE: IPO), a listed FTSE 250 company that has been investing in spin-outs from UK universities for the last 25 years. Over this time, it has supported around 500 companies, creating an estimated 10,000 jobs. At the moment, the group has 62 firms in its portfolio, spanning “deep technology”, life sciences and clean-energy technology (cleantech). The stock trades at only seven times estimated 2026 earnings and at a sharp discount to the book value of its assets.

One of IP Group’s most successful clean-technology investments was in fuel-cell and hydrogen-power technology company Ceres Power (LSE: CWR). Originally spun out of Imperial College London, IP Group stepped in to rescue the company after a failed trial, taking an active role in its management before eventually selling its stake for a large profit in 2020. Ceres Power is not currently making any money, but it continues to grow, with sales tripling between 2019 and 2024, and it is expected to be a big winner from the spike in demand for clean energy created by the data-centre boom.

One of Cambridge Innovation Capital’s many success stories is Bicycle Therapeutics (Nasdaq: BCYC). It was founded in 2009 by Cambridge Enterprises (Cambridge’s commercialisation body) and uses technology developed by Greg Winter, winner of the Nobel Prize for chemistry in 2018, to develop drugs that can target and treat solid tumours that cannot be reached by conventional drugs. It is not making any money yet, but has several promising drugs in development. The most advanced of these is zelenectide, which is in advanced trials as a treatment for metastatic urothelial cancer (the hope is that it will also prove effective in treating other cancers).

Autolus (Nasdaq: AUTL) was founded by Martin Pule, who leads the “CAR-T” research programme at UCL’s Cancer Institute, with the help of UCLB (UCL’s commercialisation arm). Its products modify white blood cells to help the body’s immune system fight cancer. The company is not making any money, but its therapy Aucatzyl has recently been approved for use in the UK, US and EU for treating acute lymphoblastic leukaemia, with the hope that this can pave the way for similar treatments being approved for a wider range of cancers in the near future.

As noted in the main story above, Kromek Group (Aim: KMK) was originally spun out of Durham University by Arnab Basu. The company specialises in making radiation detectors that use cadmium zinc telluride (CZT) semiconductors for use in medicine and security. The company has already secured contracts with GE, Siemens, Philips and Canon, and with the help of funding from the US and UK governments, it is developing devices to detect biological pathogens. The stock trades at 18 times expected 2026 earnings. With revenue more than doubling between 2020 and 2025, that looks like good value.

Investors with an extremely high tolerance for risk might want to consider micro-cap Quantum Base Holdings (Aim: QUBE). It was founded by Robert Young of Lancaster University and uses quantum technology to produce product codes that are virtually impossible to counterfeit. With counterfeiting being a significant problem for global brands, the commercial potential seems huge, although the company is currently losing money.

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Federated Hermes Sustainable Global Equity invests across a diverse mix of growth, quality, and value companies, and across developed and emerging markets. It seeks out firms whose products, operations and activities contribute towards a more sustainable future. These companies are well placed to benefit from structural sustainability trends that are reshaping industries.

One such trend is electrification, a powerful yet often overlooked investment theme. As industries shift from fossil fuels to electricity, demand is accelerating, unlocking exciting investment opportunities in areas ranging from transport and heating to mining and steelmaking. Importantly, electrification represents one of the easiest and most cost-effective ways to enhance energy efficiency and reduce emissions – especially when powered by renewables.

Thanks to decades of innovation, the cost of core components such as batteries and power electronics has fallen by 99% since 1990. This has transformed the economics of electrification and accelerated adoption. This is just the beginning. Continued innovation will drive stronger returns and broader uptake, and the most compelling opportunities lie with companies enabling the transition: delivering the means to power an electrified future.

Three stocks to watch in electrification

Taiwan Semiconductor Manufacturing Company (Taipei: 2330) supplies 90% of advanced chips globally and is a critical partner to technology giants such as Apple and Nvidia. Its cutting-edge innovations deliver the enhanced performance and reduced power consumption vital to compact electrified systems.

The firm’s technological superiority and scale position it to benefit from rising demand across sectors. Exposure to electrification, supported by its diversified customer base and sustainability-driven innovation, boosts TSMC’s growth prospects. The Industrial Technology Research Institute estimates that by 2030, each TSMC chip will save the world nearly seven times the energy needed to produce it.

Trane Technologies (NYSE: TT) is a global leader in heating, ventilation and air-conditioning systems, with a strong focus on electrifying building infrastructure. Trane’s systems cut energy costs, improve comfort and help meet emissions regulations, significantly reducing energy use in existing buildings. Heating and cooling comprise 40% of a building’s energy consumption, making Trane’s impact especially significant. Its thermal management systems are between three and five times more efficient than conventional solutions, making up for the higher upfront cost of their units. The company’s service and controls business provides recurring revenue and strengthens relationships with customers.

Schneider Electric (Paris: SU) is a global leader in the digital transformation of energy management and automation. Its platform provides an integrated, hardware, software and services solution enabling electrification across buildings, data centres, industry and infrastructure, cutting emissions and energy costs.

Schneider worked on JPMorgan’s new headquarters in New York, Manhattan’s largest all-electric skyscraper, which is expected to achieve net-zero operational emissions powered by renewables. The firm’s effective strategy and positioning in a market with high barriers to entry has fuelled strong returns for shareholders and consistent dividend growth.

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The investment-trust structure was conceived in the mid-1800s to fill a gap in the market for a low-cost, mass-market investment vehicle. One of the first was Foreign & Colonial, founded by City of London financier Philip Rose. The entrepreneur had a revolutionary goal: to provide the “investor of moderate means the same advantages as the large capitalist”.

In the 1800s, investing was largely the preserve of the wealthy, with limited options available to the smaller investor. Foreign & Colonial pooled investors’ money and invested it in a diversified portfolio, spreading risk across a basket of assets.

The closed-ended structure, which provided a stable pool of long-term capital, made these investment companies ideal vehicles for financing the expansion of the British Empire and the rapid industrialisation of the Americas. As global investment markets grew and diversified, the range of investment options available to investors with investment trusts expanded, and the range of trusts available also expanded.

Investment trusts have a fixed capital base

Investment trusts are structured as companies. They issue a set number of shares at the time of their flotation, and this forms a fixed capital base. Investors are then free to buy and sell the shares on an exchange. As the shares are freely traded and the asset base is fixed, trusts can trade at a premium or a discount to their underlying net asset value (NAV).

Open-ended vehicles, such as exchange-traded funds (ETFs), unit trusts and open-ended investment companies (Oeics) issue or eliminate excess shares at the end of each day to ensure the NAV and the share price match. This means there’s no room for a discount or premium to emerge.

This also means the capital base can shrink dramatically if the number of sellers consistently exceeds the number of buyers (and the price of shares in the fund falls). As the capital base shrinks, the vehicle has to continue selling assets to fund investment outflows. If those assets are challenging to sell, this can lead to a liquidity crunch. That’s why investment trusts tend to be the best vehicle for holding illiquid assets. They have no obligation to sell the assets, no matter how wide the discount to underlying NAV may become.

Some of the biggest trusts in illiquid sectors are the infrastructure trusts 3i Infrastructure (LSE: 3IN), Greencoat UK Wind (LSE: UKW) and the Renewables Infrastructure Group (LSE: TRIG). All of these trusts own portfolios of illiquid infrastructure assets, which generate steady inflation-linked cash flows.

Infrastructure isn’t the only asset class that lends itself well to the investment-trust structure. Trusts are ideally suited to owning portfolios of mixed assets, such as bonds, gold and stakes in hedge funds or private-equity investment funds. BH Macro (LSE: BHMU) has a position in the global macro hedge fund Brevan Howard, giving investors access to a fund that would otherwise be unavailable.

HarbourVest Global Private Equity (LSE: HVPE) is just one investment trust in the private-equity sector, offering investors exposure to this asset class via the trust structure. RIT Capital (LSE: RIT) and Caledonia (LSE: CLDN) are two examples of trusts making the most of the flexibility offered by the structure. Both are majority-owned by their founding families and own a broad portfolio of assets, from private-equity holdings to direct investments in other companies and portfolios of equities.

The structure of the investment trust also lends itself well to borrowing money. Investment trusts that specialise in acquiring illiquid assets – such as wind farms, property and infrastructure assets – can borrow against those assets to increase growth and build the asset base. These companies can also borrow to invest in equities. Borrowing money to invest in shares can be risky, but trusts can often mitigate some of the risk by issuing long-term fixed bonds.

For example, Scottish American (LSE: SAIN) issued £95 million of long-term debt between 2021 and 2022 with a blended interest rate of under 3%, maturing between 2036 and 2049. The trust, which owns a portfolio of equities, as well as property and infrastructure via other investment trusts, used the cash to reinvest into the portfolio.

The ability to borrow money is particularly helpful for the real-estate investment trust (Reit) segment of the market. Reits are a version of the typical investment trust, but with tax benefits when the majority of the portfolio is deployed into property. Companies like Supermarket Income (LSE: SUPR) and PHP (LSE: PHP) have leveraged this structure to build property portfolios designed around supermarkets and healthcare facilities, respectively.

MoneyWeek has always preferred investment trusts to open-ended funds for the above reasons – and the fact that they have historically outperformed other actively managed, open-ended funds. However, this has started to change in recent years. Investment trusts, particularly in equities, have struggled to keep up with the performance of other funds. As a result, investors have drifted away, and discounts to NAVs have risen sharply.

But there’s still a place for trusts within investors’ portfolios. Thanks to the structure of trusts, they are invaluable to build exposure to specific themes such as small caps, emerging markets, property and infrastructure. There are virtually no mass-market alternatives to the infrastructure offering, and trusts such as BH Macro, RIT and Capital Gearing (LSE: CGT) offer the sort of portfolio diversification that just can’t be found elsewhere.

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The government has promised to make Britain into a “clean energy superpower” by 2030. The UK’s share of electricity generation from renewables currently stands at 46%, according to the government’s own statistics, and the pledge calls for at least 95% to come from low-carbon sources. Getting there will involve doubling onshore wind to 35GW, tripling solar power to 50GW and quadrupling offshore wind to 55GW.

This will also require significant investment in storage and distribution. Last year National Grid, the network operator, raised £6.8 billion in a rights issue as part of plans to invest £23 billion over the next four years upgrading its transmission network to support the transition to renewables. Meanwhile, the 138-page Action Plan that UK Department for Energy Security and Net Zero (DESNZ) published in December says 29GW-35GW of batteries will be required by 2030, compared with less than 5GW installed today.

All told, this adds up to a lot of investment: if the targets are to be met, it implies that £40 billion per year is needed between now and 2030. Therein lies the problem: where will that come from? With the government’s own borrowing constrained by nervy global bond markets, it is unclear who is going to step up to fund these clean energy aspirations.

A significant amount of the renewables capacity that the UK has already built was funded by the stock market, amid a multi-year burst of enthusiasm for investing in green energy. In 2021 alone, there were nine initial public offerings (IPOs) of renewables investment vehicles that raised over £10 billion, according to Hardman & Co, the sponsored equity research boutique. Yet this boom has since turned to bust.

The entire market capitalisation of the 20 renewable energy infrastructure funds (REIFs) listed in the UK has now fallen to just £10 billion. Over the last two years, existing investors have seen a terrible return on their capital, and hardly any new money has been raised as markets have questioned the economics of the REIFs.

At the end of January, the average discount to net asset value (NAV) had slumped to 42%, according to data from ShareScope. The best of a bad bunch has been the Greencoat UK Wind, whose share price was “just” 20% below NAV. The worst performing was HydrogenOne Capital Growth on an eye-watering 74% discount (its cornerstone investors included Jim Ratcliffe and his chemicals giant Ineos).

Bond yields are only part of the problem

Some of this poor performance has been driven by fair-value accounting, which requires NAV to be marked down when the “risk-free rate” – effectively the ten-year UK government bond yield – has risen. An irony of fair-value accounting is that rising bond yields, caused in no small part by rising energy prices a couple of years ago, have discouraged investment in renewables. That’s a shame, since more investment should have lowered energy costs and improved the country’s trade deficit.

To be fair, rising government bond yields have also led to wider discounts to NAV across other investment trusts with illiquid holdings that are hard to value, not just the REIFs. Many private-equity investment trusts trade on much wider discounts than before: HarbourVest Global Private Equity has been as wide as 40%.

However, rising bond yields don’t explain why the REIF sector has seen dividend cuts and now trades on an average dividend yield above 10%. This looks like distressed valuations given the UK government bond yield of 4.5%. Meanwhile, the stock market is now valuing some REIF assets at below the build cost of new projects. Harmony Energy Income Trust (LSE: HEIT), a battery energy storage system (BESS) investor, reckons that new capacity costs £842,000 per MW. That compares with the £616,000 per MW that Harmony’s market value implies for its existing assets, so in response, it is in the process of trying to selling off its entire portfolio to realise value.

To understand what’s going on, it’s worth looking back to the TMT infrastructure bubble of the late 1990s. Strategy and management expert Richard Rumelt has pointed out that a terrible industry for shareholders will tend to have certain characteristics: i) a product that’s an undifferentiated commodity; ii) everyone has access to the same technology; iii) buyers are price sensitive and willing to switch suppliers at a moment’s notice to get a better deal; and iv) large sunk capital costs, but low marginal costs so that old capacity will continue to operate. He uses the example of Global Crossing and other fibre-optic cable firms, which failed spectacularly over 20 years ago as it became clear that it had over-invested in capacity and revenue collapsed. We can see similarities with the UK-listed REIFs, where demand is growing but has been outpaced by the supply of new capacity.

What does it mean for battery funds?

This was not how the story was supposed to play out. When Russia invaded Ukraine and the price of gas spiked in 2022, the REIFs enjoyed a strong tailwind. Combined cycle gas turbine (CCGT) generation became less competitive. Unlike renewables, which have a high upfront capital cost but low marginal cost (wind and sunshine are free), most of CCGT's operating costs are the gas that is burnt to generate power. However, the challenge with renewables is that they are intermittent. Sometimes the grid can’t cope with excess power at the wrong time (early hours of the morning for wind, midday for solar). At these times, renewable assets may need to be curtailed – that is, paid to be turned off.

The BESS sector provides a good case study for the problems. These giant batteries store excess power for a short period of time, which provides grid stabilisation and flexibility. Initially, they benefited. Yet as the price of natural gas returned to its long-term average, National Grid went back to relying on natural gas to balance demand. Thus energy storage funds such as Gresham House Energy Storage (LSE: GRID), Gore Street Energy Storage (LSE: GSF) and HEIT have seen their share prices fall precipitously since the start of 2023. The ancillary services market, which provides short-term support, saw too much capacity for recent supply. Then in a nasty profit warning in February 2024, GRID complained that battery storage was being significantly underutilised in the National Grid Electricity System Operator’s Balancing Mechanism (BM). Excessive use of legacy gas-fired generation, which provides flexibility, resulted in oversupply in the wholesale market, reducing the revenue opportunity for BESS, which was unable to compete head-to-head with gas-fired generation. So BESS capacity went unseen in National Grid’s control room and unused.

Using Rumelt’s framework, battery funds were generating a commodity product (electricity) for a customer (National Grid) who was not only prepared to switch at a moment’s notice to a different energy supplier (gas) but was also unaware of available capacity from BESS. This hit the energy-storage funds particularly hard and they have had to cut dividends.

The problems with ancillary services and BM seem fixable: these are a result of market failure, which, contrary to government policy, has created an incentive for burning gas over battery technology. The broader question is whether the government can now create an incentive for investors to provide anything close to £40 billion for investment. For instance, if BESS has already struggled with overcapacity, then it stands to reason that as more MW of battery storage is added to the grid, returns could continue to disappoint. Note too that REIFs will struggle to raise more equity from investors as shareholders question the deep discounts to fair-value NAV. From that perspective, deciding to sell down assets may make more sense for some of them than investing in new, and possibly loss-making, capacity. Many REIFs are now facing continuation votes, so management may come under pressure to liquidate their entire portfolios.

Still, this could be an opportunity. As investment in new projects slows, existing capacity could see more favourable pricing. Perhaps this signals that the worst is over for BESS funds such as GRID, GSF and HEIT, or the whole REIF sector. That said, improving returns for shareholders may well come at the cost of the government failing to achieve its ambitious targets.

Is the worst over for GRID?

Gresham House Energy Storage Fund came to market in 2018, aiming to profit from the increased need for energy storage to support intermittent renewable energy generation. Operational capacity has since increased from 70MW seven years ago to around 1GW at the end of 2024.

After Russia invaded Ukraine in 2022 and gas prices doubled, GRID’s annualised monthly revenues peaked at around £210,000 per MW. It raised £150 million of equity in May 2022 and a further £80 million in May 2023. Since then revenues have collapsed by 80%, to around £30,000 per MW at the beginning of 2024. To fund ongoing construction of new capacity in such a difficult environment, the fund’s net cash of £222 million in June 2022 has swung to net debt of £140 million September 2024. That equates to 60% of the current market cap of £240 million, which of course is barely above the amount of money raised in 2022 and 2023. That’s why GRID has had to suspend its dividend, focused on cash preservation and renegotiate its debt covenants.

The expected lifespan of a battery is ten to 15 years, yet this depends on usage: both the passage of time and the number of charging and discharging cycles determine a battery’s longevity. However, GRID is now having to invest to replace its shorter-duration batteries with two-hour ones. The business case for four-hour batteries is starting to make sense, so we could see yet another round of investment required.

There’s also the risk of new technologies, such as ceramic-oxide batteries, making the lithium-ion assets that all the UK BESS funds use obsolete. This field moves fast: in France, ProLogium is building a huge 48GWh solid-state battery factory at cost of €5.2bn. Hydrogen fuel cells, developed by companies such as Ceres Power, may also play a role in reducing the strain on the grid from intermittent renewables supply.

In November last year, the management of GRID set out a three-year plan that assumes revenue of £45,000 per MW per year for uncontracted projects, in line with revenue conditions at the time. GRID is targeting £150 million of earnings before interest, tax depreciation and amortisation (Ebitda) in three years’ time, implying an enterprise value (EV) of just 2.5 times Ebitda. Then in a January trading statement, management said that revenue on uncontracted assets (504MW) had improved to £60,000 per MW in H2 2024. So it could be past the worst.

GRID has also signed a tolling agreement with Octopus Energy on 568MW (around half of its capacity), which should provide contracted, fixed-price, inflation-linked revenues. Interestingly, Gore Street said in its first-half results that it would not enter into tolling agreements given the prices observed, and suggested decisions to do so were driven by pressure from lenders that prefer to see steady revenue generation. Cycling rates are typically higher with tolling agreements, so can degrade the battery assets faster than otherwise would be the case. So the two biggest funds are taking different approaches.

GRID’s NAV stood at £621 million or 109p per share at the end of September, with operational assets valued at an average of £661,000 per MW. With the share price at 42p and the discount at huge 63% of NAV, management has recognised that investors are sceptical about fair-value accounting NAV. In response, GRID intends to improve disclosure so that investors can better assess cash flows and valuations. It also said recently that it would shift to levying fees on a mix of NAV and market value, rather than just NAV – a growing trend among funds that trade at a large discount.

