Investing through the renewable energy transition
E*TRADE Capital Management, LLC in collaboration with Morgan Stanley Wealth Management101/14/22
Summary: Increasing demand and significant cost reductions have changed the clean energy landscape. Learn how decarbonization efforts may present opportunities for investors.
The signs of growing interest in clean energy are easy to spot: solar panels line rooftops, wind turbines dot open plains, and electric cars cruise highways.
Less apparent, but equally important, are the economics at the center of this story: The costs to produce wind and solar energy have dropped markedly in the past decade, and demand has increased as electric utilities begin to phase out fossil fuels.
During its annual AlphaCurrents conference, Morgan Stanley Wealth Management’s Global Investment Office discussed how the mix of energy sources is likely to change over time and how investors can position portfolios for the global shift toward renewables.
Shifting global energy consumption
Innovation in the energy sector is nothing new—energy consumption has changed throughout history. Most recently in the US that’s been demonstrated in the decline of coal consumption and muted oil demand, while renewable sources such as wind, solar, geothermal, and hydropower have grown their shares of the pie.
Globally, Morgan Stanley Wealth Management strategists expect the shift toward renewables to accelerate in the years ahead. The Energy Information Administration (EIA) forecasts renewable energy could represent 28% of global consumption by 2050E—up from 15% in 2018.
Renewables are forecast to become the largest share of global energy consumption by 2050E
E = EIA, MS & Co. Research estimates. Source: EIA, MS & Co. Research, Morgan Stanley Wealth Management Global Investment Ofﬁce as of July 23, 2021.
The wind and solar story
While the rise in clean energy can undoubtedly be attributed to the growing demand to address climate change, that doesn't tell the whole story. Over the last decade, costs have dropped precipitously for the two fastest-growing types of renewable energy: solar and wind.
Solar power, for example, is gaining significant ground in two notable areas: rooftop solar panels for residential homes, and solar farms built by electric utilities to replace coal-powered plants. Increased demand for solar products has fueled competition in the industry, driving costs down. In fact, solar electricity generation costs have decreased 83% since 2010.
Interestingly, wind-generated electricity costs have fallen by a similar amount—85%—assisted by a deceptively simple innovation: longer blades. In recent years, developers have successfully added longer rotor blades to both onshore and offshore wind turbines, allowing for increased energy output.
Costs of solar and wind generation have decreased over the past decade
Note: Figures include production tax credits. E = Morgan Stanley Wealth Management Global Investment Office estimates. Source: NextEra Energy, Department of Energy, Bloomberg, IHS Markit, Morgan Stanley Wealth Management Global Investment Ofﬁce as of July 19, 2021.
Opportunities in decarbonization
Many believe climate change will be the deﬁning issue of our time, and, so far, while government initiatives, policy, and regulation have driven progress, going forward, the pace and success of decarbonization may increasingly depend on the private sector. With more companies pledging to address climate risk, investment opportunities around decarbonization have grown. These opportunities aren’t just limited to the energy sector, either—to varying degrees almost all industries globally likely will be affected.
For climate-conscious investors, consider looking across the energy supply and production landscape. For example:
- Pure-play clean tech. Those companies directly involved in renewable energy technology or production.
- Utilities. Electric utility companies that are transitioning away from fossil fuels and toward cleaner generation.
- Traditional energy. Oil and gas companies that are investing in cleaner production, either through carbon capture or by diversifying production through renewables.
While Morgan Stanley Wealth Management strategists see strong growth potential for opportunities in renewables, investing in the space is not without risk. Growth for the sector assumes technological advancement, large-scale private investment, and continued policy support from governments around the world. As always, investors should make sure that decisions reflect individual goals, timelines, and risk tolerance.
Insights expressed in this article are from AlphaCurrents: Future of Energy—Investing in Decarbonization, originally published on July 29, 2021.
- The views expressed in this article are from Morgan Stanley Wealth Management. The original content has been modified for E*TRADE Securities and E*TRADE Capital Management, LLC audiences.
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