With 2016 total renewable energy investments down from 2015 numbers, and President Trump assailing investment in the solar and wind industries, investors might conclude that despite green energy’s laudable aims, it doesn’t merit their hard earned dollars. Here’s why this couldn’t be more wrong.

“While it might seem that anyone can be a value investor, the essential characteristics of this type of investor-patience, discipline, and risk aversion-may well be genetically determined.”

Renewable Energy Costs Are Plummeting

While total renewable energy investment did shrink slightly from 2015-2016, according to the International Energy Agency that is largely due to cheaper per unit capital costs. These cheaper costs allowed for a record amount of renewable investment in terms of capacity added and expected output.

Even better, investors can expect the cost curve for renewables to decline even further. Bloomberg predicted that, “in less than a decade, [solar power] is likely to be the lowest-cost option almost everywhere.” The article notes that nearly every part of the solar supply chain has dramatically trimmed costs since 2009, presenting investors with opportunities across the industry.

Countries around the world are eagerly taking of advantage of the increasing competitiveness of what they see as the energy of the future. For example, traditional oil giant Saudi Arabia announced in early 2017 a $50 billion plan to invest in renewable energy. The plan will target 30 different solar and wind projects over the next decade, an example of the enormous interest investors are giving the industry. Meanwhile, the UAE recently announced a deal in which it received a record low bid for solar-energy fueled electricity.

Wind and solar’s economies of scale and their rapidly developing technologies offer further promise for lower cost. Take for example, perovskite solar cells, a material experts say promises vast potential in lowering the costs of solar energy. While traditional silicon solar cells require high temperatures and very precise processes, perovskite cells demand much lower temperatures and simpler methods. Researchers at Brown University and the National Renewable Energy Lab have made real progress in bringing this technology to scale (academic paper here, plain English article here). And this is just one example of the many different technologies that researchers are currently developing.

As Erik Solheim, executive director of UN environment says, “Ever-cheaper clean tech provides a real opportunity for investors to get more for less.”

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett

Valuations Are Cheap

The attractive cost curves of renewable energies come paired with valuations that any other sector would kill for. As of June 30, a broad based solar energy index ETF traded at a PE ratio of 11. Meanwhile, as of August 31, a broad based wind energy index ETF traded at a PE multiple of 10. For context, on September 14, a S&P 500 ETF traded at a PE multiple of 22.

Of course, it is important to remember that: 1.Wind and solar represent a specific part of the industry, not the entire market. 2. They are trading at low valuations because investors think they have reasons to rate their prospects not as highly as the market’s overall. One potential reason: a glut of supply causing a steep drop in electricity prices in many parts of the world.

However, it’s worth keeping in mind that investors tend to overreact to negative events. Further, it’s notable that in the US, electric prices have actually stayed stable and even slightly risen over the past several years, with the EIA expecting the trend to continue past 2017.

The Bottom Line

Renewable energy technology has seen rapid development in the past decade, with the future promising even more. Despite the huge potential of current and future technology, valuations remain at extremely attractive levels. Further, with the strong scientific consensus on the dire effects of climate change, it’s a safe bet that institutions and corporations will continue to invest huge sums in renewable energy.

Want to learn how you can invest in an area that offers attractive investment opportunities while helping to save the planet? Contact Alcen Renewable to learn more.

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