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Investors in renewable infrastructure trusts have had a dismal few months. Share prices have kept falling, pushing up discounts to net asset value (NAV) and dividend yields from tempting to alarming.

The £2.2 billion Renewables Infrastructure Group (LSE: TRIG) now trades on a 26% discount and yields 8.3%, the £2.9 billion Greencoat UK Wind (LSE: UKW) trades on a 21% discount and yields 8.7% and the £580 million Bluefield Solar (LSE: BSIF) trades on a 24% discount and yields 9.2%. Elsewhere, some discounts are over 30% and some yields in double digits.

Explanations for this have followed rather than led the share prices. In September, David Bird, manager of Octopus Renewables Infrastructure Trust, warned of the increasing prevalence of negative power prices across Europe as a result of the roll-out of wind and solar capacity. He expected negative prices to reach 10% of hours by 2030 and 20% by 2050. Octopus is protected by long-term power purchase agreements (PPAs), he said, but the difference between the price at which renewable generators sell electricity and the baseload price is expected to widen.

The latest forecasts for power prices from Bloomberg New Energy Finance (BNEF) are 45% below the average forecasts of the renewables sector for wind and 61% for solar. BNEF expects baseload electricity prices to fall by 3.5% per annum in real terms up till 2050. This assumes the UK misses its target for net zero, but BNEF also publishes a forecast of annual falls of 1.6% in real terms in a net-zero scenario.

Wholesale power prices are set to fall

The UK government’s ambitious plan to significantly increase renewable power generation is based on the assumption that the wholesale price of gas will increase steadily until 2035, then flatten out. However, the International Energy Agency (IEA) expects fossil fuels to become cheaper and more abundant as consumption peaks and falls. In particular, the IEA expects liquefied natural gas (LNG) capacity to increase by 50% by 2030, which would make BNEF’s new forecasts highly plausible.

What’s more, the continued expansion of renewable energy will result in a glut of output when it is needed least (and hence negative power prices) and shortages when the wind isn’t blowing and the sun isn’t shining. Back-up generation by gas plants will still be expensive, since high fixed costs and overheads will have to be paid for, but while wholesale power prices are likely to be volatile in the short term, the overall trend will be downwards.

This volatility actually helps the battery-storage companies, who buy electricity when it is abundant to release when it is scarce, but battery lives are still too short to reconcile intermittent power generation with fluctuating demand.

The renewables gravy train could come to a grinding halt

Thus the renewables sector in the UK and Europe will increasingly rely on subsidies, even without the new capacity of which governments dream. With new capacity, the cost will be ruinous. The UK wants most of this investment to be financed by the private sector, but it would be insane for investors to rely on a growing rip-off for consumers and taxpayers. Generators such as Octopus may think they are protected by PPAs, but the market senses that this is unsustainable. Sooner or later, the gravy train could come to a grinding halt.

For the renewables trusts, “there is still downside risk that could negatively affect future net asset values”, as Christopher Brown at JPMorgan Cazenove says. A better alternative is Ecofin Global Utilities & Infrastructure Trust (LSE: EGL), of which I am a non-executive director. By investing globally in listed electricity generators, grids and other utilities, its shares have returned 21% in the last year against a weighted average of -8% for the renewables sector. It currently trades on a 12% discount to NAV and yields 4.2%.

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The government has launched its publicly-owned clean power company, Great British Energy, announcing its first major project today. 

The government plans to lease land owned by the royal family to build new wind farms on the sea bed. It hopes the project will help power 20 million homes. 

The wind farms will be built through partnerships between Great British Energy and private companies. The Crown Estate, which owns the land where the wind farms will be built, owns a large portion of the UK’s seabed stretching up to 12 nautical miles from the land. 

Starmer says the plans will drive up to £60 billion of investment into the sector, as well as “bringing down energy bills for good”.

Stefan Boscia, who writes for the political news outlet Politico, points out that this initiative isn’t necessarily a new one, as the Crown Estate already leases out land extensively for wind farms. “The Crown Estate made £1.1 billion last year, with a very large proportion of that coming from offshore wind leasing,” he says. 

The key difference, as Boscia points out, is that these projects will be delivered by a publicly-owned company under the government’s new initiative. 

Ed Miliband, secretary of state for energy security and net zero, told BBC Breakfast it would take time for households to start to see the impact on their bills, but that the project would help deliver long-term energy security. “We are going as fast as we can,” he added. 

The government will present its Great British Energy Bill to the House of Commons today, after introducing it in the King’s Speech last week. As well as delivering energy security, the government hopes investing in clean power will help boost national growth. 

What is GB Energy?

GB Energy is a publicly-owned clean power company, launched by the government to fulfil a key manifesto promise. Labour has said it wants to transform the UK into a “clean energy superpower” and deliver energy security. 

This comes after households suffered soaring energy bills in the aftermath of the pandemic and Russia’s invasion of Ukraine. The government has said clean energy is part of the solution to preventing something like this from happening again. 

GB Energy will “drive down bills and provide the energy security that will kick oil tyrants like Putin to the curb”, the Prime Minister’s Office said. 

GB Energy will not supply power to households and businesses – it’s more about accelerating investment and creating public ownership. 

The government is going to invest £8.3 billion of public money over the course of this parliament. It hopes this will be matched by £60 billion of private company investment – although there are no guarantees this will happen.

Will GB Energy cut bills?

In theory, GB Energy will make the UK less reliant on fossil fuels and energy imported from other countries. The idea is that this would make the country less susceptible to price shocks. 

However, it is currently unclear whether the government will be able to secure the private investment it needs to help bring its plans to life. We also don’t know exactly how long it will take before households start seeing an impact on their bills. 

Tom Edwards, a senior modelling consultant at Cornwall Insight, suggested securing investment could be challenging. He told the BBC that the company would “need to have the certainty of revenues for investors to say, ‘Yes, I will put my money down’”. 

He added that most of the capital injection in a project like this is up front, which means spending a lot of money at the beginning. 

Speaking on BBC Breakfast, Miliband claimed GB Energy would start making a profit within the next five years. 

When pressed on when bills would start to come down, he said: “Within a couple of years, as we build new onshore wind, new solar, we’ll start to see the effect on bills, but there are lots of things going on here. So our exposure to gas prices, which are set internationally, is something I don’t control.”

Will investing in clean power supercharge the economy?

In addition to cutting bills, the government hopes investing in clean energy will boost the economy. It has said its plans will “create jobs and build supply chains in every corner of the UK”. 

The multiplier effect from this could be felt more broadly. People will need specialist training to work in these roles – and more people in skilled jobs means more people with decent incomes who are spending money and boosting the economy. At least, that’s the theory. 

The UK also has a problem with underinvestment – something the government is trying to rectify through a range of policies, from pension reforms to an overhaul of the planning system. Investing in clean energy infrastructure could help with this. 

In its 2021 net zero review, the Treasury found that GDP multipliers for green investments in renewables can be between 2.2 and 2.5 times larger than fossil fuel energy investment. 

However, it added that “the overall productivity impact crucially depends on the degree to which the new technologies require lower operating costs and increase output compared to existing technologies”. 

Chancellor Rachel Reeves has declared economic growth to be the “national mission”, and will be hoping that launching GB Energy takes the government one step closer to achieving this. 

However, for now, there are still a large number of uncertainties – not least whether the government will be able to secure the £60 billion private investment it needs to bring its plans to life.

The number of homes with solar panels is rising as households try to cut their energy bills and lower their carbon footprint.

Over 1.6 million UK households now have solar panels, according to the latest government data. More than 267,000 rooftop solar panels were installed in UK homes and businesses under the Microgeneration Certification Scheme (MCS) in 2025, up from 180,000 in 2024.

Solar panels can help you save on your energy bills, and you could also make extra cash by selling surplus energy back to the grid.

With energy bills still elevated compared to before the 2022 energy crisis, solar panels have become a more attractive prospect. However, there are the upfront costs to consider, as well as the logistics of getting them installed.

We look at how much solar panels cost in the UK, who can get them and whether it is worth installing them.

How much do solar panels cost to install?

The cost of installing solar panels was once seen as prohibitive, especially when government subsidies for them dried up after 2016, but installations have started to pick up in recent years.

Much of this is thanks to the government removing VAT from the cost of solar panels and battery energy storage systems in April 2022, making them more affordable, according to trade association Solar Energy UK.

Retrofitted battery units are also VAT-free until 31 March 2027, while more new-build homes have solar panels pre-installed these days, even before the government intends to make it mandatory.

The average cost of solar panel installation in 2025 was just over £7,000, according to the solar panel standards body MCS.

However, total costs will depend on a number of factors specific to you and your home.

Common factors that could make your installation cost more, according to the Energy Saving Trust, are:

• the size of your proposed solar panel system
• how easy it is to access your roof
• whether you choose solar panels or solar tiles
• whether you integrate the panels into the building or have them mounted on top of existing roof tiles
• whether or not you need to have any work done on your roof.

Once your solar panels are installed, they will start generating power. But to increase the savings your system generates, you may need to invest extra in a battery (average of £5,000) and a diverter (£300+) – a device that can use solar energy to heat your hot water.

As solar panels require little upkeep, you will not need to fork out much cash for maintenance. In most cases, they only need to be cleaned once a year to keep them operating at full capacity.

One key thing to note is that you may need to register your system with a district network operator. A smart meter is a must, and you will also have to secure an agreement with the electricity company that will buy your excess power.

Are there any solar panel grants?

Though the government largely stopped giving out money for solar panel installation in 2016, there are still some grants that certain people can apply for to start generating solar energy at home.

The grants that still exist are mostly focused on those who have lower incomes or live in homes with low energy performance (EPC) ratings.

For example, you may be able to get solar panels installed for free through the Warm Homes: Local Grant if you live in England.

You qualify for a grant if your home’s Energy Performance Certificate (EPC) is D, E, F or G and the property is privately owned, either by yourself or a landlord. Typically, your household income must be £36,000 or less, although you may be eligible if your income is more than this and you’re on certain benefits or you live in a specific postcode area.

How many solar panels do I need?

The number of solar panels you can get depends on how big your roof is, and how big the panels are. Trade association Solar Energy UK estimates eight to 10 four-kilowatt solar panels would be considered as normal on an average-sized house.

Installing this number of solar panels, as well as a battery system that is big enough to match your energy usage, would typically generate enough electricity to meet all of your power needs each year.

Should you not use much energy anyway, selling what you generate back to the grid could mean you save “hundreds or even thousands of pounds a year” on your energy costs, according to the trade association.

To get a sense of the savings you could make with your home, the Energy Saving Trust, an independent organisation who study energy efficiency, has a handy solar power calculator tool.

Do I need planning permission to install solar panels?

Currently, you don’t need planning permission for solar panels in most instances. Installing them is considered to be ‘permitted development’.

However, there are restrictions for listed buildings, as well as homes in conservation areas and national parks. In these instances, it’s advisable to get in touch with your local planning office.

They may force you to opt for more expensive options than standard panels, such as solar tiles. If you live in a flat, you will likely need to get permission from your building’s landlord and a majority of the building’s residents to get them fitted.

How to sell power back to the grid

If you choose to install solar panels, the prospect of selling your excess power back to the grid for a bit of extra cash is a big draw.

This is done through the Smart Export Guarantee (SEG), a government-backed scheme that allows households and businesses that generate renewable electricity to feed any energy that they do not consume back into the grid.

You will get paid for every unit of electricity that you feed back to the grid using the SEG, but will not be paid for any energy that you use yourself.

The SEG is available in England, but not every provider will take part.

Providers have their own export tariff and their own rates that they will pay for your energy, so it is important to shop around to make sure you get the best rates.

They will also have different restrictions, with some requiring you to be with the same firm for solar export and energy supply, while others also require you to have a solar battery to benefit from the rates.

The top SEG rates at the moment are both with Octopus, though they require a solar battery to benefit from. Here are the best SEG rates on offer at the time of writing in April 2026:

Source: MoneySavingExpert, April 2026

Is it worth buying solar panels in the UK?

While the UK weather may seem to be unsuitable for solar panels, they can actually pay for themselves relatively quickly. This is because the sun doesn’t always need to shine for them to work – although their performance will drop in cloudy conditions, as well as over the winter months.

For example, if you live in an area of the country which typically gets a lot of sunshine, at least compared to other parts of the UK, your solar panels will produce more energy, and therefore ‘pay for themselves’ faster.

Additionally, solar panels can be more suitable for some types of homes and less for others. If your home is permanently in the shade, then your solar panels will produce much less energy than if you have a home in the sun.

The direction your home faces will also have an impact on how much power you can generate. The optimal place to put solar panels is on a south-facing roof that has an unobstructed view to the sky as this maximises the amount of time that your solar panels will be exposed to the sun.

However, if your roof does not face south, then placing your solar panels on an east or west facing roof can yield decent results as they are still exposed to the sun for a large part of the day.

The direction you should avoid, if possible, is installing solar panels on north-facing roofs as these will have the least exposure to the sun of all.

So how long will it take for you to make back your investment on your solar panels?

The Energy Saving Trust crunched the numbers, and found that using your solar panels for energy, while also exporting some of what you produce, will cover the upfront costs in between 10 and 12 years if you live in London.

The table below shows how long it will take for solar panels to pay for themselves in different parts of the country.

Source: Energy Saving Trust, April 2026

While the above figures give a good estimate, the exact timings for how long it’ll take you to make a return on your investment depend on a whole host of factors, including: how much energy your home uses, which direction your roof faces, the angle of this roof, and how much power you’re able to use yourself or sell to the grid.

So, if you can absorb the upfront costs and live in a suitable property, solar panels may be a good choice.

Should you get plug-in solar panels?

In March 2026, the government announced plug-in solar panels would be available for consumers to buy in supermarkets such as Lidl and Iceland “within months”.

Plug-in solar panels are marketed towards those living in flats and apartments who can’t install traditional solar panels.

They usually come with two solar panels, mounting brackets (to attach the panels to a balcony), a plug and microinverter, which converts the electricity generated by the panels from DC to AC and power household appliances such as fridges or Wi-Fi routers.

Plug-in solar panels tend to cost up to £1,000 and government estimates suggest they can save you between £70 to £110 per year.

However, experts have flagged safety concerns about people installing the panels in their homes.

Mark Coles, head of technical regulations at the Institute of Engineering and Technology (IET), said many UK homes have “poorly maintained electrical installations” that “could expose homeowners to risks” if plug-in solar panels are introduced.

He added: “Before purchasing or plugging in any off-the-shelf generation product, householders should have their electrical installation checked by a competent electrician. What may be safe in one home may pose a significant risk in another.”

A Department for Energy Security and Net Zero spokesperson said: "Our tests have shown plug-in solar is safe to use on UK domestic circuits. All products will need to meet UK product safety standards, and we have commissioned an independent study to inform further regulations ahead of their sale."

MoneyWeek contacted Lidl and Iceland asking for comment.

While the government seeks to accelerate Britain’s drive to “net zero” through the increased adoption of renewable energy, the private sector is going in the opposite direction. Since the middle of 2023, The Renewables Infrastructure Group (TRIG) has sold £210m of assets at an average premium to book value of 11%. 

Admittedly, most of these assets were in Ireland and Germany but it is notable that the proceeds are not being reinvested in the UK but used to reduce borrowings and initiate a £50m share buyback programme. With TRIG’s shares trading at a 21% discount to net asset value (NAV), this makes sense. 

Greencoat UK Wind, trading at a 9% discount, is also prioritising buybacks over investment. It launched a £100m buyback programme last autumn and expects to have £1bn of surplus cash flow in the next five years, based on its current power price forecasts. With borrowings of £2.3bn, it is likely to focus on debt reduction over buybacks.

Foresight Solar, whose shares trade at a discount of 23%, is also buying back shares, though with borrowings equivalent to 65% of net assets, debt reduction is the priority. It has stopped making new investments and announced a disposal programme. Bluefield Solar, trading on a 19% discount, has also been selling assets to reduce debt and finance new projects. 

With combined assets of more than £10bn, these are not small companies. The story in the rest of the sector is the same – shares trade at significant discounts to NAV, making the raising of new capital impossible. Share buybacks and the reduction of debt are a priority, as are asset sales to speed the strategy along.

Is the renewable energy push destined to fail?

No wonder the UK Offshore Wind auction last September failed, securing no bids at all – the previous government set an ambitious price cap of £44 per megawatt-hour (MWh). This was similar to the price set in the previous auction but, since then, inflation has increased costs significantly. Industry experts estimated a price of £60 per MWh would be necessary for any bid to be viable, and the government responded with an increase in the maximum price at the next auction to £73. 

That, though, is above the current wholesale price of electricity and takes no account of the cost of the intermittency of renewable generation. If the new government conducted an auction on this basis the cost of electricity would rise, yet the Labour Party is committed to “cutting household energy bills by up to £1,400 a year and saving businesses £53bn by 2030”. So where will “the clean and cheap power” it has promised come from? 

Not from onshore wind generation – the turbines are too small and onshore arrays lack the huge scale of offshore. The new National Wealth Fund and GB Energy, funded with borrowed money, are supposed to “unlock critical investment in key UK infrastructure” by “co-investing with the private sector in larger projects such as onshore wind and solar farms”. Presumably, the government is looking to the big pension funds for this investment but they are unlikely to find economies the listed funds can’t. And a liberal sprinkling of honours is unlikely to tempt them into investments with low returns.

Are the risks of renewables worth the reward?   

Even if the additional investment was forthcoming, whether from the private sector or the new public bodies, the result would be a glut of electricity when weather conditions were favourable – and hence very low prices – while shortages and very high prices would persist at other times. 

This would undermine existing providers of renewable energy, added to which the government’s wary tolerance of the private sector, while it is hoping for investment, could be replaced by hostility if, as is likely, investment is not forthcoming. 

On attractive discounts to NAV and with dividend yields above 7%, the investment funds specialising in renewables in the UK are superficially attractive, especially now they are focused on efficient operation, cash generation and enhancing shareholder value rather than expansion. Still, the political risks are significant, so investors should hold off.

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The past couple of years have been very difficult for investors in renewable energy companies. The sector has suffered from poor sentiment due to the upswing in interest rates, which has hurt valuations. However, the underlying attractions of renewable energy are, I believe, better than ever. 

Growth in renewable energy looks set to continue its rapid upward trajectory as governments around the world get serious about their obligations to reduce carbon emissions and tackle climate change. Major buyers of power, such as the multinational global technology companies, also have an important role to play. Many of these firms no longer see it as acceptable to power their growth with electricity generated by fossil fuels. Crucially, these are creditworthy counterparties with deep pockets. 

Demand for electricity in developed markets, which has been falling for several years as we have become more efficient, now looks set to increase, a consequence of new uses for electricity, such as transportation and potentially large-scale hydrogen production. New sources of demand, such as artificial intelligence and data centres, could provide a further boost. The combination of a recent poor performance and an improving fundamental outlook has given rise to many attractive investment opportunities, particularly for those investors willing to look beyond the traditional leaders in the sector.

