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Bright outlook for renewable energy

About the author

Andrea Murad is a freelance investing and careers writer based in New York City.

Sailboat equipped with a solar panel (Fred Tanneau/AFP/Getty Images)

Sailboat equipped with a solar panel (Fred Tanneau/AFP/Getty Images)

Nuclear accidents, environmental disasters and shifting regulations around the world have stunned both investors and consumers. Catastrophes such as Japan’s Fukushima nuclear power accident and the Gulf of Mexico oil spill have reignited demand for renewable energy worldwide.

As it stands, renewable energy — primarily from solar, wind or biofuels — is more expensive than traditional sources like nuclear or fossil fuels. Still, this could change as the cost of environmental cleanup from disasters adds up, implementation of carbon taxes takes hold, as countries make concerted efforts to switch to renewable and as demand for energy grows.

Where there’s growth and a shifting market, there can also be opportunity for investors. There are two primary ways to invest in renewable energy, each with its own cost and potential return. 

Alternative energy funds

Offered by a variety of mutual fund companies, alternative energy funds allow investors to hold a stake in different technologies including solar, wind, biofuels that turn waste to energy and disruptive technologies like fuel cells, LED lighting, electric vehicles and energy storage. These funds can be less risky than investing in individual companies.

But there are downsides.

“Fund performance has been very volatile,” said Treasa Ni Chonghaile, portfolio manager for the Calvert Global Alternative Energy Fund in Dublin, Ireland.

Such funds lost more than 50% in value in 2008 alone. Companies in the alternative energy sector were heavily reliant on government subsidies in 2008 and 2009 and countries affected by the sovereign debt crisis cut financial support to green technologies. But, Chonghaile said, in the past 18 months, performance has been strong without the added government help.

Returns over the past three years were flat or down among the sector’s exchange-traded funds and mutual funds, but performance this year has turned around. The Calvert Global Alternative Energy Fund returned about 30% year-to-date and the Guinness Atkinson Alternative Energy Fund returned about 59%. Among ETFs, the First Trust NASDAQ Clean Edge Green Energy Index Fund is up about 84% year-to-date, while the Market Vectors Global Alternative Energy ETF has returned about 63% so far this year.

One thing boosting returns: initial public offerings of renewable companies that are added to funds and indexes. These companies have long-term feed-in tariffs, which are 20-year guarantees on the amount paid for electricity. These are meant to make renewable energy pricing competitive with that of fossil fuels and nuclear energy while the industry matures — and can hopefully compete on its own on price. The upshot? As long as government regulations don’t change, the guarantees should provide a dependable level of returns.

(For more on feed-in tariffs, read A solar panel on every home?.)

Investors should also “consider geographic diversification to manage the risk of these investments — you want to be diversified across countries with more activity”, said Bruce Kahn, portfolio manager at Sustainable Insight Capital Management in New York.

Understand all the risks, said Kahn. That includes “direct risk and unintended risk,” he said. Among them: political risks, potential for currency devaluations and environmental risks that will impact the viability of the alternative energy firms.

The companies don’t “operate in a vacuum, but in a moving economy and market,” Kahn said.

Go solar

Whether to install a solar energy system depends on how much energy can be produced and the investment needed to buy and install the system.

Solar panels have a 25-year life and can help protect you from unexpected surges in electric costs, but determining the true return on your investment is tricky. Among the considerations: subsidies and incentives for installing a system; how much you could earn for selling your excess solar power; and your current electricity costs.

Depending on available government subsidies and the local kilowatt-per-hour rate for electricity, installing a system to produce, supply and store solar energy, investment may generate a more stable return than equities.

The typical system consists of solar panels and a battery that stores power when the sun isn’t shining. The systems are sized according to a home’s electricity needs. A typical 5 kW system can cost between $20,000 and $30,000.

In the US, homeowners can receive tax incentives to offset that price. Tax-based incentives are spread out over many years, so they appeal to people who have money to pay for the installation upfront and want to reduce their tax liabilities over time. Other countries, like Australia, offer an AUD$8,000 ($7,247) incentive for solar installations.

In Germany, as in other countries, incentives and subsidies can help offset a lack of sunshine . “[Germany] has more than 50% of the world’s solar power [production], but they don’t have as much sun,” said Jamie Hahn, cofounder and managing director at Solis Partners, a developer and integrator of commercial solar power systems based in Manasquan, New Jersey. 

Homeowners need to consider how many solar hours they can produce and what they can save compared to their current electric bills. Of course, solar investments pay off quicker in areas with higher kWh rates. In 2011, electricity rates ranged from about $0.08 per kWh in China and India to $0.35 per kWh in Germany and $0.41 per kWh in Denmark

Another consideration: can you earn money on the side?

 “Are you able to sell power back to the grid and at what rate? The profitability is dependent on this,” said Diana Ürge-Vorsatz, professor and director at the Center for Climate Change and Sustainable Energy Policies at the Central European University in Budapest. 

This story was produced under the BBC's guidelines for financial journalism. A full version of those guidelines can be found at bbc.co.uk/guidelines.