An asset class with a future Invest in renewable energy

Everything you need to know about investments in renewable energy.

Carbon dioxide – climate killer? The invisible molecule of CO₂ has become the symbol of an energy economy that no longer seems to be viable for the future. Scientists agree that the atmosphere warms up due to the increase in CO₂ concentration caused by fossil fuels such as oil, gas and coal.  

On the other hand, renewable energies are largely free of such climate-impacting emissions. Their costs have been falling for years and are expected to continue to do so¹, making them increasingly attractive as investments as well.  

They use the power of the sun to generate clean energy – in the form of solar, wind and hydropower. And the best part is that the sun is available for free. Its radiant energy is about 5,000 times greater than the energy requirements of everyone on Earth combined. German politicians have also long recognised its potential and have been promoting the expansion of solar power plants with the German Renewable Energies Act (EEG) since 2000.

Investors can also benefit from this development, especially as renewable energy investments are no longer a niche product and have successfully established themselves on the market for sustainable investments. In 2020 alone, more than 300 billion euros were invested worldwide in the expansion of renewable energy². 

The market for renewable energy investments is growing steadily – this makes it all the more important, among other things, to have a good overview of it for your own investment decision.

The effects of global warming are becoming increasingly noticeable: droughts, floods, crop failures and extinctions of species have steadily increased in recent years.³  

Fossil fuels such as lignite, hard coal, petroleum and natural gas have stored solar energy in the earth for millions of years. Since the beginning of industrialisation, they have been burned at a tremendous pace, releasing carbon dioxide (CO₂) and other greenhouse gases.  

As a result, the planet’s natural greenhouse effect has become out of balance. With the Paris climate targets, the United Nations has set itself the goal of reducing emissions of climate-impacting gases and switching from fossil fuels to “clean” energy production alternatives. 

Nuclear power is not an alternative. Although it may appear to be clean (as it is carbon-free), it poses constant dangers and unresolved problems. The fuels and waste required for energy production are highly radioactive, and disasters such as Chernobyl or Fukushima reactor accidents have highlighted the risk of this technology. In addition, there is still no permanent disposal solution for highly radioactive nuclear waste.  

Renewable energies do not require fossil fuels – their energy source is the sun, which provides unlimited, free and environmentally friendly energy that can be used as electricity or for heating. Within 90 minutes, the earth receives as much solar radiation energy as humanity needs in a whole year.⁴ A fraction of this can be harnessed through renewable energies. They are durable and do not generate toxic waste products. 

There are many ways to generate electricity and heat in an environmentally-friendly way.

Contrary to expectations, solar panels produce energy not only when the sun is shining, but also when it is cloudy but bright. In a photovoltaic system, small solar cells generate electricity. These cells are made of crystalline silicon or based on thin-film technologies.

Solar energy uses the “photovoltaic effect”, meaning that incident sunlight turns into electricity. Several solar cells together form a solar module and several solar modules are interconnected in a photovoltaic system. 

The efficiency of this technology has continued to increase in recent decades with industrially manufactured modules made of crystalline silicon now achieving an efficiency of over 20 percent.⁵ In addition, the prices for photovoltaic modules have dropped by more than two thirds in the last ten years.⁶

How much sun can be used depends on the local weather conditions, altitude, angle of incidence and latitude. In sunny regions such as Southern Europe, photovoltaics is already the most cost-effective method of generating electricity.

A wind turbine with an output of 3 MW produces electricity for around 2,000 households in one year.⁷ Wind power is also based on the energy we receive from the sun. This is because, depending on how the sun’s rays hit the Earth, temperature and pressure differences arise that need to be balanced out – and this is what makes the wind blow!

This flow force causes the rotor blades of wind turbines to turn, e.g. on land (onshore) with wind farms or small systems on private land, or on the sea (offshore).

Wind energy is responsible for the lion’s share of renewable electricity supply. As of May 2022, it currently has a share of 20.1% in German electricity production.⁸ Internationally, the German wind industry is a global market and technology leader. 

But there is still a lot of untapped potential: by replacing older plants with more modern ones ("repowering") and expanding offshore wind farms, significantly more energy could be generated from wind.

Everything that is generated in agriculture and forestry can be used as biomass: the energy from the sun is stored in slurry, organic waste, grass cuttings, straw and leftover feed. Some raw materials such as corn and wood are also sometimes part of the mix, but could also be used for their material instead of their thermal capabilities. Any biomass can be converted into electricity, heat or fuel. 

Microorganisms break them down into biogas in the absence of oxygen. Biogas is considered CO₂-neutral as it only produces as much carbon dioxide as the plants had assimilated during their growth phase. 

From an ecological point of view, biogas is nevertheless associated with uncertainties. The production of biogas poses risks due to the uncontrolled escape of the greenhouse gases methane and nitrous oxide, and significant indirect emissions can also be caused by the repurposing of land.⁹ ¹⁰ When investing in biogas, it is therefore important to ensure that the systems are well implemented. 