Renewable energy funds that are profiting from growth

RWE (Frankfurt: RWE) is a company that many people still consider to be a traditional utility, but while it does continue to operate some legacy coal assets, a timetable for closure for these has been agreed with the German government. RWE now firmly sees itself as being a renewable and low-carbon energy company. Its US renewables business should be one of the key beneficiaries of the growth in demand for power from data centres in North America, and it recently signed 15-year power sales agreements with Microsoft for two new Texas wind farms that are currently under construction. Furthermore, it is one of the major players in the fast-growing global offshore wind market, having managed to avoid some of the difficulties that have dogged other participants in that sector. 

Another company profiting from the growth of the technology sector’s demand for power is Greencoat Renewables (LSE: GRP), which has signed a 10-year sales contract to supply power to a data centre in Ireland. This company is less well known than its stablemate, Greencoat UK Wind, but it benefits from the fact that many of its assets come with fixed contracts, in contrast to its more market-exposed big brother. Irish wind farms comprise 60% of the portfolio, with the remainder located in Germany, France, Spain and the Nordics. Like many other renewable energy investment companies, it trades at a meaningful discount to its published net asset value (NAV).

A fund that services the green revolution 

Many investors advocate “pick and shovel” investing: buying the companies that supply a service to a sector rather than the sector itself. Cadeler (Oslo: CADLR), which owns and operates wind turbine installation vessels, is a good example. Cadeler is benefiting from a shortage of the very large vessels capable of installing the new generation of offshore wind turbines. With four vessels already on the water and another seven to be delivered over the next four years, Cadeler is the established market leader.

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In investing you have to get the big ideas right. By identifying and tracking secular themes, you are participating in an industry where a rising tide lifts all boats. When the key trend is working in your favour you benefit from a natural hedge against company-specific risk.

Clean energy is one of these secular themes. It is also not always the case that you can do good for humanity while at the same time making the best decision for your wallet. Human beings are self-interested, and corporations need to allocate capital as efficiently as possible.

There used to be so much fossil-fuel consumption in the world because it was the most cost-effective method of generating power. Now, the narrative has flipped. It is much more efficient and profitable on a unit economic basis to produce one unit of solar power rather than use traditional fossil-fuel sources. This is no longer just some sort of science project: you can’t fight the numbers.

Powering change

There is a saying in the renewable-energy sector that “the sun doesn’t always shine, and the wind doesn’t always blow”, which refers to the so-called intermittency problem. However, we’ve now found a solution for this: battery technology. Take lithium-ion batteries. Using one to power a house cost $75,000 in the 1990s, and they weighed 250 pounds (lbs). In 2021, the cost is $2,000 and they weigh 88lb.

We need to find ways to harness this opportunity, and solar energy is excellent in this respect. The following three stocks are leaders in the industry. They are the drivers behind the cost optimisation that makes solar such an attractive alternative to traditional fossil-fuel energy.

Solar energy has a key part to play in addressing climate change, as replacing most sources of fossil fuels today with solar energy is one of the only ways we can achieve our climate goals. Allocating capital to these innovators is crucial for our success.

A key player in photovoltaics

First Solar (Nasdaq: FSLR) is a global solartechnology company that manufactures and sells photovoltaic (PV) arrays with an advanced thin-film semiconductor technology providing a high-performance, lower-carbon alternative to conventional crystalline silicon PV solar modules. The company currently operates many of the world’s largest grid-connected PV power plants. It displays impressive attention to detail in all areas, from the sources of raw materials all the way though to the finished product. Enphase Energy (Nasdaq: ENPH) delivers smart solutions that are easy to use to manage solar generation, storage and communication all on one platform.

Enphase was founded in 2006 and revolutionised the solar industry with its microinverter technology. It has evolved to produce a fully integrated solar-plus-storage solution. SolarEdge Technologies (Nasdaq: SEDG) is also facilitating the race towards the globalisation of solar energy.

The company provides smart energy to both homeowners and businesses. Solar Edge is a leading provider of an inverter solution that optimises the way power is harvested and managed in PV systems. The company’s direct-current inverter maximises power generation at the individual PV module level while lowering the cost of energy produced by the PV system

Governments are torn between two seemingly contradictory goals. On the one hand, most major economies have committed to slashing carbon emissions and even to move to “net zero” emissions within the next few decades. However, governments are also desperate to bring down soaring energy costs, which are feeding into a cost-of-living crisis. In this context, refusing to take advantage of the remaining reserves of fossil fuels seems like a luxury few can afford.

Carbon caption and storage (CCS) technologies could offer a way to square these competing priorities. As the name implies, CCS involves trapping carbon emissions and locking them away so that they don’t enter the atmosphere, and even in some cases re-using them. Nonetheless, the entire principle of CCS is controversial. The idea of using carbon reduction to eliminate net emissions sits uneasily with many environmentalists, who prefer to focus on reducing emissions in the first place.

“If we do climate change mitigation and nature-based solutions correctly, there will be no need for direct carbon capture technologies,” says Gabriela Herculano, chief executive and co-founder of fintech firm iClima Earth. A report by climate group One Earth concluded that carbon capture is “risky and expensive” compared to alternative approaches. Herculano suggests developing renewables, eating less meat, taking fewer flights and investing in “proven and price competitive” solutions such as “more afforestation and reforestation projects” as preferable.

Many investors also see risks. If badly handled, carbon capture could become counterproductive, especially if business starts to view it as a “get out of jail card” that will enable them to avoid doing the hard work around reducing emissions, says Mike Appleby, investment manager on the Liontrust Sustainable Investment Team. However, even he accepts that the need for practical solutions means that carbon capture is here to stay. And from a market perspective, attempts to put a price on carbon emissions in order to support renewables – either through taxes or tradable permits – have played a major role in making carbon capture economically viable.

A ten billion tonne opportunity

Part of the case for CCS is that “renewable power alone isn’t going to get the world to net zero”, says Tom White of C-Capture, which designs chemical processes for carbon capture. “Even when everything that can be decarbonised has been decarbonised, there are still significant sources of greenhouse gas emissions that are not energy related but created in the chemical process itself of making vital products that society needs.” These include industries such as cement, steel and glass, as well as waste treatment processes.

Thus the necessity of continuing to operate at least some carbon emitting industries means that a large amount of carbon will need to be captured if net zero is to become a reality. Currently, the carbon capture market amounts to roughly 40-50 million tonnes of carbon dioxide per year, or just 0.1% of human-related emissions, says Andrew Shebbeare of Counteract, which invests in a range of carbon removal technologies. Much of this carbon dioxide is used in the oil industry rather than stored permanently. Shebbeare estimates that this will need to grow 200-fold over the next three decades to an annual figure of ten billion tonnes. To put this into context, the output of the global oil industry grew 42-fold between 1900 and 1950.

Governments around the world are investing large sums of money in this area with the US Department of Energy alone putting $3.3bn into various carbon reduction technologies, says Shebbeare. Interest from the private sector is also booming, with a “thriving ecosystem of startups” that are “attracting early-stage risk capital from a number of climate-focused venture funds, corporate investors and philanthropic foundations”. Carbon removal will form the basis of a large new industry, with the development of the market for carbon emissions creating new business models, he says. We should see “a thriving global sector made up of new companies by the end of the decade”.

The two leading approaches

At the moment, the two approaches to carbon capture that are furthest along are pre-combustion and post-combustion carbon capture, says Stuart Haszeldine, professor of carbon capture at Edinburgh University. These have “decades of evidence to show that they are feasible” and are also “increasingly economical”.

Pre-combustion capture involves removing carbon dioxide from fuels before they are fully combusted. The fuel – typically methane or gasified coal – is converted into a mix of hydrogen and carbon dioxide. These are separated and only the hydrogen is burned. There are several pre-combustion schemes under way at the moment – including those under development at Teesside, Humberside and Liverpool in the UK – that aim to store emissions and produce low-carbon hydrogen for industrial use.

Post-combustion technology, which captures the carbon after it is burned, is more widely implemented already. Aker Carbon Capture, a spin-off from Norwegian engineering firm Aker Solutions, is a pioneer in this area: Aker was originally involved in helping the Norwegian oil company Statoil (now Equinor) inject carbon dioxide into oil wells to lower emissions for oil production in the late 1990s, “which helped lead us to start researching carbon capture in the 2000s”, says David Phillips, head of UK and investor relations at Aker Carbon Capture. This has enabled it to develop a way to extract carbon at source by treating the exhaust gas from factories and power plants with a proprietary solvent blend which absorbs the carbon dioxide. The solvent is then heated to release the carbon dioxide, which is then typically stored in liquid form, before being transported for storage.

Aker has cut the cost of the technology to the point where in some cases it is already economically viable given European carbon allowance prices, and has managed to win several contracts in northern Europe, especially in Scandinavia, the Netherlands and the UK. Over the next few years, it plans to expand geographically, first growing in Norway, Denmark and the UK, before looking to set up in other countries such as Sweden. It is also eyeing up the North American market, which is “now just one or two years behind Europe”, says Phillips. “Proof that you can capture carbon in an economically viable way is starting to convince people that the technology works.”

Taking carbon dioxide from the air

In theory, capture technology related to Aker’s could also be applied to take carbon dioxide straight out of the air, known as direct air capture (DAC). However, this is still some way from the point where it makes economic sense, emphasises Phillips. The concentration of carbon dioxide in the air is much lower than from factory exhausts, so it currently costs roughly five to ten times as much to extract one tonne of carbon via DAC as it does from its normal industrial processes, he estimates. However, with the technology constantly improving and costs coming down, it remains “an interesting option” that could become viable in the medium to long-term, perhaps within a decade.

“The technology to capture carbon from the atmosphere has existed for more than 50 years and is well proven,” says Phil Beattie, head of strategic relationships at SparkChange, which provides carbon investment products and data. However, it needs a “massive amount of heat and electricity”, which in some cases “creates more emissions than the carbon dioxide captured”. Still, there “are spots in the world where DAC works”, especially in places such as Iceland where virtually free geothermal energy and storage make it a theoretically viable – although still extremely expensive – option. Tech firms Microsoft and Stripe have recently invested in a DAC plant in Iceland.

Edinburgh University’s Haszeldine is optimistic about DAC technology. “There has been a lot of research in this area over the past two decades.” Mitsubishi Heavy Industries and chemical firm Linde are two major companies with established records that have invested resources into anticipating the growth of this area, while there are also a lot of smaller companies trying to make the process viable. It will take only one breakthrough to set off a “goldrush”, he says.

Solving the storage problem

Extracting carbon dioxide is only half the problem. Companies will also have to find ways of transporting and storing it, says Aker Carbon Capture’s Phillips. Although his firm is just involved in carbon capture, past experience shows that there are several ways to do this, including trucks, railcars and ships, but the simplest way is to use a pipeline. It can then be put into a depleted oil and gas field or put into a porous rock formation. Either way, it ends up being stored offshore, kilometres below the sea bed.

Ironically, oil and gas companies’ past experience in re-injecting carbon dioxide into their fields to drive out more oil gives them a competitive advantage when it comes to transporting the gas with the aim of storing it, says Haszeldine. Hence “all the leading oil and gas companies now have stakes in companies involved in transporting carbon and storing it”. He thinks that carbon storage will not only enable oil and gas companies to survive the impact of carbon taxes in the short and medium term, but will give them a new role in the long run, even after oil and gas are eventually replaced by renewables.

The value of carbon dioxide is much lower than oil, so this may be “a less lucrative model”, but “it will be a much more sustainable one”. Incumbent firms in oil and gas may also have an advantage over start-up carbon storage and transport companies “because they have the added credibility associated with their past reputation and balance sheet” – something that is important when you are looking to permanently store something and minimise leakages.

Making use of captured carbon

Storage is important, but the big benefits will come “when firms find ways to use the carbon extracted, rather than just store it”, says Santiago Tenorio-Garcés of investment firm Arowana. This is because companies can use the money gained from selling it on to reduce the costs of storage. Already oil and gas companies are using carbon captured from their oil and gas – rather than carbon extracted from naturally occurring underground carbon dioxide deposits – to reinject into their fields. Other companies are also finding innovative ways to use the captured carbon dioxide, including adding it to fizzy drinks.

Carbon8, a spin-out from the University of Greenwich, is at the forefront of ideas for storing and reusing captured carbon dioxide as a solid. The firm’s carbonation technology came as a result of a “eureka moment” by its founders, Paula Carey and Colin Hills, who realised that you “could take the toxic residue and carbon emissions from heavy industry and combine them to turn them into aggregates, something that normally takes nature over 1,000 years”, says chief executive John Pilkington. The aggregate can be used in concrete blocks in construction – both eliminating the need for additional storage and producing revenue.

Crucially, the fact that the carbon remains trapped in the aggregates even after it is added to the concrete means that it is stored in a more secure manner than storing it underground, which is “prone to leakages”, argues Pilkington. Carbon8’s first commercial unit, which is stored in a sea container and is designed to operate in a “plug and play” manner so it can be quickly and easily fitted to industrial flues, was successfully deployed at a Vicat cement plant in France two years ago. While Carbon8’s product is just designed to work in one specific industry, the company has already had interest from firms in other sectors and is adapting the core technology for use with other industrial residue.

Overall, carbon capture’s future looks very promising. It has been clear to the energy sector and carbon-intensive industries for while that “carbon capture will be a key component to reducing emissions”, says Stacey Morris, director of research at specialist index provider Alerian. However, the field of carbon capture has “gained more traction broadly in recent years as the world [searches for] paths to net-zero emissions”. We look at some of the companies who could profit from this in the box below.

Five plays on carbon capture and storage

The current leader in the manufacture of carbon capture equipment, with just under half of the global market, is Mitsubishi Heavy Industries (TYO: 7011), says Santiago Tenorio-Garcés of Arowana. While carbon capture is just one element of MHI’s business, which includes nuclear power and hydrogen technology, the firm believes that it will become the main driver of growth over the next few years, thanks to plans to decarbonise a wider range of industries, as well as develop new products in everything from shipborne carbon dioxide transportation to direct air capture (DAC). Mitsubishi trades on 15 times forecast earnings for 2023, with a dividend yield of 2.5%.

Aker Carbon Capture (Oslo: ACC) offers a purer play on carbon capture. The firm sells its technology to clients in a wide range of industries: it is currently focusing on northern Europe, but it plans to expand across Europe to North America, and even Asia. It also recently agreed to collaborate with Microsoft to help in the scaling of the carbon capture market, especially the voluntary side of the market. Aker Carbon Capture was spun off from Aker Solutions in 2020. It isn’t currently making a profit, which makes it a risky investment, but sales are starting to take off, and are expected to double over the next year.

Oil company Occidental Petroleum (NYSE: OXY) may seem like an unlikely carbon capture stock, but it is aggressively investing in carbon capture, including spending $1bn on building the world’s largest DAC plant in the Permian basin in Texas, with the aim of storing the carbon captured underground using existing infrastructure. It aims to build a further 69 DAC facilities in just over a decade, eventually making more money from carbon capture than it does from oil and gas. At present, it trades on just over seven times forecast 2023 earnings.

ExxonMobil (NYSE: XOM) is the biggest investor in carbon capture and storage (CCS) among the giant oil majors. It has around 20% of the global carbon capture capacity, and is set to spend billions to increase the amount further, says Stacey Morris of Alerian. The company’s own analysis predicts that, by 2050, around 80% of its operating cashflow will come from selling low-carbon services, of which CCS will be a major part. ExxonMobil also makes compelling sense from a value perspective: the shares are currently trading at less than ten times forecast 2023 earnings, with a dividend yield of 4.3%.

In the UK, power producer Drax (LSE: DRX) also sees opportunities in CCS. Until recently, it attracted controversy as its main asset was Britain’s largest coal power plant. However, in the past two years it has started switching from coal to biomass. In 2021, it announced that it was partnering with Mitsubishi Heavy Industries to build what will be the largest carbon capture project in the world, with the aim of becoming carbon negative by 2030 (ie, removing more carbon dioxide than it emits). The shares trade on less than six times 2023 earnings, with a dividend yield of 3.4%.

Modern civilisation is built on fossil fuels. Oil, natural gas and coal still account for around 85% of the world’s primary energy inputs. While these represent a small fraction of reported global GDP, they support all other economic activities. Ending our dependence on hydrocarbons was always going to be a tough call. The ongoing process of deglobalisation makes it even harder.

In his new book, Grand Transitions, Canadian scientist Vaclav Smil describes how the modern carbon-based energy system supplies fuels for transportation, and inputs for what he calls the “four pillars” of our economy: iron, cement, plastics and ammonia. Currently there are no readily available mass-scale alternatives for the use of petrochemicals in feedstocks or fuel for bulk shipping and air travel. Despite growing concern over the risks posed by climate change, the use of fossil fuels has increased by around 20% since the turn of the century.

To date we have taken only tiny steps away from hydrocarbons. Electric vehicles accounted for 5% of global car sales last year. Wind and solar power still only account for a small share of electricity generation. If history is any guide, the transition is likely to be painfully slow. It took more than a century for crude oil, which was first extracted in the US, Canada and Russia in the 1850s, to overtake coal as the world’s largest energy source. “Large energy transitions,” writes Smil, “have always been gradual, prolonged affairs unfolding across generations, and the shift from carbon to non-carbon energies will be no exception.”

Carbon emission targets are too ambitious

Nevertheless, governments around the world have committed to cutting carbon emissions in the coming decades. Smil doubts whether the timescale is feasible. Every historical transition has been facilitated by using the previously dominant fuel. Early British coal mines used timber for their pit shafts and props, while coal was transported from mines in wooden carts on wooden rails. In the 19th century, steel, produced with coke, was required to construct oil rigs and pipelines. Likewise, the transition to clean energy will require lots of fossil fuels – Chinese solar panels are made with electricity generated by coal. The trouble is that the oil market is in tight supply. As energy prices rise, the cost of investing in renewables is rising in tandem.

Thanks to recent technological advances, the price of electricity generated from renewables has reached parity with power from fossil fuels. Sometimes it’s cheaper. But ease of storage has always been a key factor in successful energy transitions. Currently there’s no cost-effective method of storing electricity produced by wind and solar, whose supply is intermittent. Owing to the vagaries of the weather, renewables in Europe operate at only 20% of potential capacity, according to Andy Lees of MacroStrategy. As the contribution from renewables increases, the intermittency of their supply is causing severe problems for electricity grids across the world.

Decarbonisation will spur demand for clean energy materials. We’ll need more lithium, nickel, cobalt and manganese for electric vehicles, vanadium for energy storage, silver and polysilicon for solar panels, iron and zinc for wind turbines, and copper for everything. But some of these materials are in short supply, and it’s not clear there are sufficient deposits of copper and nickel to meet projected demand. Lithium is a key material for electric cars. This element is not rare, but extraction is a messy business and new mines often face opposition. If Tesla reaches its projected demand for lithium-ion batteries in 2030, it would consume 75% of the world’s current nickel production and four times the current supply of lithium. Over the past year, the cost of lithium has risen sharply, pushing up battery prices.

Russia’s invasion of Ukraine further complicates matters. Not only is Russia a major producer of oil and natural gas, but its raw materials – zinc, copper, nickel and so forth – are also essential inputs for the next generation of motor vehicles. The country is the world’s largest producer of platinum group metals that are used in hybrid and hydrogen-powered vehicles. Norilsk Nickel, the Russian mining giant, is the leading supplier of the battery-quality chemical for lithium-ion batteries.

