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Blogs

The move toward clean energy

Sid Queler

July 23, 2021

At least 110 countries have pledged to become carbon neutral by 2050. Investors should consider what sectors of the market are likely to benefit from the change.

Elon Musk recently illustrated the complexity of the clean energy story. In February, Musk’s company started accepting cryptocurrency in payment for electric vehicles (EV). By May, the company had stopped accepting the currency because mining cryptocurrency was contributing to climate change. The decision sparked immediate debate about clean energy because, let’s face it, mining lithium for EV batteries isn’t environmentally friendly. In June, Musk announced the company will begin accepting cryptocurrency again “when there’s confirmation of reasonable (~50%) clean energy usage by miners ....”1,2

Energy is a complex topic because different sources of energy have different effects on people and the environment, as the chart shows. Today, the majority of the energy consumed throughout the world is derived from fossil fuels. However, renewable energy sources are becoming more common because the cost of renewable energy has dropped significantly in the past decade.

The price of electricity is expressed using the “levelized cost of energy,” which includes the expense of building the power source, as well as the cost of fuel and operations over its lifetime. From 2009 to 2019, the price of electricity generated by solar dropped by 89%, and the cost of electricity from onshore wind fell by almost 70%3. In 2019:

  • Solar-powered electricity cost $40/megawatt-hour (mWh) 
  • Onshore-wind-powered electricity cost $41/MWh 
  • Combined-cycle-gas (natural gas and steam) electricity cost $56/MWh
  • Coal-generated electricity cost $109/ MWh 
  • Nuclear-powered electricity cost $155/MWh

A key advantage for some types of renewably sourced electricity is that the primary direct cost is the operation of the power plant or structure. There is no cost for sunshine or wind.

The pros and cons of renewables

Renewables have become more cost effective and tend to have smaller environmental footprints, but there are pros and cons to renewables, just as there are for fossil fuels. Let’s take a closer look at some advantages and disadvantages of a few renewable energy sources.

Wind

Wind turbines are proliferating across the United States and around the world, both onshore and offshore. The obvious advantage is that wind is plentiful and free in many regions. One disadvantage is that wind turbines can harm wildlife and negatively affect biodiversity. In addition, turbine production is energy intensive, and turbine blades are not recyclable. As a result, landfills in some areas are cluttered with old blades. A final drawback is that wind farms can be unattractive and negatively affect housing prices.

Solar

Solar panels, cells, and plants convert sunlight into electricity. A clear advantage is that sunlight is plentiful and free. A disadvantage is that some types of solar panels are energy and cost intensive, and producing them results in significant waste of materials. Durability also can be an issue. Like wind farms, solar panels can be physically unattractive and may negatively affect home resale values.

Hydropower

Hydropower harnesses the power of rivers by using dams to control the flow of water. The advantage is that rivers are replenished by rain and snow. Tidal and wave energy harness the power of the ocean. One disadvantage is that hydropower sourced through dams disrupts ecosystems and communities.

Biofuels

Biofuels produce energy using corn, wood, waste, and biogas. These materials are relatively plentiful. However, biofuels sometimes create competition for agricultural products, like corn. This can affect the price and availability of food.

Countries have ambitious clean energy goals

Many countries and organizations around the world have pledged to become carbon neutral, emitting net zero emissions, by 20504. The change will require that coal-, oil-, and gas-fired power stations be replaced by renewable energy sources.

In the United States, the Biden administration created a National Climate Task Force to identify ways to reach emissions targets. However, it’s unclear whether Congress will ever agree on how to tackle climate issues. As a result, climate issues are being addressed primarily by local governments, the private sector, and shareholders.

In the private sector, companies are talking about climate change and sustainability, among other issues. More than 30% of S&P 500 companies discussed environmental, social, and governance (ESG) factors on earnings calls between March and June 20215. This was a much higher number than usual.

When companies have not acted decisively to understand and address climate issues, shareholders and courts have been stepping in to influence corporate behavior. During the first half of 2021, several large oil companies were forced to make unexpected strategy and board changes. In May, a Dutch court ruled that a British-Dutch multinational oil and gas company must reduce greenhouse gas emissions 45% by 2030. The company had planned a slower reduction6

Fully disclosing climate change risks and opportunities may have some advantages for publicly traded companies. New research found “the stock market responds favorably to such disclosures.” In the days following a disclosure, "the disclosing firm’s stock price increases by 1.21% on average (on a market-adjusted basis). This suggests that investors value higher transparency with respect to climate change risks and that disclosure tends to benefit disclosing companies.”7

There are many ways to invest in companies that focus on and adhere to clean energy goals and policies, including environmentally friendly, fossil-fuel-free, and thematic strategies. There also may be opportunities to invest in public and/or private equity and debt investments. If you would like to learn more, contact Sid Queler at Sid.Queler@cibc.com or 617.531.6954.

 

Sidney F. Queler is the chief growth officer of CIBC Private Wealth, US. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also serves as a member of the CIBC Private Wealth US Operating Committee and as a member of the advisory team for the firm's Boston office. In addition to leading national business development, he remains actively involved with client relationships.

[1] Twitter, 06.13.2021.
[2] BBC News, 05.13.21
[3] Our World in Data, 12.01.2020
[4] United Nations, 12.2.2020.
[5] FactSet, 06.07.2021.
[6] Barron’s, 05.05.2021.
[7] Harvard Business Review, 04.22.2021.