Large fossil fuel power plants often use only one of two forms of energy: electricity (power) or thermal energy (heat). Many release the heat into the environment unused, especially into rivers where the heat warms up the local ecosystem. 

In most cases, such conventional power plants only achieve an efficiency of approx. 30 percent. All of this was and is wasteful because combined heat and power (CHP) which uses electricity and heat, has been around for a long time. 

Combined heat and power plants (CHP) not only produce heat, but also valuable electricity as a “waste product”. With an efficiency of up to 90 percent, they are very efficient. They are particularly environmentally friendly if they are not operated using fossil gas or crude oil, but with renewable fuels from biomass.

Even the ancient Egyptians operated machines with the power of water. Until the 19th century, sawmills, paper mills and grain mills were powered by streams and rivers, and today this potential for decentralised energy production from small power plants is being revived. 

The kinetic energy of the water can also be converted into electricity on a larger scale. In Germany, for example, the Walchensee power plant has been using the current from the Isar river for electricity production since 1870. 

Pumped storage power plants in particular play an important role in the energy transition because they serve as storage. If there is too much power in the grid, water is pumped from the lower basin to the upper basin. Later, when more energy is needed again, the downward flow can be converted back into electricity. This means that electricity can be generated and stored regardless of the weather and time of day.

The volcanic island of Iceland benefits from geothermal energy: two thirds of its energy supply is generated from geothermal energy.¹¹ But we also have a lot of energy stored beneath the earth’s surface. 

Geothermal plants can convert them into electricity, heat and cold. Simmering deep within the earth at temperatures of up to 6,000°C, the heat radiates upwards and also heats layers and water reservoirs, which we can reach by pumping. The deeper you drill, the warmer it gets: approximately 3°C per 100 metres depth. As geothermal energy doesn't need good weather, wind or daylight, it is popular as an independent source of energy. 

Heat pumps can also use the ambient air to provide heating or cooling. In the energy transition, they serve as a welcome consumer of temporarily surplus (renewable) energy in the grid.

Renewable energy is a future-proof asset class. Numerous investments are available here that are independent of the stock market and broadly diversified. Investors have the opportunity to invest in future-oriented investments with attractive risk-adjusted returns. 

There are many benefits to investing in renewables. On the one hand, you are actively helping to combat climate change, as your investment supports future-proof technologies that hardly generate any CO₂ emissions.

In this way, you can help ensure that our grandchildren can still live and do business. On the other hand, investing in tangible assets is comparatively crisis-proof and is less subject to the otherwise typical market fluctuations.  
 
Some investors shy away from investing in renewable energies because they are afraid they don't understand the technology enough. But that is like saying you would have to be able to build a car to invest in an automotive manufacturer or penetrate an oil extraction plant to invest money with an energy supplier.

None of this has been necessary so far – and the operation of renewable energies is not rocket science, as the previous section has shown. In addition, the technology has developed significantly and now functions reliably and cost-effectively. 
 
Money has power. Every euro that flows into alternative electricity and heat generation instead of fossil fuels drives the energy transition. In this way, you contribute to environmental protection and also generate a good return on your investment. 

If you want to invest sustainably , a wide range of opportunities is open to you. The financial world has recognised the signs of the times and created a broad variety of products. Although there is something for everyone, it’s worth taking a closer look. Some offers sound more sustainable than they actually are.

Initially ridiculed and fought against, renewable energy is now no longer niche. In 2019 alone, 301.9 billion euros¹² went into renewable energies worldwide; in Germany it was 10.5 billion euros.¹³

Despite the strong growth of recent years, the market is far from oversaturated, and is expected to continue to grow. According to a study by McKinsey, in order to achieve the international Paris climate goals, investments of at least one trillion euros¹⁴ per year are required in Europe. 

In line with this, politicians subsidise everything that promotes climate change mitigation: research, innovation and plant construction in the field of alternative energies. Political developments in recent months have once again highlighted the importance of independence from “old” technologies on the one hand, and from external energy supply on the other. 

In addition, investments in energy infrastructure are relatively stable. They are largely independent of suddenly occurring events and developments such as the coronavirus pandemic. While the renewable energy market is not new, it is now finally broad enough to allow many more private investors to participate in its growth than before. 

Green investments, for example, go into the production and operation of power plants from renewable energy sources. There are many possible forms of investment, five of which are presented here: equities, thematic funds, best-in-class funds, investments, savings deposits and impact funds.¹⁵

If you acquire a company's unit certificates – e.g. a wind turbine manufacturer – this increases its rating. You make a profit if the company pays dividends or if you sell the share at a higher price. 

The long-term impact of such an investment is relatively low. As a rule, the purchase of a share does not directly transfer money to the real economy, but rather to the previous holder of the unit certificate. A higher rating may make it easier for the company to obtain loans for growth. At the same time, you are missing out on the opportunity to make your portfolio independent of the stock market with a new asset class.