Ostracised by the West, Russia could be driven into China’s arms. If China gets favoured access to Russian fossil fuels and raw materials, its own energy transition could accelerate. But if tensions between China and the US escalate, the West will find it trickier to switch. China controls more than half of the world’s current supply of lithium-ion batteries, lithium mining capacity, cobalt and zinc, says Sean Maher of Entext. It makes most of the world’s solar panels. The country is also the main supplier of so-called “rare earths”.

In short, the world will remain dependent on fossil fuels for the foreseeable future. In the past, oil companies responded to rising prices by boosting investment. But that’s not happening this time. The global rig count, currently at around 1,600, is less than half its level of ten years ago, says oil-services company Baker Hughes. Policymakers now face some hard choices. Will they ease the cost of living crisis by boosting the supply of fossil fuels, or will they continue on their current path to zero emissions? The West must soon choose between decarbonisation and deglobalisation: it can’t have both.

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In defence of fossil fuels

This month has been a good one for the UK’s oil giants. Last week Shell reported 2021 earnings of $19.3bn and this week BP announced its best profit numbers in eight years. Add up what these two are making and it comes to real money, says Labour’s Anas Sarwar. Think “£44,710 a minute”. That doesn’t sound fair does it – particularly when all our energy bills are soaring?

Luckily there are politicians aplenty with ideas about how to make it fair. Here’s the Lib Dems’ Ed Davey on the matter. “It just cannot be right that these energy companies are making super profits without suffering an extra tax while people out there are too scared to turn their radiators on.” Labour is with him: it reckons it is time for a windfall tax on North Sea oil profits. That sounds logical – after all, as windfall-tax fans point out, the extra profits are nothing to do with these firms’ own cleverness and everything to do with global supply and demand dynamics. However, the truth is that the idea is really anything but logical.

First, it isn’t clear that the big oil firms are seeing much of a windfall at all. As economist Julian Jessop points out, they took massive lockdown-related hits in 2020. Add 2020 and 2021 together and “energy firms are still worse off than if the pandemic hadn’t happened”. No windfall here. Still, let’s ignore 2020 – everyone else does – and just think about 2021. Yes, the oil companies have done well, but will we get what we want by taxing them even more this year than we did last year? (Note that the marginal tax rate on UK North Sea production is already around 40%, so higher than standard UK corporation tax.)

Investing in what we really need

We want to see heavy investment in the renewable energy we need for transition. BP says it intends to increase spending on renewable energy to 40% of total expenditure by 2025. Add that to Shell’s commitments in the area and these two are some of the biggest players in the renewables sector. A lot of the money being made from keeping today’s energy show on the road is being poured into getting tomorrow’s under way. That, to my mind, is the very definition of the kind of sustainable we should be encouraging – not penalising.

We also need oil and gas. Right now we are more than 80% reliant on non-renewable fuels in the UK and as Paul Jourdan of Amati Global Investors points out, our own UK Climate Change Committee estimates that we will consume 18.3 billion barrels of oil equivalent (boe) of oil and gas over the next three decades with a mere 8.5 billion boe of that coming from the North Sea. That’s not really enough, in energy security terms or in price terms (oil prices are global, but the gas price is local). Cutting fossil-fuel production in the UK (by giving firms an incentive to go elsewhere, or just to stop exploring) makes no sense at all. Better to create an incentive for more production, so that we can keep prices low and limit the hardships on the way to net zero.

This is not, I think, complicated stuff. But I can make it even easier perhaps for the tax-them-now crowd to grasp with a simple question. When you have a supply problem that is driving prices up to lifestyle-destroying levels, should you a) make the problem worse by introducing measures that will almost definitely reduce supply further, or b) work to increase supply? This is not a trick question.

As the COP26 conference in Glasgow showed, world leaders are under huge pressure to slash carbon emissions by phasing out fossil fuels and embracing renewable energy. This transition is likely to lead to a massive increase in overall global demand for electricity as people opt for electric vehicles rather than cars fuelled by petrol and use electricity rather than gas or coal to heat their homes.

David Morrison, senior market analyst at trading platform Trade Nation, estimates that the world “will need around two to three times the electricity currently produced”. No wonder, then, that enormous sums are being invested in meeting this additional demand in a sustainable way. The expenditure is already starting to bear fruit.

Nick Scullion of Foresight Capital Management notes that the costs of operating and equipping renewable energy plants are falling. In many parts of the world renewables are entering what he calls a “Goldilocks moment” in which their costs are close, or even in some cases equivalent, to the cost of fossil fuels.

Of course, many technical challenges remain, especially around grid connection and storage, but these are being addressed. This backdrop bodes well for firms at the cutting edge of renewables technology and for the sector’s equipment manufacturers.

A bright future for solar power

Solar power is the third-largest source of renewable energy in the world, behind wind and hydropower, according to BP’s Statistical Review of World Energy. It has enjoyed a “meteoric rise” over the past decade, says Nick Boyle of Lightsource BP, the largest solar developer in Europe.

Boyle notes that the “cost of buying a solar panel is now 1/12th the price it was 12 years ago, while the typical size of a panel has increased from 200 to 250 watts per panel to 500 watts”. Panels are also much more efficient, with the best “able to capture 20% of the energy from the sun, up from 13%” previously.

Overall, “the cost of pretty much every aspect of solar energy, from equipment to generation, has fallen”, says Boyle. So the technology “can now compete with coal in many markets, even when it doesn’t receive a subsidy”, making it the most economical form of renewable energy. This is partly due to the advent of large Asian firms using economies of scale to drive down prices. Small and medium-sized firms elsewhere had previously dominated the sector.

But technological advances that have given energy companies (and consumers) much more “bang for their buck” have been another key development. Boyle expects these improvements to continue with the emergence of bifacial panels, which can catch the reflected light from the ground.

Bifacial panels aren’t the only technology that could boost the appeal of solar power. Kevin Chin of Arowana thinks that there are three radical technologies currently in development. With the efficiency of the silicon inside solar cells close to reaching its limit, researchers at Berkeley College, University of California and the University of New South Wales are trialling the addition of perovskite to silicon. Perovskite materials contain a crystal structure that gives them a high solar efficiency, while they are more versatile than silicon. Early results have been so promising that the Hunt family of oil explorers has set up its own company, Hunt Perovskite Technologies, to develop pervoskite solar panels commercially.

Chin thinks floating solar farms could catch on too. While they are currently an “oddity”, they have “become much more economic to install” and have advantages in places “where land is at a premium”, such as Singapore. They are also more efficient than plants sited on land, “since the water has a cooling effect” that helps them absorb infrared rays better.

Perhaps the most interesting development is “anti-solar technology”: solar cells that produce power by emitting infrared rays during the night. During the day the panel, which is cooler than the sun’s rays, absorbs light and heat; at night it will be warmer than its environment, so it will radiate heat. While researchers admit that such panels would produce much less energy than normal ones, they would be a source of around-the-clock power.

Wind energy is picking up

Chin admits that wind power “isn’t developing quite as fast as solar”, as advances in technology, engineering and equipment in this area tend to be “incremental’ – especially compared with the breakneck pace of change in solar energy. However, wind remains the second-largest source of renewable energy. And while onshore wind farms are controversial owing to their impact on the landscape, “offshore wind is becoming more and more economic”.

Chris Holmes and Chris Tanner of JLEN Environmental Assets Group agree that “offshore wind farms will be a major part of the energy mix” in most developed countries, with further cost reductions coming from “the movement to ever-larger capacity platforms and the use of bigger machines”. They note that while older turbines tended to generate around 1.6 to two megawatts of power each, today’s can generate around five, while “some in Sweden can even generate up to eight”. Several manufacturers are working on developing software that can help predict the speed and direction of the wind, enabling the turbines to be adjusted to maximise output.

Turbines that are “bigger than skyscrapers” and software improvements that can allow turbines to operate in a wider range of conditions are all areas where the technology is improving. But bladeless turbines could also help wind power, says Scullion. Such turbines capture the vibration of the wind without the need for blades or a mechanical motor.

Not only do they look much more aesthetically pleasing, allowing them to be used in a wider range of areas, but the removal of the blades also eliminates the risk of birds being caught in the turbines, which is one of the reasons why wind farms are unpopular.

Harnessing water and waves

Hydropower is not only the largest source of renewable energy, “but also the oldest... we’ve been harnessing the power of rivers for a long time”, says Scullion. As well as generating energy by driving a turbine, hydropower comes with the added advantage that it can be used to store power. This technology, known as pumped storage, involves using electricity generated during periods of low demand to drive water up a hill, or between reservoirs at different elevations, only to release it later to flow down and produce electricity when more is needed.

Rivers and dams aren’t the only way to harness the power of flowing water, says Stuart Murphy, founder of tidal-energy project TPGen24. Tidal energy, essentially “a hydro plant in each direction to capture both rising and falling tides”, has the potential “to deliver energy 24 hours a day” – unlike wind and solar, which are dependent on the weather, time of day and season.

In a country such as the United Kingdom, with its relatively large coastline, this means that it could deliver much “constant, baseline energy”. The latest systems in development allow energy to be stored, so it could also respond to changes in demand.

Tidal energy has huge potential and could ultimately produce “up to half of the UK’s energy needs”, agrees Ashley Slade of engineering consultants Expleo Group. However, at present the technology is being hampered by several obstacles, such as the need for large, complicated surveys and long construction times of up to a decade. Operating in a marine environment is also challenging: just one strand of seaweed in the wrong place “can cut efficiency by up to 20%”. Still, several large companies are working on making the technology more economically viable, using composite materials and vertical turbines to boost durability and efficiency.

Agrifuel is a growing field

The final major source of renewable energy is biomass, which involves the conversion of agricultural products into energy; one common process is turning sugar or corn into ethanol, a fuel. While purists might argue that biomass is not a proper renewable-energy source, since carbon is released when the fuel is burned, JLEN’s Holmes and Tanner point out that the fact that carbon is taken out of the air when the crops are first grown means that the net impact on emissions should be zero. They note that the rise of carbon-capture technology, which takes the carbon and recycles it for use in food and beverages, means that biomass is now “carbon-negative”.

Another form of biomass energy is anaerobic digestion, whereby special bacteria are used to break down waste such as animal slurry, cow manure and discarded food. While the process “has been known about for decades”, they point out that recent improvements in technology have made the process more efficient, allowing more feedstock to be produced and gas to be released. Producers have become better at tweaking the range of feedstock to increase yield further. Biomass has great potential in heavy industry, says Chin. Mining giant Rio Tinto has pioneered a process that will enable biofuel to replace coal in the conversion of iron ore into steel, “which is where 70% of the emissions in steelmaking occur”. Rio is working with the University of Nottingham to develop it further.

Storing green energy

Cheap generation isn’t the only technological challenge for renewable energy. The power produced also needs to be integrated with the national grid so that the system is stable and consistent enough to produce enough energy to meet demand, says Chris Kimmett, director of the power grids business unit at Reactive Technologies.

Until recently, the short-term stability of the grid depended on inertia: turbines and industrial motors powered by oil, coal and gas were not only very good at producing constant amounts of energy, but also briefly kept turning even if the power plants driving them went offline.

However, since solar and wind power don’t provide the same degree of inertia, the amount of electricity that they produce varies from second to second. In essence, a grid powered by renewables “is like a motorbike, rather than a steam train”, says Kimmett.

In 2020 the National Grid tried to take advantage of greatly reduced overall demand to experiment with an all-renewable grid for a few minutes “only to decide that it wasn’t stable enough, forcing it to cut the proportion of renewables to 83%”. Solving this problem will require “artificial intelligence to predict fluctuations in supply” and “fast-acting batteries that can compensate for falls in output”.

Progress is being made on both fronts, say Dan Travers and Laurence Watson, heads of data science and technology at UK technology-accelerator Subak. Several companies are trying to use machine learning to enable renewable power companies and the grid to forecast more accurately fluctuations in production so that batteries can be charged in anticipation of any dips in output. Moreover, the price of lithium-ion batteries, increasingly used for short-term storage, is falling dramatically “thanks to the economies of scale generated by the rise in demand for electric cars”.

While lithium batteries are ideal for very short-term energy storage, other battery technologies have great potential for storing energy over longer periods. Travers and Watson are especially impressed by start-up Form Energy, which has developed an “aqueous air-battery system” that can store and dispatch energy for up to 100 hours at a much lower cost than a lithium-ion one. For longer, seasonal storage, batteries containing hydrogen look promising.

The progress in battery technology will help renewable energy to continue growing “exponentially” says Carlton Cummins, co-founder and chief technology officer at Aceleron Energy, a battery specialist. However, one problem created by the rapid changes in technology is that “many renewable firms are worried about investing in batteries, only for them to become obsolete”.

What’s more, many batteries produced by companies such as Tesla “can’t be upgraded to take advantage of innovations that come in after they are purchased”. So several firms, including Aceleron, are developing batteries that are much easier to upgrade.

What to buy now

Many renewable-energy technology companies are not publicly listed. Ordinary investors do, though, have access to the big oil explorers, who are investing large sums of money in renewables while selling off their legacy fossil-fuel businesses.

For example, Royal Dutch Shell (LSE: RDSB) recently spent a large sum of money on a majority stake in the Emerald floating wind project, which aims to generate 1.3 gigawatts from floating wind farms situated between 35 and 60 kilometres off the coast of Ireland.

Thanks in part to its pariah status with investors focused on environmental, social and governance (ESG) concerns, Shell trades at 6.8 times 2022 earnings, with a dividend yield of 4.5%, but it should be rerated as it embraces renewables.

Another oil company actively positioning itself for a future dominated by renewable energy is BP (LSE: BP). Thanks to its CEO, Bernard Looney, BP is starting to sell many of its fossil-fuel projects to fund investment in solar and wind projects. It owns half of Lightsource BP, which specialises in solar projects and technology. Again this strategy should help investors to buy a dependable income stream at a discount today – BP is on a 2022 price/earnings (p/e) ratio of 6.2 and a dividend yield of 5.3% – while benefiting from changing attitudes in the future as reduced stigma boosts valuations.

Nick Scullion of Foresight Capital Management likes Clearway Energy (Nasdaq: CWEN), which builds, operates and maintains solar and wind-energy plants, as well as battery-storage facilities, across the US. Scullion thinks that Clearway is set to be a prime beneficiary of President Joe Biden’s infrastructure bill.

He deems the bill to be an “absolute gamechanger” because it contains various tax incentives to boost renewable energy. Revenue is growing by around 5% a year, more than justifying the fact that the company trades at around 20 times 2022 earnings. The stock also offers a solid dividend yield of 3.7%.

A purer play on the development and engineering side of renewable energy is Denmark’s Vestas Wind Systems (Copenhagen: VWS). It specialises in designing, manufacturing, installing and servicing both offshore and onshore wind turbines.

Vestas has a 20% share of the installed onshore turbine market and 15% of the offshore one, more than any other firm, and services more than 50,000 turbines, accounting for over 100 gigawatts of combined capacity. It trades on a 2022 p/e of around 30, but this is more than justified by revenue growth of approximately 50% over the past four years.

A riskier bet is VivoPower International (Nasdaq: VVPR). VivoPower concentrates on technology and engineering relating to electric vehicles, batteries and solar energy. While VivoPower isn’t making any money yet, revenues are growing fast, jumping from $13.6m in 2019 to $40.4m in 2021, and analysts’ sales forecasts remain encouraging.

The company is working on various projects, ranging from solar farms in both the US and Australia to electrification and decarbonisation work in the mining industry. VivoPower also has enough cash on hand to get it through the next few years.

Renewable energy funds raised around £2.3bn of new equity the first nine months of 2021, according to Numis, in over 20% of the total for all investment trusts.

This represented an acceleration in terms of money raised in both absolute and relative terms from the 2014-2020 average.

But was it justified by the performance of the sector?

Renewable energy funds have had a tricky time so far in 2021

It seems not. Initially, funds in the renewable energy sector were held back by weak power prices, then by the absence of wind or sun in the summer. They failed to benefit from the surge in prices in September due to their long-term contracts.

Diversification into Europe was no help and the two North American funds in the sector hadn’t yet gained traction. Returns both in terms of share price and underlying performance were mostly negative, even with the inclusion of generous dividend yields.

The two battery storage funds – Gresham House Energy Storage (LSE: GRID) and Gore Street Energy Storage (LSE: GSF) – and SDCL Energy Efficiency Income (LSE: SEIT), by far the largest of the three energy-efficiency companies, performed much better, though prolific equity issuance creates the challenge of ensuring returns on the new projects are as good as on the old ones.

Are investors right to take the long-term view? Analysis by Christopher Brown of JP Morgan Cazenove suggests they are. Not only have spot electricity prices risen, but so have forward prices for the next three years. “Even for those companies which have fixed much of their near term production revenue,” he writes, “there is likely to be a benefit from agreeing new forward contracts at higher prices than for those coming to an end.”

As a result, he has increased his net asset value estimates, on a conservative basis, for the six UK companies by between 1.4% (John Laing Environmental (LSE: JLEN)) and 3.2% (Greencoat UK Wind (LSE: UKW)). Companies with European assets should see a comparable benefit.

In addition, the discount rates used by funds to arrive at net asset values vary from 6% (Bluefield Solar (LSE: BLIF)) to 7.3% (JLEN). The higher these are set, the lower are net asset values and these discount rates look more than enough to take account of the upside to interest rates and bond yields. In other words, net asset values look understated.

Finally, autumn is here and the wind is blowing again, helping electricity generation. Solar energy in the UK may appear to be the triumph of hope over experience of British weather, but significant technological improvements mean that solar generation is more dependent on light than sunshine. Clearly, generators in southern Europe and southern US don’t need to worry.

Investors can afford to relax a little; the sector looks likely to continue to generate high single-digit returns. There could even be some good news if the chancellor is forced to perform a U-turn on higher rates of corporation tax now that the US administration has been forced to stick with the 21% rate rather than increase it to 28%.

The renewables sector has promise but there are plenty of risks

But investors still need to be on their guard. Electricity demand is expected to grow strongly, perhaps doubling by 2050, as the UK decarbonises heating and transport, but that does not necessarily mean higher prices. If the government approves new nuclear power plants, these will eventually supply much of the increased demand at low marginal cost. The supply of sites for wind and solar is far from infinite and the cost of installation and maintenance is likely to rise.

As more and more money is shovelled into renewable energy projects, encouraged by the universal zeitgeist, there is a danger that returns could start to fall. The political and popular drive to replace hydrocarbon generation with renewable energy does not have investor returns as a key objective.

As Richard Crawford, a director of InfraRed, the managers of the Renewables Infrastructure Group (LSE: TRIG), says: “while more and more renewables development may appear to policy makers as low cost and painless progress, without other complementary measures, increased intermittent capacity risks flooding our system with excess electricity at times. This will push down returns, actually discourage investment, and will not on its own achieve the required decarbonisation.”

Too often, environmental and political goals are confused. Reducing the global usage of hydrocarbons is a worthy environmental and economic goal but the commitment to “net zero by 2050 in the UK” is almost irrelevant to that goal and an investment strategy based on it is skating on very thin ice.

There are too many risks for investors to relax. Electricity prices could fall again, reducing returns, either because of over-investment in generation or as wind generation picks up or as the interconnector with France is repaired. Bids from major hydrocarbon companies desperate to diversify into renewable energy are possible but would make no business sense.

