Understand Renewable Energy before You Invest in Energy Commodities

By Amine Bouchentouf

In practical terms, renewable energy refers to sources of energy that are essentially always present, always available, and always renewable. The sun and wind are traditional sources of renewable energy because the sun always shines and the wind always blows, day in and day out. Harnessing these renewable sources of energy is beneficial for a couple reasons. First, they’re always there. Second, they don’t emit any greenhouse gases, which decreases pollution output.

The benefits of renewable energy are obvious, but one of the big obstacles to implementing a large-scale, global industry is less obvious: cost. For instance, the cost of harnessing the power of the sun to generate electricity is extremely high and requires massive commitments of capital expenditures. The solar industry currently needs heavy government subsidies to be able to generate enough profits to remain competitive; the same applies to wind energy and other types of renewable energy, such as ethanol.

Renewable energy as a whole represents only a small fraction of the total energy landscape in the United States, which is also attributable to the broader global footprint. Getting exposure to some of these sectors from an individual portfolio perspective is difficult. For example, unless you own or operate geothermal plants, you have few direct methods for getting this kind of exposure. Focus only on renewable energy sources for which there are tradable, liquid, and transparent instruments — specifically, solar, wind, and biomass.

Although it’s currently more challenging to get direct exposure to different renewable energy submarkets (such as geothermal), this will undoubtedly change in the future as more instruments are made available and as the market gains more breadth and credibility. In addition, you can adopt a creative approach to getting this kind of exposure; for example, if you want to get exposure to hydroelectric power generation, you can examine the electric utilities universe for companies that have hydroelectric power assets. This strategy may not give you that direct investment route, but you can still manage to generate indirect exposure in your portfolio.

If you’re interested in keeping up-to-date on the latest developments in the renewable energy space, check out the Department of Energy’s Energy Efficiency and Renewable Energy (EERE) initiative. For the United Nations’ official intergovernmental policy view on global warming and greenhouse gases, consult the Intergovernmental Panel on Climate Change (IPCC).