If you invest according to the best-in-class approach, you will buy shares of the “best in class” in different sectors. In each sector, the companies that are most likely to take ESG criteria into account i.e. that have dealt with the topics of environment, social and governance, are identified.  

But they can also be operators of particularly efficient fossil-fuelled power plants. They strive for sustainable improvements in their field, but overall they are not pioneers in alternative energy. In the evaluation, they receive positive points for environmental management or efficiency improvements in resource and energy consumption, for example. 

If you pursue this strategy, you could rely on the best-in-class renewables, but this tends to have a low spread and therefore a higher risk.

With sustainable thematic funds, your money flows into a wider selection of equities or bonds from certain sectors. Some green funds and environmental funds specialise in renewable energies. These are often referred to as renewable energy funds. 

While solar funds invest particularly in European solar parks or solar thermal power plants in southern Europe and Africa, wind funds use the funds to build or improve onshore and offshore wind farms. Biogas funds are also very popular because the energy source is versatile. The form of securities varies, for example, there are closed-end funds or profit participation certificates.

Some thematic funds also act as impact funds. They stand for impact investing, whereby your investment not only flows into financial products, but into concrete projects with environmental objectives and verifiable results.  

Impact investments combine financial returns and measurable sustainability performance. They are often based on the United Nations’ Sustainable Development Goals (SDGs).
Unlike shares or other funds for example, with an impact fund you invest directly in the real economy and not primarily in the financial economy. In such a sustainable fund, your money achieves a direct sustainable impact, which must be made transparent by the providers.

The opportunities to invest directly in renewable energy plants or companies are varied and no longer reserved only for institutional investors. People often join forces on the ground to jointly finance citizen energy plants (CEP): a biogas plant in the village, solar panels on the roof of the local kindergarten or a rediscovered hydropower plant by the stream. Larger projects usually receive cross-regional support, e.g. via crowdinvesting platforms on the internet. 

All these investments can be roughly broken down by company form or contract type, each of which entails different co-determination options and liability risks. 

• eG: Here, you are a member of a cooperative. You purchase cooperative shares and co-finance renewable power plants. No matter how much you invest: every member of the cooperative has exactly one vote, which is why this form of organisation is regarded as particularly citizen-oriented and democratic. Depositors receive a proportionate share of the profits. In the agricultural sector, for example, investors invest in local biogas plants and found cooperatives for this purpose.
  
• GmbH & Co. KG: With this entity, you are a limited partner. Your liability is generally only tied to your contribution – not your private assets – and you therefore have little say.
  
• GbR: This is a partnership under civil law. Each partner is liable not only up to the amount of their contribution, but also their private assets. You should only invest in this form if the project is small and manageable – e.g. neighbours jointly co-financing a neighbour’s solar power system. Every partner has an equal say here.
  
• Loans: You can participate in citizen energy systems indirectly by lending money to the company behind it – regardless of its legal form. Types of loans typically include: bearer bonds, bonds or subordinated loans. It is also possible to lose all your money here as there are no co-determination rights.

The benefit of a direct investment in renewable energies investments is that their performance is largely independent of stock market developments. The German Renewable Energies Act (EEG) provides a certain degree of planning certainty, as it guarantees that the electricity produced will be purchased for a definite period of time at a fixed feed-in tariff. 

The disadvantage is that the investment capital is tied up for several years. Due to possible miscalculations, there is the business risk of a total loss. The option of investing smaller amounts (e.g. via crowdinvesting), is usually paid for by means of higher risk (e.g. in the form of a subordinated loan in which all other creditors are serviced first in the event of insolvency). 

Some banks offer savings products that finance renewable energies. Here, you invest your money with the bank for a fixed period (often five or ten years) at a fixed interest rate. This means that the bank invests in renewable energy projects, mostly within the region, e.g. as loans to citizen energy plants. 

Savings deposits with names such as “Sparbrief” (climate savings certificates) offer a relatively high level of safety thanks to the banks’ statutory deposit protection, a total loss is generally excluded here. However, interest rates are comparatively low, funds are tied up for a long time and there are no co-determination rights.

By investing in renewable energy, you can make an active contribution to climate protection. But what is the best way to do this and what needs to be taken into account when selecting products? Some questions worth finding the answers to can be found below.

The age of fossil fuels is coming to an end. If we want to stop warming the atmosphere through CO₂ emissions, coal, gas and oil must remain in the earth wherever possible. But humanity will continue to need electricity and heat in the future. 

This is why it is indispensable to expand renewable energies – and you can actively contribute to this with your investment. And the best thing is that the power of the sun can also bathe your wealth portfolio in bright light. With government funding and appropriate planning security, such a tangible asset investment is also a ray of hope from an economic perspective. 

This article provides you with an overview of investments in renewables. For a closer look at certain investments, we suggest our articles on wind power investment, solar funds and impact funds. Good luck with your investments!