Investors should avoid getting carried away by the media and political hype and focus on whether the companies are still generating a satisfactory and sustainable rate of return. They should also remember that the solution to the challenge of decarbonisation lies in new technology. For example, the capacity of battery storage is currently measured in hours but if that could be extended to days or weeks, the intermittency of renewable energy and the inflexibility of nuclear generation would cease to be a problem.

The financial and environmental pay-off would be enormous and explains the high valuation accorded to companies such as Tesla that are investing in this area. By all means invest in renewable energy funds, but find room also for funds focused on innovation.

Sheepwash is a tiny village in North Devon with a population of just 250 or so people.

The Sheepwash Chronicle is the local magazine for and about the residents. It’s not what you might call the mainstream media.

I have some close family down there, so I visit quite often. Last week I stumbled across an article in the Harvest 2021 edition. It might be the best article I’ve ever read about green energy and our future electricity needs.

I thought I’d discuss it today.

Nuclear energy is clean and safe – so why is it so hated?

It’s by Dr Philip Bratby of the Countryside Charity and it’s called: Small Modular Reactors - An Opinion Piece. The ultimate low-carbon renewables.

It’s worth declaring up front that Bratby is pro-nuclear. It often seems that the energy debate is no longer about what is the cleanest, most-efficient energy source; the debate has been politicised and corrupted, often by those with their snouts in the trough of government subsidy, so anyone who suggests that fossil fuels have done a lot for mankind or that nuclear power might not be all bad is immediately branded a heretic.

But Bratby’s views seem particularly pertinent at the moment because of the current energy crisis in which we find ourselves, spiking natural gas prices and the fact that only recently, with no wind, the government has had to switch coal-fired plants back on.

I googled Bratby, and there isn’t much online. He has a first class honours degree in physics from the Imperial College of Science and Technology (London University), a doctorate in physics from Sheffield University, he worked in the military and civil nuclear industry as a energy consultant, and is now semi-retired.

There are a couple of anti-nuclear websites that have a go at him, using straw man arguments, quoting out of context and so on, so I won’t stoop to mention them here. Let’s get to the article.

If the government has its way, says Bratby, we will need much more electricity for heating and for charging all those millions of electric vehicles. To meet these needs, the electricity supply will need to be both expanded and more reliable.

Commercial nuclear power stations have been operating for nearly 70 years. They have provided huge amounts of reliable and affordable “clean” and almost-infinitely-renewable electricity. Nuclear energy has the best safety record of any energy technology. All environmental concerns, such as waste disposal, have been solved.

So why hasn't nuclear power been widely accepted?

One reason is that over the course of many years environmental activists have persuaded much of the public, many politicians, and the media that nuclear energy is unsafe. However, some activists have recently changed their minds.

For example James Lovelock, who proposed the Gaia hypothesis, has said that “nuclear power is the only green solution”. Bryony (now Baroness) Worthington, a lead author of the Climate Change Act, who once said that she was “passionately opposed to nuclear power” has more recently said of nuclear power: “I urge you on moral, ethical, scientific and environmental grounds to rethink your opposition to it”.

One-time anti-nuclear campaigner, environmental activist and author Mark Lynas, who has said that he “grew up hating nuclear power” has now said that “continuing to oppose nuclear was a mistake… it’s extraordinarily safe… and we must learn to love nuclear power”.

So why do some environmental organisations still oppose it and prefer environmentally-destructive wind and solar farms coupled with batteries?

The reason, says Bratby, is not that it doesn't produce abundant low-carbon energy, but that it does, and that conflicts with their aim: to halt economic growth.

Now – and this is Dominic speaking – I think there’s a lot of truth to that last statement. I often feel that that’s the main agenda behind a lot (not all) of authoritarian activism. The agenda, as well as to impose their views on others and dictate how to behave, is to stop capitalism, progress and economic activity altogether. Hence the hashtag #endcapitalism which you find everywhere.

Anyway back to Bratby: thanks to anti-nuclear propaganda, regulators require multiple, excessive layers of safety in nuclear plant design that needlessly pushes up costs. The regulatory process is complex, slow and cumbersome, and so takes years to complete.

The long lead time between building and operation adds to expense. And so political uncertainty is one reason many recent proposals for nuclear power stations in the UK have been abandoned, leaving the twin power stations at Hinkley C in Somerset as the only ongoing project.

The future of nuclear power

To overcome some of these problems, the focus for future nuclear power stations has switched to SMRs – small modular reactors.

SMRs have been in operation for over 60 years in submarines, aircraft carriers and ice-breakers, but only in the last few years has serious attention been paid to developing land-based SMRs for commercial electricity generation.

The advantages of SMRs over current nuclear power stations are legion:

• They use relatively simple, proven technology.

• They can be manufactured in factories and built on site rapidly.

• They are safer than current nuclear power stations.

• They occupy very little land and have little impact on the landscape. Some can even be constructed underground – surely preferable to wind turbines and solar farms.

• They provide generation that can be controlled to provide baseload and load-follow capability.

• Their output is not weather-dependent.

• They are synchronous and the large rotating generators provide inertia, which is a positive benefit to the reliability and stability of the grid.

• They use very high energy density fuel and thus require a lot less land. A 440MW SMR would require about 25 acres of land and would produce about 3.5TWh of electricity per year (enough for about 1.2 million homes). A solar farm would require about 13,000 acres (20 square miles) for the same output; wind farms would need about 32,000 acres (50 square miles).

There are about half a million homes in Devon. So Devon's domestic electricity needs could easily be met by a single 440MW SMR occupying a small area of land. By contrast, a huge area of Devon's farmland would need to be covered in solar panels or wind turbines to provide the same amount of electricity. Even then, alternative sources would be needed for when the wind doesn't blow or the sun doesn't shine.

I read that the biggest solar farm in the country is planned for Holsworthy, about 15 miles up the road from Sheepwash: 76,000 panels over 165 acres. It won’t come close to meeting Devon’s electricity needs.

In the UK, it is envisaged that SMRs would be constructed on the redundant sites of closed nuclear and coal-fired power stations, ie, on brownfield land where grid connections are readily available.

If they really are such a silver bullet, SMRs are going to happen whether activists oppose them or not. A shortage of energy will demand it. You don’t have to watch videos of Extinction Rebellion blocking traffic on social media to know that the British public have lost patience.

How to invest in SMRs

Several competing designs are being developed around the world, ranging in size from tens of megawatts to 500MW and of many different design concepts. But at the moment none of the pure play SMR companies are publicly listed.

RollsRoyce (LSE: RR) has built seven generations of SMRs for use in nuclear submarines and, with its design for a 440MW SMR, it is a contender – so that is one option. It’s about to land a load of orders from Eastern Europe, I hear, but it is not exactly a pure SMR play.

Another contender is NuScale, an American company, which is unfortunately still private. There is a way to get exposure to NuScale, however. The majority shareholder is engineering company Fluor Corp (NYSE: FLR). It has been through the wars a bit, and its share price is low so it might represent an opportunity - though again it is not a pure play.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Energy efficiency funds are an increasingly popular part of the infrastructure asset class. Four London-listed funds are currently valued at over £1.5bn – going up in value by the month with new placings and fund raisings – and there will surely be more launches in the wings. I’m a non-executive director of one of these, the battery fund Gresham House Energy Storage (LSE: GRID), so I’m not going to make any comment about the attractiveness or otherwise of any individual fund, but here’s a quick run-through of the basics.

A new kind of infrastructure

These funds look a bit like other infrastructure funds: they are income focused, backed by real assets, and generate inflation-linked dependable cash flows. The average yield over the next few years should be in the 4%-7% range, which explains why all four trade at big premiums to net asset value – 16% for SDCL Energy Efficiency Income Trust (LSE: SEIT).

However, unlike many infrastructure funds, there is little government involvement (ie, no contracts underpinned by the state), although government policy can have an impact on revenues. They also act more like operational businesses, buying and selling services to commercial end-users.

With the energy-efficiency funds, these users might be corporate clients. For example, SEIT, which listed in 2018, recently invested in a US business called RED Rochester that provides services such as electricity, steam, water and compressed air to customers in a business park. RED has over 100 customers, typically on 20-year contracts, with renewals linked to their tenancies.

Meanwhile, Triple Point Energy Efficiency Infrastructure (LSE: TEEC) raised £100m in an initial public offering in October 2020 to invest in low-carbon heat distribution, social-housing retrofit and industrial energy efficiency, and distributed generation. One deal involves community heat and power (CHP) assets that generate heat for big commercial greenhouses. These are more efficient than the old engines and less carbon intensive. Even the carbon dioxide waste from combustion is used to enhance crop yields.

In both projects, we can see long-term contracts, frequently inflation linked, with defined cashflows. There are no worries about governments, subsidies, or wholesale power prices (unlike renewable energy funds).

Very big batteries

The two battery funds, GRID and Gore Street Energy Storage (LSE: GSF) are rather different. Renewable energy creates lots of power at the wrong times. These funds own storage batteries that take in electricity when it’s plentiful (and thus cheap), and supply it when it’s needed (and therefore expensive).

Clients include the national grid operators, who are keen to make sure that there is spare capacity in the system to cope with peak periods of use or sudden unscheduled outages.

These funds have been busy buying into new projects, some of which are in the fast-growing Irish market. Both have a strong sustainability angle, in that they enable the push towards renewable power in the UK. This may help explain why big institutions have been buying into them.

A victim of popularity

What of the risk? Rising inflation could increase equipment and operating costs. Higher interest rates might make their yields less attractive. Operationally, all these funds depend on complex optimisation and valuation models with varying inputs (forward market pricing, inflation, discount rates) which can change over time. Income investors should keep an eye on operational net cash flows to underpin dividends.

Government policy might change (eg, more nuclear power would make storage less important), although that is unlikely. The greatest risk is that too much money goes into these energy efficiency niches, pushing down rates of return

When the coalition government set a target of 30% of the UK’s electricity supply to be met from renewable resources by 2020, it was ridiculed. In 2010, renewables had accounted for just 7% of supply. The target seemed absurdly ambitious and ruinously expensive given that renewable energy required heavy subsidies. Yet renewable generation reached 45% of supply this year and our carbon emissions have fallen by 29% in ten years. Such has been the fall in equipment and installation costs that a rising number of new onshore wind and solar farms are subsidy-free.

Power at a premium

Investors have benefited from the creation of a 13-strong renewable-energy sector within investment funds. Share prices, however, trade at a 20% premium to net asset value. Though electricity prices are now rising as demand recovers from the lockdown lows, UK demand is in long-term decline, having fallen by 15% since 2005. The go-ahead for Sizewell C would at least maintain the long-term market share of nuclear at 20%, leaving renewable energy to compete with the most efficient and versatile gas-powered generation. Dividend yields ranging from 5%-6.7% are certainly attractive, but are they sustainable without higher long-term demand or prices?

Several of the funds have assets in the EU too, but that renewable energy market is as developed as the UK. Only in the US, where renewables account for just 17% of electricity output, does there seem to be much room for growth. In addition, the growing enthusiasm from the governments of developed countries for “green new deals” should worry investors, implying large-scale expenditure without regard for investment return.

Jean-Hugues de Lamaze, investment manager of Ecofin Global Utilities & Infrastructure (EGL, of which I am a director) is more optimistic. “While electricity consumption in the US and Europe has been stagnant in the last decade,” he says, “there is likely to be demand growth from the displacement of fossil fuels in road transport, the heating of homes, industrial automation and in the production of hydrogen for fuel cells. Though about 200 gigawatts of new wind and solar-power generation capacity was added worldwide in 2019, [the annual pace] will need to more than double over the next three decades to reach the 2050 zero net-carbon emissions target.” He argues that the prices paid in private-equity transactions across the infrastructure spectrum have been far higher than in listed infrastructure funds. “For example, recent transactions have valued offshore wind assets at nearly double their invested capital. This suggests that listed infrastructure valuations still need to fully price in the global decline in interest rates.”

The top tips

However, the best opportunity lies in utilities transitioning to renewable energy. Since 2005, European utilities have retired 40% of their coal plants. RWE (Frankfurt: RWE), still Europe’s largest emitter of carbon dioxide in 2018, is now its third-largest renewable energy generator. The stock has trebled in five years.

North America’s largest electricity generator, NextEra (NYSE: NEE), plans to raise renewables from 10% of generation to 30%-40% by 2030, according to its chief financial officer, Rebecca Kujawa, with “renewables now the lowest-cost means of power generation. This is the best environment for renewables development we have ever been in and it keeps getting better, offering 6%-8% annual growth for a long time”, she says.

The upshot is that the specialist renewable-energy funds, especially those with international expertise, are still attractive, while what many regard as “boring old utilities” are becoming growth businesses

Imagine a future where your kettle, your washing machine, your plug-in car and “the whole lot of them will get their juice cleanly and without guilt from the breezes that blow around these islands”, as Boris Johnson invited his audience to do at the virtual Conservative party conference earlier this year. Imagine Britain as the Saudi Arabia of wind. Imagine wind power propelling this country to “commercial greatness” again, just as it once puffed the sails of Drake and Raleigh and Nelson. Imagine a future, post-Covid-19, when investment in new energy technologies has boosted the economy, created tens of thousands of new jobs, and helped the UK to meet its target of net-zero carbon emissions by 2050. It’s easy if you try, no doubt. But though you may call the PM a dreamer, he’s not the only one. Europe and China have committed to similarly bold plans, as have Saudi Arabia, Japan and Korea; the US seems likely to too, now that Joe Biden is on his way to the White House. Investors have been placing their bets: the S&P Global Clean-Energy Index has climbed by over 70% since the start of this year.

From vision to reality

Johnson was expected to announce further steps in his green revolution as MoneyWeek went to press, including bringing forward the ban on new cars powered by fossil fuels. But the wind blowing around these islands, not to mention the hot air issuing forth from Conservative podiums, will not be enough on its own to keep the lights on. As The Times points out, progress has already been made towards the goal of decarbonising electricity networks. But to make further progress towards the government’s legal commitment to net zero by 2050 will require additionally decarbonising heavy industry, transport and heating. Electricity, however, no matter how cleanly produced, is not up to the job of smelting iron or lifting jumbo jets.

That means hydrogen will have to play some role in Johnson’s plans. Its potential as a clean fuel has long been recognised – it is the most abundant element in the universe and the only waste product produced when it is used as fuel is water – and it is indeed already in use in a number of pilot projects around Britain. It fuels buses in London and Aberdeen, and ferries in Orkney. Trials of hydrogen-powered trains have begun, and the Tees Valley is set to host the UK’s first hydrogen transport hub. Earlier this year the world’s first hydrogen plane took to the skies over Britain – a first step towards commercial flights by 2023, it is hoped. ArcelorMittal Europe aims to produce its first “green steel” using hydrogen technologies this year.

The obstacles that remain before hydrogen’s full potential could be realised – and the hoped-for “hydrogen economy” replaces our current one running on fossil fuels – remain considerable, however. Hydrogen, although abundant, is not found just lying around in pure form. Most of the hydrogen produced in Britain is manufactured by burning fossil fuels. It is possible to produce “green” hydrogen instead, by electrolysing water using renewable energy, but costs remain prohibitive. Still, as The Times notes, it’s “probably right” that Johnson “not lose sight of the long-term prize” here. Renewable energy costs have tumbled over the past decade; the cost of green hydrogen is likely to do so too. And other countries, including Germany, China, Japan and the US are investing in the technology. Goldman Sachs estimates that green hydrogen could be a $10trn global market by 2050, driving investments in renewables, electrolysers, pipelines and storage.

The challenge, as Dieter Helm, a professor at Oxford University, points out in the Financial Times, is of turning the grand vision into a reality. “The energy scene is littered with the debris of grand visions and bold initiatives,” he says. The PM has, for now, merely added to it. If the rhetoric is to be transformed into something of substance, action is urgently required. The UK’s coal industry is now “effectively closed and the nuclear fleet is ageing”. The long-promised energy white paper “must be delivered and decisions taken. Otherwise, the lights might go out and the carbon targets be missed”.

Hydrogen might well be one of the key planks on which to build a proper energy policy “after two decades of dither and uncertainty”, and Johnson is “good at willing the ends, if only vaguely”, says Helm. But Johnson must also will the means: ensuring appropriate infrastructure is in place and providing an appropriate regulatory and institutional infrastructure, for example. Doing all this and more would be a “great legacy for the prime minister” – assuming he will act “and pay for it too”. As an FT editorial points out, Germany has already set out a recovery plan with an estimated €40bn of detailed green measures. France has pledged almost a third of its €100bn recovery fund to green investments, including hydrogen. All this is a “far cry from what the British government has announced so far”.

How to invest

Still, the speculation and the government subsidies already announced have made hydrogen the “energy buzzword of the moment” among investors, as George Hay of Breakingviews puts it. That is reflected in the “toppy valuations” of the main players in the industry, and “investors might be forgiven for avoiding hydrogen altogether, especially as a similar burst of sector enthusiasm two decades ago proved short-lived”. This time around, an enthusiasm for environmental, social and governance (ESG) investing is also inflating valuations as fund managers snap up anything that appears to be “on the right side of the energy transition. That could keep share prices elevated even if the returns that justify the hype remain a long way off”.

Indeed, all of the stocks suggested by MoneyWeek last time we covered the sector earlier this year – Ceres Power (Aim: CWR), ITM Power (Aim: ITM), McPhy Energy (Paris: MCPHY) and Siemens (Frankfurt: SIE) – have soared since, rising fivefold in the case of McPhy. It would be tempting to ride the momentum, but be aware that, at least in the case of the purer plays, you will be making risky bets on companies that have yet to make profits and on the likelihood of further progress over the next 20 or 30 years in the highly uncertain energy revolution already outlined.

But there’s a way to get some exposure and hedge your bets at the same time. Hydrogen can only live up to the hype if it is able to ride the coat-tails of the more general transition to a lower-carbon future. To stand a chance of doing that, the hydrogen produced will have to be “green”. That means that the growth of a hydrogen economy depends on growth and development in renewable energy. “The… investment opportunity for green hydrogen is really, actually, in more renewable energy,” as BNP Paribas analyst Mark Lewis told CNBC. To meet the EU’s goal of producing as much as ten million tonnes of renewable hydrogen by 2030, for example, about €400bn of investment will be required, reckons Lewis. “Fully half of that is for dedicated new renewable energy capacity. So this is only going to increase the growth opportunity that was already there around renewables.” The real opportunity, then, says Lewis, is in the capital goods companies that build the electrolysers (an example is Siemens, which MoneyWeek suggested as an option earlier this year) and renewable energy projects more generally. You can play the latter theme via two clean-energy exchange-traded funds – the iShares Global Clean Energy (Xetra: INRG) and the Lyxor New Energy (Xetra: NRJ) ETFs.

Among investment trusts, Renewables Infrastructure Group (LSE: TRIG) was popular with MoneyWeek readers when we asked in our 1,000th issue what you would invest £1,000 in until 2030. Edward Sheldon of Motley Fool likes it too: the FTSE 250-listed trust is “one of the best UK renewable energy investment trusts” out there, he reckons. It owns a broad portfolio of wind and solar farms in the UK and Europe and aims to provide investors with regular dividends. It has a trailing yield of about 5%.

If the US is serious about tackling the biggest challenges facing the country right now, it needs to embark on a new “green” Marshall Plan, says Jeremy Grantham.

Jeremy Grantham, who co-founded US asset manager GMO in 1977, believes the US government should take advantage of historically low interest rates to finance “a long, sustained and massive public works programme”, similar to the scheme that helped to rebuild Europe in the wake of World War II, “at negative real rates”.

While Covid-19 is today’s obvious concern, Grantham is more worried about long-term issues. “I believe income inequality is eating away at the economy from the inside with the lack of economic progress for workers reducing demand.”

This problem goes back to the financial crisis, if not beyond. “The great waste in 2009 and 2010... was the use of precious resources to bail out banks,” says Grantham. The decision “was both unjust and economically inefficient: it was a violation of the spirit of capitalism”.

A new Marshall Plan should focus on “green” infrastructure spending: “It is absolutely imperative that the entire economy be greened if we want any hope to maintain a stable global civilisation in coming centuries.” Infrastructure in the US is already “unusually behind schedule on maintenance and subpar quality”, and many of the jobs created would be “industrial and labour-intensive”, helping to address growing inequality. The move would also help challenge China’s “growing dominance” in green tech.

What goals has the UK set out?

Britain is not known for great acts of dirigiste planning, but when it comes to tackling climate change it has – to remarkably little fanfare amid the noisy political dramas of the last few years – set out strikingly ambitious climate goals and a route map to achieving them. Margaret Thatcher’s self-appointed mission, in the late 1980s, to put the nascent issue of climate change at the top of the global agenda, is today regarded as a major part of her legacy by some historians and environmentalists. By the same token – in the spirit of crystal-ball-gazing – it’s possible to speculate that Theresa May’s much briefer and more unhappy period in government will be remembered for its revolutionary commitment to making the UK a net-zero carbon emitter by 2050.

What have we committed to?

A few weeks before May stepped down in the summer of 2019, the UK became the first major economy to pass legislation binding itself to achieving net-zero carbon (and other greenhouse gas) emissions by mid-century. We did this in the form of a statutory amendment to the Climate Change Act 2008, acting on the recommendations of the Committee on Climate Change (a government advisory panel of climatologists and economists chaired by the ex-Tory environment minister John Gummer, now Lord Deben). At the time, plenty scoffed that the move was pointless and even self-harming without a similar commitment by other nations. But since then, many others have followed – first the EU and more recently South Korea and Japan. China has said it can follow by 2060.

But is it remotely feasible?

That depends on two things. First, whether a wholesale shift away from fossil fuels is possible in the country that spawned the industrial revolution and was once the world’s largest consumer of coal. And second, whether the nascent technologies of carbon capture, utilisation and storage can develop sufficiently rapidly to offset ongoing emissions. The biggest chunk of UK emissions (28%) comes from transport, mostly cars. Earlier this year the Johnson government gave the motor industry a jolt by bringing forward the ban on sales of new petrol, diesel and hybrid cars (including plug-in hybrids) to 2035; previously it was 2040. But unless hydrogen fuel-cell technology advances far more rapidly than most motor industry analysts expect, that is not credible without investing in electricity-charging infrastructure (millions of charging points costing tens of billions of pounds) and also beefing up the UK’s electricity grid and power-generation infrastructure to meet the new demand (at a cost of another £48.5bn, reckons ScottishPower). Of course, transport is just one of the many challenges involved.

What are the others?

Heating buildings accounts for 19% of UK carbon emissions. Weaning tens of millions of households off gas boilers – in favour of either hydrogen cells or heat pumps run on electricity – will be difficult and expensive. Power generation accounts for 16% of emissions: electricity will need to continue getting cleaner (renewables) and more abundant (which could require boosting nuclear power). Industry accounts for 23% of emissions and even if electricity generation were to become 100% renewables, carbon capture will be crucial in hitting net-zero because some heavy industries (such as steel, petrochemicals and cement) will continue to produce a lot of carbon dioxide.

Is wind power the answer?

A shift to renewables will not in itself create a decarbonised economy (for the reasons discussed above), but it is necessary – as Boris Johnson recently recognised. Britain is not blessed with the sunshine needed to power a significant solar-energy industry (a sector that will play a key role elsewhere), but it does have natural advantages when it comes to wind, including the fact that parts of the North Sea are relatively shallow, making turbines easier to install. Wind power is already a massive UK success story, fostered by the government’s strategy (since 2013) of attracting investment via a contracts for difference system of granting licences and subsidies based on future returns. A combination of scaling up, engineering progress and growing confidence among investors has pushed down costs and turned the UK into the biggest offshore wind market in the world (albeit not a significant player in the construction of turbines). Boosting wind power further – growing the sector about fourfold to 40 gigawatts of electricity a year by 2030, a ten gigawatt increase on the existing goal– is step one in the PM’s ten-point plan for the UK’s “green revolution”.

What are the other steps?

The rest of the plan is due to be unveiled imminently and is expected to include detail on plans for fostering hydrogen power and carbon capture and storage. Other priorities are reported to include investment in small modular reactors; a new focus on hydrogen-fuelled trucks, trains and aircraft; energy-efficient housing; and investment in synthetic fuels made by extracting carbon dioxide from the atmosphere and combining it with hydrogen produced from renewable energy. All this might sound more like a shopping list than a coherent plan, but it makes clear the direction of travel and the potential era-defining opportunities for investors in coming decades. The expansion of wind power alone will require £50bn in investment, according to Aurora Energy Research. In the long run, it is to be hoped, investing billions in green energy will be a boost to the UK economy rather than a drain on resources. This country is already a global leader in wind power, green finance and insurance, and dominates the manufacture of electric engines. Looking ahead to the next 20 years, challenges abound, but there are also plenty of reasons to be cheerful.

Bubbles are a part of investment life. You get big bubbles, like the dotcom boom. You get little bubbles, like the ones that erupt in sectors like cannabis or 3D printing every so often.

Ideally, as investors, we’d like to ride a bubble up, then step off, and watch it collapse back down, safely sitting on a huge pile of cash.

It’s a lot harder in practice than in theory. But in case you want to give it a shot, I think we’ve got the makings of a real humdinger of a bubble forming right now.

Bubbles can be good for us

Bubbles often come with very negative connotations. Bubbles raise your hopes on the way up, then smash them to pieces on the way down. Bubbles burst. If you’re the one holding the bag when they do, you’ll lose money, often a lot of it.

Bubbles are also extraordinary breeding grounds for fraud. Our low-interest-rate world has already created some vintage frauds in the last few years (Germany’s Wirecard is only the most recent). And I am absolutely positive beyond all doubt that we’re going to see some real stunners in the next few years.

But you know what else bubbles do? They get things done. Nothing gets an otherwise wildly ambitious or even borderline deranged plan of action over the starting line like the promise of getting rich beyond your wildest dreams.

Bubbles are how the railways got built. Bubbles laid the fibre-optic cables that enable the internet. If you really want to get a lot of people to spend money on laying out the infrastructure for a new era, then a good old-fashioned investment bubble is a very good way to do it.

And I reckon that’s what we might be seeing in the electric and alternative fuel vehicle market right now.

That probably sounds daft (and it might be). I mean, Tesla is already a one-stock bubble machine on its own – I’ve lost track of how many times you could have doubled or halved your money by buying it at various points throughout this year. And we’ve seen would-be electric-truck maker Nikola go through its own little boom and bust cycle already too.

And yet, when you look at what’s happening in the real world as opposed to financial markets, it feels as though we’re just at the beginning of this transport revolution, rather than near the end.

I’m not saying you should invest in Tesla, by the way. I genuinely still don’t know what to think about the company. But whatever you think of Elon Musk and all the hype he pumps out, the one thing that you can categorically say without doubt is that Tesla has produced an electric car that people want to drive.

That has proved a game changer for the sector. And it’s now about a lot more than just Tesla. Even as Musk was delivering another hit-and-miss PR moment yesterday in the form of “Battery Day” (which appears to have been a bit of a damp squib), Volkswagen was unveiling the ID4, which will be its first “affordable" electric SUV to be sold in the US, says tech site The Verge.

Politics and technology are aligning

Meanwhile, the political pressure to cut carbon emissions is only growing. Governments around the world are competing to see who can ban petrol and diesel cars first. There’s talk of the UK ban being pulled back from 2035 to 2030 now. You can see this as cynical “virtue signalling” – and you’d probably be right. But there’s more to it than that.

Car manufacturing is big business. It’s an industry that’s always been viewed as important by governments in every nation. So if we’re looking at a relaunch of the entire automotive sector, plus an all-new car replacement cycle, then every government wants to look like an attractive place to set up that business.

The desire to find some sort of economic and morale-boosting way out of the lockdown-induced hole will only be adding to this sense of mission.

Your personal view on this is irrelevant. The question of whether the electric car manufacturing process creates more lifetime emissions than a fossil fuel car is also irrelevant. The point is, it’ll happen because it’s the conventional and accepted wisdom that this is the way forward.

In turn, that means the bigger players in the sector are adapting to it and accepting reality and finding new ways forward (this is also the biggest risk for the likes of Tesla). The 2015 “Dieselgate” scandal was already pushing them in that direction. If big car manufacturers have the assurance that electric or hydrogen is now the future, whether they like it or not, then they’ll retool.

You then have to think of all the spin-off activity that goes into changing how we drive. Electric cars need different infrastructure – charging points rather than petrol pumps. They most probably require changes to our electric grid infrastructure, at both the grand scale and the micro scale. And this is before getting into the competition from hydrogen fuel cells.

There’s also the more distant future (but not that distant). Self-driving is the next big battleground and the area where companies will battle for a competitive edge. That’ll require all sorts of technology and sensors and the rest of it.

Of course electric cars are not new – even if you only count back as far as their first Tesla incarnation. But the move to mass adoption will be the thing that really gets this going. I suspect that a proper full-blown front-page mania is still to come.

How can you take advantage? I looked at a few options in last Friday's issue of MoneyWeek. But if I’m even close to being correct about its bubble potential, we’ll be writing a lot more about this topic in the months ahead. So subscribe here if you haven’t already – you get your first six issues free.

This year has seen many dramatic changes, but one milestone in particular stands out. For over two months, from early April to mid-June, coal power made no contribution to the national grid – the longest period since the 1880s. While this was partly due to the slump in energy prices, it shows that non-renewable sources of energy – coal in particular – are on their way out.

The renewable-energy sector is made up of multiple sources, such as wind and tidal power, but the biggest winner in recent years has been solar energy. In 2009 it accounted for 20,000 megawatts (MW) of global capacity; by the end of 2020 the figure is estimated to be 720,000MW – enough energy to power around 522 million homes. And the future for this energy source looks bright.

Costs are falling everywhere

The key reason solar power is taking over as the energy of the future is that its cost has plummeted in recent years as the technology behind it has improved. Liam Thomas, chief investment officer (CIO) of New Energy Solar (a company that buys and runs large solar-generation facilities), and also CIO of the US Solar Fund, notes that there are several ways to measure the price of solar energy.

The levelised cost of energy (LCOE), the long-term price that a utility needs to charge to cover its costs and satisfy its investors, is generally regarded as the industry benchmark. Using this measure, the cost of energy from large-scale US solar plants has declined by an average of 13% a year for the last five years. This means that in the US, solar power “is already competitive with other forms of newly-built energy generation”, and in many states, especially in the southern part of the US, “solar is now the cheapest form of new-build energy production”.

While it is still generally cheaper to generate energy from a conventional power plant, the cost of solar energy is declining so quickly that solar plants are starting to undercut them on price. This cost-competitiveness means that a majority of new solar build in the US is now motivated by economics rather than the demands of regulators.

America receives a lot more sunlight than most of Europe and the UK, so solar producers in Britain are still at a cost disadvantage compared to other power sources. But even this is changing, says Wayne Cranstone of Gresham House Asset Management. In Britain solar and onshore wind are “already the lowest-cost forms of renewable energy”, and they are also “very close” to grid parity, which means that developments of the right size in the right location “can still be profitable in the UK without subsidy”. There are even a few projects as far north as Scotland.

Solar producers are also finding ways to get around the volatility of electricity prices. One strategy is to agree a power purchase agreement (PPA) with clients. Under these arrangements, companies agree to purchase a certain amount of power generated from a solar plant at a fixed inflation-linked price for between ten and 15 years. These agreements can either involve the company getting the power directly from the plant, or via an electricity company, which in turn buys an equivalent amount of power from the solar plant. This greatly reduces the risk for the producer, and greater certainty lowers overall financing costs.

Batteries are getting better

Until recently one of the problems hampering widescale adoption of solar power has been that, unlike coal or gas plants, which could effectively provide power on demand at any time of day, the output of solar plants is limited by the amount of sunshine. This was a particular problem since demand tended to peak in the evenings when people came home from work – precisely when solar generation is at its lowest. However, while this is still an issue, both solar power companies and utilities are starting to find ways to get around it, says Christian Roessing of Pictet Clean Energy.

One simple solution is to find economical ways to store the electricity generated. Fuelled by the growth of the electric-car industry, the costs of lithium-ion batteries, which can store excess electricity, “have come down by around 90% over the last decade”, says Roessing. While they are still not yet quite low enough to completely eliminate the need for additional power, he predicts that “within the next three to four years, [costs] are likely to have fallen enough to make short-term storage of solar power affordable”.

Meanwhile, as Andrew Buglass of Buglass Energy Advisory says, a “big shift” is taking place in how national energy grids are operated, which should hopefully smooth demand and reduce (though not completely eliminate) the need for storage. For example, the National Grid in the UK has developed the Demand Turn Up service, which encourages conventional producers to reduce output at times of low national demand and high renewable output, so that they only operate when renewables are silent.

In addition to encouraging conventional power companies to fill in the gaps in solar power generation, the National Grid’s initiative also attempts to nudge demand toward the times where solar production is at its strongest, cutting the cost of consuming electricity at these off-peak times.

Buglass also notes that the coronavirus crisis, which has seen more people working from home, has already led to some dramatic changes in power consumption, which should further favour solar producers as well as show electricity companies that the “pattern of consumption is not set in stone”.

Regulatory and political tailwinds

The fall in the cost of solar generation means that it is “increasingly competitive on an unsubsidised basis”, says Thomas. However, subsidies and mandates have clearly been “helpful” in encouraging investment and speeding up the process. In the US the main turning point was the federal Solar Investment Tax Credit in 2006. This allowed owners to claim a tax credit equal to 30% of a project’s capital cost. This scheme largely explains why the US solar power industry has grown more than 100-fold in the last 15 years.

There has been plenty of action at the state level too, with “37 out of 50 states implementing some form of subsidy”. A majority of states have also set targets for renewable energy. As these targets are met, they are usually increased, “further driving the demand for installations”. Indeed, seven US states (California, Hawaii, Maine, Minnesota, Nevada, New York and Virginia), as well as Washington DC and the territory of Puerto Rico, have passed laws that commit them to meeting all their energy needs from renewable sources by a set date.

The US is not alone in promoting renewable energy. There are also several schemes “helping to promote the adoption of solar energy across the world”, says Claudia Quiroz, lead fund manager of Quilter Cheviot’s Climate Assets Fund. However, the situation is a little more complicated in the UK. The government scrapped interest-free loans for domestic solar panels in 2015, which reduced the number of panels installed. It also subsequently phased out a Renewables Obligation scheme that encouraged the construction of solar and wind farms.

This means that at present the solar industry in the UK receives no direct subsidies. On the other hand, since 2014 the government has been running a Contract for Difference scheme whereby developers are “paid a flat (indexed) rate for the electricity they produce over a 15-year period”. Although more generally suited to wind rather than solar, this “de-risks investment in renewables”.

It hardly seems crucial, however. The technology has now advanced to the point where both the domestic solar panel industry and the solar power generation market are “quite healthy without the need for any direct government subsidies”, even though annual new installed solar capacity is still less than it was six years ago.

Cheaper oil and gas is no longer a threat

This year has seen unprecedented volatility in the energy market, with the price of a barrel of West Texas Intermediate (WTI) oil plunging from around $60/barrel at the start of the year; it briefly turned negative, but even after a subsequent rally, WTI currently trades below $40/barrel.

While natural gas prices move more smoothly, the trend is also sharply negative, with the spot price of the main Henry Hub benchmark less than half the price at the end of 2018, and a third of its level six years ago. Oil and gas price-slumps fuel concern that cheap fossil-fuel prices will discourage new investment in solar power, and could even result in a move back to oil and gas.

Quiroz accepts that the dip in gas prices may lead to “lower marginal costs for existing gas-fired electricity generators”. Similarly, it will also make gas plants “more attractive” when it comes to installing new electricity generating capacity. Still, any effect is likely to be extremely mild, since companies understand that energy prices can be “extremely volatile”.

As a result, when deciding whether to build energy plants, they tend to look at forward energy prices over the lifetime of the project, reducing the impact of short-run fluctuations in prices. Quiroz notes that the International Energy Agency (IEA) also thinks that the low oil and gas price will have a minimal impact on solar power (and other types of renewable energy such as wind). In its latest update on the prospects for renewable energy, published in May, the IEA predicted that, “planned renewable electricity projects with long-term contracts will be mostly shielded from low natural gas prices”.

This is because the medium and long-term economic case for wind and solar “remains strong thanks to expected continuing cost reductions and to the long-term price predictability over project lifetimes”. In essence, solar is now established enough not to sustain significant damage from slumping fossil-fuel prices.

Buglass agrees, noting that the current price falls in natural gas haven’t prevented an increasing number of solar projects being economically competitive, even without government support. Moreover, the low maintenance costs of domestic solar panels also mean that they provide a cheap form of insurance against a sudden spike in energy prices.

What’s more, no matter how cheap oil and gas get, they are still extremely polluting, a cost that governments around the world will have to price in, either via taxes or carbon trading schemes, “if they are at all serious about meeting their stated emissions targets”.

How to invest in the solar energy sector

The recent disruption caused by Covid-19 means that many solar projects that were due to go ahead this year have been postponed. However, in the longer term the growth in output is “certainly not going away”, says Louise Dudley, a portfolio manager at Federated Hermes, an investment manager.

The proportion of global new energy capacity accounted for by renewable power is likely to expand “from around 20%-25% now to 42% by 2030, and then to 57% by 2050”, with solar the largest contributor. The sector should also get a boost as total electricity demand continues to grow in line with the global economy. One way to play the solar boom is to invest in companies that manufacture equipment related to solar power, most notably photoelectric cells (PV). However, Dudley thinks that investors have to be careful if they want to go down this path, because many of the companies in this sector “are still quite small”, which means that both their revenue and share price can be extremely volatile. However, a few of them have tried to get around this by using their expertise to diversify into other areas. She also thinks that “green real estate”, projects that incorporate solar power into their design, is another area worth looking into.

Roessing is even more sceptical of PV manufacturers as an investment, emphasising that it is a sector that potential rivals can easily enter, reducing established operators’ profitability. He thinks that the real winners from what he calls the “inflection point around solar energy” will be those companies that run and operate the solar plants. Operators of gas and coal power plants with plans to switch to solar in the near future should also do well given the mounting concern about climate change. I highlight some potential investments in solar energy below.

What to buy now

One easy way to buy into the solar power boom is through iShares Global Clean Energy UCITS ETF (LSE: INRG). This exchange-traded fund (ETF) tracks the S&P Global Clean Energy Index, which contains 30 stocks. While it is not limited to solar power firms and utilities, four out of its five largest holdings are involved in solar power.

The firms in the fund have an average price/earnings (p/e) ratio of 18.5. It has a total expense ratio of 0.65%, which is reasonable for such a specialised ETF, and cheaper than most actively managed funds.

One actively managed fund worth researching is Pictet Clean Energy, run by Xavier Chollet and Christian Roessing. This fund focuses on companies that contribute to the reduction of carbon emissions though clean energy, including utilities specialising in solar power, utilities moving towards solar energy and semiconductor firms involved in the production of more efficient solar panels. Top holdings include NextEra Energy, the world’s largest producer of solar and wind power. While its management charge is 1.6%, the fund has a strong record, significantly outperforming similar funds over the past decade.

Despite advances in demand management, the rise of solar (and wind) power will create a need for utility-scale energy storage systems. Gresham House Energy Store Fund (LSE: GRID) is an investment trust that invests in utility-scale energy storage projects. It currently owns nine, with another five in the pipeline this year. It has a relatively high management charge of 1.64% a year, but it trades at a discount to net asset value of 8% and offers a dividend yield of 4.9%.

The Renewables Infrastructure Group (LSE: TRIG) invests in a diversified portfolio of 78 operational renewable energy projects in the UK and Europe, and an additional project related to battery storage. Solar energy accounts for nearly two-fifths of its portfolio. Claudia Quiroz of Quilter Cheviot’s Climate Assets Fund likes the fact that 75% of its overall portfolio is underpinned by government subsidies lasting until 2024, thus giving investors an added degree of security. It has a solid dividend yield of 5.34%.

The mass shutdown and gradual restart of nuclear power plants in Japan following the 2011 Fukushima disaster has created an opportunity for solar power. Enter Kyocera Corporation (Tokyo: 6971). Not only does it manufacture photovoltaic cells and solar modules, but it also operates solar power plants, including a “floating plant” built on reclaimed land off the coast. Louise Dudley of Federated Hermes says that the firm’s operational diversification allows it to benefit from the solar boom without completely depending of the volatile PV market. It is on a trailing p/e of 20.

Consider also SolarEdge (Nasdaq: SEDG), which supplies storage, battery and monitoring systems for home and business solar projects. Thanks to the boom in home and business solar panels, SolarEdge’s revenue has climbed fourfold from $325m in 2014 to $1.42bn in 2019, while its earnings have risen fivefold in the same period. Its dominant position in its home solar market allows it make a return on capital expenditure of 20%. This more than justifies a 2021 p/e of 27.

Infrastructure as an asset class is mostly accessed via specialist investment trusts, but as it has (rightly, in my view) grown more popular, we’ve seen the rise of what are in effect infrastructure funds of funds, structured as open-ended vehicles. In other words, these funds grow or shrink as investors buy in or withdraw money, unlike an investment trust which has a fixed number of shares in issue which investors trade with one another. VT Gravis UK Infrastructure and FP Foresight UK Infrastructure Income, the two biggest such funds, have between them more than £1bn in assets under management, and I remain bullish on both.

Big fish, small pond

But some – including a fund manager I talked to recently – have raised concerns, both about these types of funds specifically and infrastructure more generally, which seem worth addressing. First and most obvious is the issue of common shareholdings. Both the aforementioned funds have seven names in common in their top ten holdings list, including HICL, Foresight Solar and Renewables Infrastructure (TRIG). These seven comprise 43% of the Gravis fund’s holdings and 44.4% of Foresight’s (although not in the same mix). This is not unusual or worrying (big US funds often hold the same subset of big tech stocks), except that a) these holdings are investment trusts, which sometimes suffer poor liquidity (ie, they’re hard to buy or sell without moving prices), and b) the funds hold quite a chunk of them.

Broker Numis reckons that the classic infrastructure funds have a combined market capitalisation of around £18bn. There’s roughly another £10bn in medical, student and social property trusts. So that’s around £28bn all told. That means these two funds on their own comprise about 3% to 5% of the total capital invested in listed infrastructure. According to my worried fund manager, the risk is that the Gravis and Foresight funds “are forced buyers of their trusts when they receive subscriptions and they might be setting the price for these trusts”. In other words, the funds (and their investors) are the dominant buyers and sellers of these trusts.

To be clear, these worries are not entirely echoed by market makers and analysts who cover this sector. Most reckon the ownership of big trusts such as HICL and TRIG is fairly well diversified. As one put it to me: “It’s not like Woodford/Invesco in P2P lending where they were half the registers in a lot of cases.” Simon Elliott, who heads funds research at Winterflood, also isn’t too fazed. The six big infrastructure funds “have an average market cap of more than £2bn, while seven of the 13 renewable funds have market caps greater than £500m”.

What if?

William MacLeod, managing director at Gravis Advisory, adds that 11 of the trusts held in his Gravis UK fund (about 63% of its total listed investment trust exposure) are FTSE 250 members, with natural daily traded volumes in the millions. Thus the fund’s share dealings in the likes of HICL and TRIG are “rather insignificant” compared to wider market activity. Meanwhile, Mark Brennan, lead fund manager for FP Foresight UK Infrastructure Income notes that the fund owns “less than 5% of the issued share capital of all our holdings”, with an average ownership level of 2%.

However, I’m not entirely convinced these diversification strategies will stand up in a worst-case scenario. Infrastructure has held up well in tough market conditions. But, say, an external factor knocked the whole sector for six. If that happened, we could see selling across the sector. In turn, these funds of funds, with their big holdings, might be forced to sell into this volatility if unit holders also decided to run for the exit.

Such a rush is hardly far-fetched. It seems like ages ago now, but just last year we saw market jitters over Labour’s proposals to curb private sector infrastructure investment. But I would be most cautious around renewables. Again, my fund manager contact has a specific fear: “Why would you invest in anything where the marginal cost of production is zero, as pressure on pricing will always be downwards? Dividend cover is very skinny with these trusts … income will come under pressure as power prices inevitably come down.”

Now, I think the idea that marginal costs will head to zero is a tad alarmist (see below for more on power pricing) but concern about the valuations of renewables more generally is widespread. Note that the Foresight fund has been cutting its exposure to UK renewables since the second half of 2019 “in reaction to pricing and valuation”, according to Brennan.

The risk to me is that if there is a sudden rush for the exit within infrastructure over the next few years, it might happen in the renewables space where premiums are still high. If that worst-case scenario did occur, we might see investors flee both the trusts and the funds of funds holding them, fuelling a downwards spiral. As I said, I’m still bullish on them – but investors should remain alert for signs of strain in the underlying trusts.

Renewables, power pricing and valuation risk

Renewables are flooding the UK power market at an increasing rate. Wholesale prices are determined by the marginal cost of generation, which – as renewables typically have very low marginal costs – is pushing wholesale prices down. JPMorgan analysts recently warned that renewables were “cannibalising” revenues, noting that data from Bloomberg New Energy Finance suggests that UK baseload electricity prices will fall in real terms (ie, after inflation) by 4% a year to £19 per megawatt hour (Mwh) by 2040.

The danger is that many UK renewable funds expect prices to rise by 0.6% a year over that time, to £52/Mwh. JPM reckons this mismatch could see the share price of such funds fall by a third on average. Moreover, many renewable funds’ direct exposure to power prices has been rising, because subsidy flows have fallen. JPM may be wrong – as Winterflood’s Simon Elliott warns, “any number of experts have struggled to consistently forecast prices”. However, he also acknowledges that sector’s “risk/return characteristics ... [are] undoubtedly changing”.

This article was first published in MoneyWeek magazine issue no 988 on 27 February 2020. To make sure you don't miss out in future, and get to read all our articles as soon as they're published, sign up to MoneyWeek here and get your first six issues free.

Hydrogen is the fuel of the future – and always will be. That’s the industry joke and, as Homer Simpson would say, it’s funny because it’s true. Or at least it has rung true for a long time. General Motors built a car powered by hydrogen in 1966, as Fatih Birol of the International Energy Agency (IEA) points out. It ended up in a museum. At semi-regular intervals since then, hydrogen has been touted as the answer to humanity’s energy needs. After all, it is the most abundant element in the universe and, when burned, releases only energy and water. It can be stored and transported in liquid or gaseous form, is energy dense, and is not subject to intermittent supply. All of these qualities put it ahead not just of fossil fuels, but of renewable alternatives too – at least in potential.

Until now the momentum in renewable energy has been with other sources such as the wind and sun, but converting these into electricity cannot possibly meet all of our energy needs, no matter how cheap or widely used they become. Electricity is unlikely ever to be suitable for running heavy lorries or airliners, for example, nor could it meet all our heating needs or replace fossil fuels in energy-intensive industries such as those involved in the production of iron, steel and cement.

And as hydrogen is not found in pure form on earth and so must be produced, it is not as clean or green as it might at first glance appear. Demand for hydrogen – coming mostly from its traditional uses in the manufacture of ammonia and in the oil-refining and steel industries – has climbed steadily, rising threefold since the mid-1970s and today that demand is mostly met by hydrogen produced from natural gas. The manufacturing process itself consumes energy, today mostly coming from fossil fuels. Production of hydrogen is responsible for around 830 million tonnes of carbon dioxide per year, equivalent to the emissions of the UK and Indonesia combined.

The rise of “green” hydrogen

The rise and ever-declining costs of wind and solar have given hydrogen a new lift, however – if hydrogen were instead produced by electrolysing water using electricity from renewable sources (so called “green hydrogen”), then we would have at our disposal an abundant source of genuinely green energy. Less than 0.1% of global dedicated hydrogen production today comes from water electrolysis, but the Hydrogen Council, an industry body, thinks that by 2050 green hydrogen could provide almost a fifth of total power consumed globally and thereby avoid six billion tonnes of greenhouse-gas emissions per year – roughly the equivalent of those emitted by the US annually.

This has obvious attractions for governments and companies looking to reduce their carbon footprints, and helps explain why the shares in some producers of hydrogen and manufacturers of fuel cells – which convert the chemical energy in a fuel such as hydrogen into electricity – have soared to their highest levels in decades. The companies enjoying the attention are themselves often small and loss-making, and it may be years before they see any profit (see box on page 26). But the bullish excitement of investors is explained by the prospect for soaring future demand as societies transition from fossil fuels to cleaner alternatives. Hydrogen could clearly play a role in that – but how big a role is the question.

Here comes the cold water

Before we get too carried away, we should bear in mind that hydrogen has been “hailed as a pollution-free substitute” before, as Jonathan Ford points out in the Financial Times. And there’s a reason why hydrogen today accounts for just 4% of final energy use: it’s costly to manufacture and bulky, making it cumbersome and expensive to handle.

At present prices, green hydrogen comes in at $6/kg. Transform that into the energy equivalent of hydrocarbons and it equates to a “recession-inducing” oil price of $270 a barrel. Even if you factor in likely future efficiencies and price falls, you still only get to $45 oil in the long term before distribution costs. Such considerations make hydrogen “relatively uneconomic over anything but short distances”. If it were to become the basis of a new “hydrogen economy”, as some predict, the problem then is who would fund the cost of investment in infrastructure in advance of demand.

There is a reason the industry is “looking hungrily at governments for another wave of support, with taxpayer subsidies acting as a midwife to the new hydrogen economy”. Ford thinks there is a better way – setting an appropriate price for carbon, imposing “carbon border adjustments” to prevent the export of energy-intensive industry, and restricting government subsidies to assistance at the margin, supporting research and development, say, rather than trying to predict and bet on the technologies of the future.

That argument makes a lot of sense, but it may be wiser to bet on what is actually going to happen rather than on what we think should happen. Providing bungs to job-creating industries in a hot new sector and being seen to be doing something radical about climate change would seem to be an easier sell politically for governments striving to meet their climate commitments than higher taxes and tariffs and hand-waving in the direction of the free market.

The former seems to be the way the wind is blowing. Hydrogen is “currently enjoying unprecedented political and business momentum, with the number of policies and projects around the world expanding rapidly”, concludes a report from the IEA last year. Over the past few years, global spending on hydrogen energy research and development by national governments has risen. China, for example, is aiming to get one million fuel-cell vehicles on its roads by 2029 and by 2023 it will have invested more than $17bn in the broader hydrogen sector. Japan is promoting the global adoption of hydrogen and working towards a goal of being predominantly powered by the fuel by 2050. And the UK has also been subsidising the industry in a bid to meet its aim to reduce greenhouse-gas emissions to net-zero by 2050.

Earlier this month the first low-carbon hydrogen energy production plants in the UK were granted £70m in government funding, reports the BBC. Facilities at Stanlow Oil Refinery in Ellesmere Port, Cheshire, and St Fergus Gas Terminal in Aberdeenshire, will produce hydrogen for manufacturing industries. St Helens’ glassmakers Pilkington and Unilever in Port Sunlight are experimenting with using hydrogen to cut carbon emissions.

And the North West Hydrogen Alliance is seeking to promote the region as a pioneer in the industry, with operator Cadent Gas distributing hydrogen through a pipeline network. The firm already supplies a 20% hydrogen and natural gas blend to heat 100 homes and 30 faculty buildings at Keele University in Staffordshire. Rolling that 20% blend out across the country could in itself save about six million tonnes of carbon-dioxide emissions, the equivalent of taking 2.5 million cars off the road, says The Guardian. Alstom and Eversholt Rail have also announced a plan to launch a hydrogen-powered train by 2022.

This time it’s different

There have, of course, as we have noted, been false starts for hydrogen in the past, but there are good reasons for thinking that this time could be different, as the IEA report points out. There is a widespread political determination to be seen to be green. The global energy sector is in a state of flux as a result and governments and companies are looking for ways to meet their climate goals. The recent successes of solar, wind, batteries and electric vehicles show that change is possible, and could be repeated for hydrogen. Support is already coming from governments, as we have seen, and companies, from renewable electricity suppliers to car makers and major engineering firms, are investing.

At present, there are headwinds. Hydrogen production remains costly. But the falling cost of renewable energy and the development of new technologies, if they reach sufficient scale, could be transformative. The Hydrogen Council claims that the cost of producing hydrogen could be halved by 2030, making it affordable for 22 different applications, including trains and heavy-duty transport such as lorries and long-distance coaches. Once costs come down after 2030, demand would take off over the next couple of decades, reckons Bloomberg New Energy Finance, to reach as much as 275 million tonnes of renewable hydrogen by 2050.

The challenge is not technical, but one of collective action. The development of hydrogen infrastructure is proceeding slowly and holding back widespread adoption, according to the IEA. National, regional and city governments could guide future expectations by setting clear long-term goals, stimulating demand, supporting research and development, making conducive policies and eliminating unnecessary barriers to progress. And there is an obvious place to begin – many of the firms that might benefit from the rise of the hydrogen economy cluster at major industrial ports, so there is an opportunity there to build combined infrastructure. Such ports could be turned into hubs for lower-cost, lower-carbon hydrogen.

What we’re still waiting for is a game-changing moment. If heavy industry were to switch to hydrogen, for example, that would create a dependable customer, one able to keep up demand and drive production, according to some industry experts. That could be a powerful driver in the transition towards a hydrogen economy.

When it comes to the other potential drivers of demand – cars, heating, domestic electricity production – then at the moment, there’s a kind of chicken and egg problem, as Daniel Oberhaus points out in Wired. Car manufacturers, for example, are already developing hydrogen fuel cells, so that when the hydrogen economy finally arrives, they’ll be ready to take advantage of it. Yet for now, no one wants to buy a hydrogen-powered car because there isn’t a ready supply of hydrogen fuel. Here, then, is a task for Amazon boss Jeff Bezos’s new $10bn climate fund: “end the stalemate by pledging to rapidly scale up sustainable hydrogen production, finally giving the hydrogen fuel-cell industry the supply it needs”.

Governments will have to lead the way

Get Bezos to chip in? Well, why not, but the challenge is greater than that. Exploiting the potential of hydrogen requires large-scale projects, backed by public-policy decisions, says Nick Butler of the King’s College Policy Institute in the Financial Times.

At present, there are many small-scale developments, but “none sufficient to cut unit costs enough or to resolve the technical challenges involved in using hydrogen in specific markets such as home heating”. Governments in key geographies will need to put in place supporting policies, agree the bosses of the Hydrogen Council on the World Economic Forum blog, and investment support of around $70bn will be needed from various sources over the next decade in order to scale up so that hydrogen can achieve cost-competitiveness.

hat’s a sizeable figure, and is more than the total value of Bezos’s new fund, but it accounts for less than 5% of annual global spending on energy – subsidies provided to renewables in Germany totalled roughly $30bn in 2019 alone. And Germany might be about to forge ahead and lead the way. A draft report from Germany’s Ministry for Economic Affairs suggests that the country may be about to throw its weight behind hydrogen to “secure its global position in hydrogen technologies”, reports Bloomberg. “Germany wants to raise production of the element using electrolysis to as much as five gigawatts from less than one gigawatt at present in order to have a fifth of hydrogen consumption via renewable resources by 2030.”

Four ways to play the rise of hydrogen

UK-based Ceres Power (Aim: CWR) is a maker of fuel cells made from ordinary steel – as opposed to more expensive materials such as platinum – that burn natural gas to generate low-carbon electricity. The technology also works with hydrogen and other biofuels, and enables residential and commercial properties, and charging points for electric vehicles, to generate their own power.

The company is investing in new plant and technology to meet rising demand and is probably a good four years away from making any profit, but sales are growing fast and losses narrowing. For the full year to June, revenues were up 142% to £15.3m, the fourth year running that Ceres has more than doubled turnover. Ceres licenses its technology to commercial partners including Chinese engine maker Weichai Power, America’s Cummins and car makers Nissan and Honda. Germany’s Bosch recently increased its stake in the company to 18%, investing £38m. The shares have been on a tear recently, more than doubling in the past six months, but if the company can live up to the comparisons that some are making with technology giant ARM, that could be justified. Orders at the end of June totalled £28.4m, with a pipeline worth a further £50m.

ITM Power (Aim: ITM) is also based in Britain and manufactures electrolysers, which use electricity to split water into hydrogen and oxygen. Losses have grown recently despite rising revenues – in the six months to 31 October, ITM notched up pre-tax losses of £9.8m, up from £5.3m in the same period the year before – but the firm believes its new joint venture with Irish chemicals firm Linde will be transformative, allowing ITM to focus on its own developments and reduce its exposure to the kind of challenges that led to the losses. ITM was recently awarded £7.5m in funding from the UK Department for Business, Energy & Industrial Strategy for the second phase of its Gigastack renewable hydrogen joint venture, which will generate hydrogen using offshore wind as a power source, with the aim of demonstrating the feasibility of producing low-cost, zero-carbon hydrogen on an industrial scale. If that happens, ITM is well placed to benefit, but its shares have also been on an upward streak of late, trebling over the past six months.

McPhy Energy (Paris: MCPHY) is headquartered in France and is a specialist in hydrogen production and distribution equipment. It is to equip the first large-scale, zero-carbon hydrogen project in Europe, a project initiated by Nouryon and Gasunie, two leading industrial groups, that will be installed in Delfzijl in the Netherland. McPhy’s “Augmented McLyzer” technology will convert green electricity into 3,000 tonnes of clean hydrogen per year. This will be used to produce biomethanol and will contribute to reducing carbon emissions by up to 27,000 tonnes per year, according to the company. McPhy recently reported strong revenue growth of 43% to €11.4m in 2019 and it has raised €7m from investors to pursue its development strategy. It has yet to make a profit though and, again, its shares have near doubled in six months.

A less risky and speculative way to play the trend might be to buy the bigger engineering groups whose fortunes are not entirely tied to the rise of the hydrogen economy, but which might profit from it should it take off at a later date. Siemens (Frankfurt: SIE), for example, is a world leader in the manufacture of hydrolysis equipment for the large-scale production of hydrogen. The multinational conglomerate is Europe’s largest industrial manufacturing company and it is well run, with a strong balance sheet. The shares trade on a forward price/earnings ratio of 14.2 and a near-4% dividend yield is on offer, a payout that is well covered by earnings. The firm sells into markets that face strong headwinds, but, as The Motley Fool points out, it looks likely to weather these and the stock looks “good value for income seekers”. A hydrogen-based lift would be a nice bonus.

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I like the idea of a “green” future. Who wouldn’t? Put ideology aside for a moment. There is no reason why anyone sensible would prefer “dirty” energy sources to “clean” ones, any more than they’d prefer a beach covered in litter to a clean one.

So this vision of a world where renewables generate electricity cleanly and consistently (with the help of battery storage and smart grids), which is then used to power sleek, reliable electric cars, which are only ever a couple of software upgrades away from being genuinely autonomous? That sounds like a good world to me. It’s getting there that I’m a little more cautious about...

There is a compelling new narrative gripping the markets

My colleague Dominic Frisby often talks about bubbles requiring a compelling narrative. I agree to an extent. It’s a bit chicken and egg for me. Does the story come first, or the cheap money to fund the opportunity? Or is it – like everything else in markets – reflexive?

But we’ve certainly seen a compelling narrative take hold in a very short space of time. The narrative is all about saving the world. It’s being fuelled by a great many different things. There’s the tech-utopianism represented by Tesla boss Elon Musk and the other tech billionaires – we can solve anything if we just put our minds and our infinite reserves of zero-cost capital to it.

There’s the active fund management industry, desperate to find a way to market its funds while passive investing is eating its lunch. “ESG” and greenwashing is currently seen as the best way forward.

There are those who are genuinely concerned about the environment. And there are those who see this movement as a good stick with which to beat capitalism. And there are politicians, who always love a bandwagon that enables them to make rousing speeches about long-term policies that some other government can renege on in the future.

There’s the fact that the US is now effectively energy independent, which has really shaken up the power dynamics in the oil market. Crude oil has turned from being "black gold” into being a long-term liability for those dependent on it. Ironic as it is, don’t underestimate how much this has contributed to the drive to look beyond oil.

Anyway, there are lots of drivers behind this narrative. And in the market, the focus is on the companies that are at the vanguard of the new green revolution, and those that are going to be left behind in the dirt. This is why, on the one hand, the energy sector now accounts for less of the S&P 500 than ever before. And on the other hand, you have offshore windfarm specialist Orsted trading on a price/earnings ratio of more than 40, and talking about challenging the oil majors in terms of energy production.

But if one stock could be said to represent “divestment” mania more than any other, it has to be electric car giant Tesla. And to say that Tesla investors are exuberant right now would be understating things. The share price rose by nearly 20% (or one “bull market”, if you take the generally accepted definition) yesterday alone. The stock has already more than trebled since June last year.

There are certainly arguments that things have improved for Tesla: recent results have beaten expectations; Elon Musk has managed to keep his mouth shut for a few months; and any stock with that level of short interest is going to spurt higher when the shorts capitulate. But nearly 300% in under a year? That’s bubble territory. Come on.

In short, I feel that the market is getting over-excited about the demise of fossil fuels. And I suspect there’ll be a snapback at some point.

How could fossil fuels make a comeback?

What could be the catalyst? I can see two possibilities, and one strikes me as being more likely than the other.

One: if global growth starts to look better than everyone expects right now, that would do it. We might hate fossil fuels but we do still need them. Two: it becomes clear that there are more serious obstacles to the adoption of electric vehicles than previously anticipated.

Now, I believe the first is the most likely, certainly in the near term. I do think that the roll-out of electric vehicles will take longer and prove trickier than expected, but I’m pretty sure that in the longer run we’ll all be driving them (I hope we are – it’d be nice to ditch petrol).

So – we’re looking for growth to surprise on the upside. Well, what are the chances of that? Well, what's interesting is that, if we hadn’t had the coronavirus outbreak, then you could make an argument that growth would be looking quite healthy now.

Survey data suggests that the global manufacturing sector – which has been in recession for about a year now – has seen the worst. The most recent data from Germany, which is close to being ground zero for developed-world manufacturing, showed that, while manufacturing was still having a tough time, it’s not as bad as it was.

So the question is this: how long will it take for the coronavirus to pass by as a concern? Obviously, I can’t answer that one. And the short-term hit could be massive. But keep an eye on the headlines and the infection rates. If the progression starts to slow, or an effective treatment is discovered (Thailand is having promising results with various drug combinations apparently) then the market will be able to price in the damage. And then it’ll start to price in the effect of added stimulus. Which is when you’d expect all the hardest-hit assets to start rallying.

So, as I said yesterday, I’d stick with your oil and resources stocks. A good example is oil major BP. It just reported this morning. Earnings fell in the fourth quarter, as you’d expect, because the oil and gas prices fell, which more than offset increased production. However, the figures did beat analysts’ expectations, which is one reason why the share price is up healthily this morning. It probably also helped that the company jacked up its all-important dividend by 2.4% compared to the previous quarter.

I’ll repeat. I think today’s images of a green utopia (or at least, a world with a healthier energy mix) will come true. But everything that we believed about the internet in 2000 also came true. That didn’t stop an investor from being financially ruined if they had bet the house on that future at that point in time.

Electricity generation from renewables rose more than 10% year-on-year in the first quarter of 2018 in the UK to comprise more than 30% of the total. In the summer heatwave, the share of solar energy alone reached 27% at times. Although the share of renewables in total energy consumption (electricity, heat and transport) was just 1% in 2004, this had risen to 10% by 2017, and the government wants it to reach 15% by 2020.

This growth was the consequence of a great deal of investment and, inevitably, there has been no shortage of entrepreneurs offering investors a compelling opportunity. Six renewable UK energy funds have been launched since 2013 with combined net assets of £4.5bn, three specialising in solar energy, one in wind farms and two with mixed assets.

Returns have been healthy

The performance of the renewables sector has been good, with a compound return of 8.5% per year over three and five years (though only three funds go back that far). These returns have lagged behind the mainstream infrastructure sector, whose seven funds have returned more than 11% compound over three and five years. Yet the average dividend yield of nearly 6% is 1% higher than for the infrastructure funds, and they trade at lower premiums to net asset value.

The catch is that revenues, and hence earnings, have persistently undershot targets set out at flotation. Sometimes this is because the wind doesn't blow or the sun doesn't shine, but mostly it is because wholesale power prices have risen more slowly than the retail-price-index-plus 2%-2.5% expected.

Although between 60% and 75% of the sector's revenues are fixed and predictable, the remainder is subject to market prices. That market prices have been lower than expected is good for the consumer, but not for the producer. All that renewable energy generation has served to depress prices.

What is not good for the consumer is that the fixed-price element of the sector's revenues is fixed at their expense. Larger renewable generators are paid a subsidy to generate an agreed volume of electricity; smaller generators benefit from an agreed "feed-in tariff" considerably above market prices. The cost of the subsidy is passed on to consumers and that cost will approach £9bn a year in 2020/21, according to the National Audit Office, adding £110 to a typical household bill.

The renewables industry proudly points to falling costs thanks to improving technology. New offshore wind farms are now supposedly competitive with gas-powered generation, while onshore wind and solar will be by 2025. This claim is a bit of an exaggeration, as it doesn't take into account the higher cost of transmission, nor the cost of less reliable output, but the downward trend in the cost of renewables is beyond dispute.

The response of the government to this trend was to announce an end to subsidies on new projects in the 2017 Budget. This has led to "a dramatic fall in investment" according to a parliamentary committee, but this may be good news for investors in the sector. Falling dependency on subsidies improves the business model of the industry, while lower investment could result in firmer prices.

Prices are unpredictable

An increase in the real growth rate of power prices from 1% to 1.5% would add 3.5 to 5% to net asset values, though a corresponding decrease would have the reverse effect, estimates Iain Scouller of brokers Stifel. He expects many of the funds to take advantage of their premium to asset value to issue more equity, and recommends waiting for such issuance before buying a spread of funds. However, the unpredictability of power prices may make sticking with the mainstream infrastructure funds a better bet.

When people get excited about battery technology, it's usually in connection with electric vehicles.

And it is all very exciting. Shell has introduced electric charging points at various petrol stations in London, Surrey and Derby, which allow electric car drivers to recharge about 80% of their battery in half an hour. It's a small start, but it is a start.

But there's another big battery-driven shift going on. And it's one that could have even bigger consequences than the move towards electric cars...

The rise of the micro-grid

The International Energy Agency reckons that solar will continue to dominate future growth. According to IEA executive director Dr Fatih Birol, solar photovoltaic capacity growth "will be higher than any other renewable technology up to 2022", according to The Guardian.

In sunnier climes, solar energy is already having a huge impact on the economics of electricity production. In the US, for example, wholesale electricity prices will sometimes go negative because of excess generation (too much sun, not enough energy consumption), which means generators in one state are effectively having to pay others to take their overspilll.

That points to the big problem with renewable energy finding somewhere to keep it. Coal you can burn that to harvest the energy when you like. Nuclear you can switch on and off. But solar power works when the sun is shining. Wind works when it's windy.

In other words, you can't just switch them on and off. You need a middle stage where you can collect the energy and then release it again when you need it.

There are two obvious solutions. One is storage. We're now getting to the stage where we now have batteries for individual homes. Tesla's Powerwall is probably the best known, although there's also a big German manufacturer, Sonnen, and various other providers.

In the US, reports The Wall Street Journal, one property developer Mandalay Homes now plans to build estates of ultra energy-efficient homes that come with batteries installed. The idea is to create a "virtual power plant for demand response".

What does that mean? You're effectively creating your own little micro-grid, that can take the strain off the main grid by accommodating any spikes in demand.

And this isn't just happening in the sunny parts of the US. In Japan spurred partly by the 2011 Fukushima disaster towns and cities are aiming to become at least partly self-sufficient via the use of microgrids.

As Reuters reports, one city in northern Japan Higashi Matsushima has used reconstruction funding to build "decentralised renewable power generation to create a self-sustaining system capable of producing an average of 25% of its electricity without the need of the region's local power utility".

The idea is partly to have decent back-up power systems to prevent a repeat of the blackouts that followed Fukushima. But it's spreading across Japan.

Demand management and smart energy systems

Consumption is all about "smart" grids and demand management of energy systems. Basically, this involves enabling all of the devices connected to a grid to talk to each other, and direct and use electricity more effectively. This helps to avoid consumption spikes and makes more sensible use of energy at peak times.

So your various devices would know when was the best time to do the dishwashing, say, or to heat (or cool) the house to a given temperature.

Professor Takao Kashiwagi, who is the head of Japan's New Energy Promotion Council, tells Reuters that the days of big power plants are numbered. "Instead, we will have distributed power systems, where small power supply systems are in place near the consumption areas."

It's all very exciting. Who wouldn't want a more efficient energy system, ideally powered by a clean and virtually limitless energy source? It could be far more revolutionary than anything we've seen so far, including the internet.

And clearly there are huge implications for many sectors here the potential beneficiaries range from battery manufacturers to the miners of battery' metals to energy efficient builders to companies involved in the internet of things'.

On the other hand, the "disruptees" in this case, the utility companies could have a very interesting challenge on their hands. Particularly as they've been seen as dull, reliable stocks for a very long time.

We'll be looking at how to profit from this in an upcoming issue of MoneyWeek magazine if you're not already a subscriber, sign up here.

I was talking to my colleague Nick O'Connor a week or so ago.

Nick was heading off to California, the hub of almost all of the most exciting technology being created in the world right now, to go to a conference and investigate the big tech trends.

It all sounded quite sci-fi, so we got to talking about which trends we thought would have the most impact over the next few decades.

For me, one stood out batteries.

Compared to tourist flights to the Moon or anti-ageing compounds it might sound dull.

But it's far from it

Batteries are the key to a revolution

Put aside the issues of climate change and even pollution for the moment. Fossil fuel extraction is a costly business. Even with oil prices collapsing, having long-term reliance on a source of energy that booms and busts with regular frequency, and is often found in politically unstable or even hostile areas, is simply not much fun.

Wouldn't it be better if we could all source energy from a stable, politically neutral source like the sun, say?

There are plenty of things we need to make that reality. Solar panels are getting ever more efficient, and in several areas are becoming competitive with other sources of energy. In California, for example, solar is playing havoc with the energy market. Reports Bloomberg: "A glut of solar energy has crimped prices in the California market, driving them below zero at some on-peak times." That means that grids and power systems need to adapt too.

But perhaps the biggest requirement is a way to store all this power so that it can be used as and when it's needed. The problem at the moment and one of the factors causing such problems in California and Germany is that renewables can at times generate all the power anyone needs. But for all those other times, you need a fossil-fuel (or nuclear) powered back-up that can be switched on and off as and when necessary.

Batteries are the key to getting past this. And according to a piece by Ed Crooks in the FT this morning, investment bank Lazard reckons we're getting there.

"The cost of batteries is falling to the point that they are becoming an increasingly viable option for uses such as supporting the stability of power grids," notes the piece. As a result, wind and solar power could increasingly be relied upon.

"Within five years, Lazard believes, the price of batteries is likely to have fallen to the point that they will be competitive against back-up fossil fuel power generation for a wide range of uses". In other words, instead of having a back-up power plant for night times, or days when there's no wind, you'd use stored battery power instead.

Electric car manufacturer Tesla's gigafactory designed to pump out huge quantities of batteries is the most obvious example of this trend in action. But it's not just Tesla plenty of companies and university departments are working on making better batteries.

A world with no traffic jams and far fewer cars

My colleague Bengt Saelensminde has written a lot about this in MoneyWeek and on the website, and it's a topic we'll be returning to again and again.

But here's an interesting statistic I read the other day, in Allen Brooks' Musings from the Oil Patch' email (courtesy of the FullerTreacyMoney website) it might give you some real food for thought.

Apparently, researchers at the University of Texas conducted a simulation of vehicle use in cities. "They found that if our vehicle fleet was fully autonomous, every shared autonomous vehicle could replace 11 conventional vehicles."

That's staggering. And as Brooks puts it: "That doesn't sound like a bright future for either the automobile or petroleum industries."

Sure, that relies on people being willing to give up not only driving, but also ownership of their cars you'd presumably subscribe' to a car service that would come and pick you up with a tap on a smartphone. (Presumably you'd also need a breakthrough in smart materials or robo-cleaners to keep the things spotlessly hygienic between users).

But if it's even half-true, the future for many industries we now take for granted could be staggeringly different to what we see today.

Anyway, it's an interesting flight of fancy and I'd be very interested to get your thoughts at editor@moneyweek.com.

On Monday 6 September, a record 10% of Britain's electricity came from wind power, equivalent to the output of four nuclear power stations. Industry bodies such as RenewableUK cheered the news but sceptics noted that the 10% figure was only hit because the turbines were running at full tilt in windy conditions, while demand was lower than normal.

This sums up the problem with renewables matching supply to demand. If the wind has to be blowing for the lights to come on, then clearly you can't rely on that power source alone. But if you could store 'surplus' energy it would be a different matter. Not only would it allow energy to be saved for periods when demand is higher, but it also changes the economics of wind farms. If electricity produced during off-peak periods can be stored then sold during peak periods when prices are higher, it means better returns.

The good news is that 'grid-scale' power storage, as it's known, is evolving rapidly. The most cost-effective form is pumped hydro storage, but you need the right geography National Grid has a facility in Wales. Another, mostly experimental, technique is to use 'spare' electricity to pump compressed air into underground caverns, then release it again to drive turbines during peak times.

But for investors, the battery industry offers the most interesting opportunities. On the one hand, growing demand for lithium-ion batteries for electric cars is bringing manufacturing costs down. On the other, California is set to pass legislation by the end of this month, which will force utilities to set targets for installing renewable energy storage systems. These two factors could kick-start the entire industry.

Chinese car and battery group BYD Corp (part owned by Warren Buffett) has recently signed a deal to build a storage facility at a wind farm near Los Angeles. And A123 Systems, a lithium-ion battery maker, which listed last year, has spun out a specialist unit, 24M Technologies, to develop grid-scale storage. Last month it signed a deal to provide up to 44MW of capacity to utility AES Energy Storage. National Grid, which has extensive operations in North America, is testing zinc-flow batteries made by Premium Power and flywheel systems developed by Beacon Power. Beacon is expected to complete its first, full-scale 20MW plant in upstate New York late this year.

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"We see energy storage as a key technology to help us manage the intermittency of renewables," says Stan Blazewicz of National Grid. "Given the pace of development of renewables we need to see energy storage keep up". Flywheel systems give quick, 15-minute bursts of power for when the wind suddenly drops, says Blazewicz, while zinc-flow batteries can provide power for much longer up to 40 hours. "Zinc-bromide provides pretty good scale and has the potential to be low cost," he adds.

Lithium-ion costs are also falling. French battery group Saft is building a huge 1GW lithium-ion facility in Florida, with help from US federal funding. "We're focusing more and more on lithium-ion because we believe it's more flexible,", says Franois Bouchon of Saft. And with new manufacturing capacity coming on line, costs are also likely to keep falling over the next couple of years, he adds. We look at the best way to invest in the sector below.

The stock to buy now

A market leader in industrial batteries, Saft (Paris: SAFT) manufactures everything from rechargeable batteries for trains to batteries for defence applications. The company, which has been making batteries for nearly 100 years, has recently launched two new business areas. The first of these is a joint venture with Johnson Controls to make lithium-ion batteries for hybrid and electric vehicles and the second is in renewable energy storage.

"If this legislation [in California] goes through then it's going to give the industry a big boost and Saft is a key player," says Clare Brook of socially responsible investment specialist WHEB Asset Management. "It's not a cheap, cheap share, but it's got tremendous growth prospects and has been slightly overlooked because it's not deemed as racy as companies such as Ener1 or Advanced Battery Technologies," she adds. Saft has a market cap of €738m and is trading at €29, with a dividend yield of 2.6% and p/e ratio of 16 for 2011. Broker Collins Stewart reckons that the current price fails to value the two new growth businesses effectively, you're getting the new battery businesses for free: "batteries not included", as the saying goes. The broker has a price target of €37.

Nick Hanna wrote The Green Investing Handbook . He has shares in Saft.

This article was originally published in MoneyWeek magazine issue number 505 on 24 September 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.