Good news, the UK has just got a little greener. This week the country was powered without coal for a record seven days in a row, the longest stretch since the Industrial Revolution.
Once the cornerstone of our energy mix, the use of coal to generate electricity in the UK has been declining steadily. Coal now accounts for under 10% of Britain’s power output and the government plans to phase out the country’s last coal-fired power plants by 2025 in an attempt to cut carbon emissions.
According to Drax Electric Insights, the electricity mix on the coal-free days was made up as follows: 43% from gas, 25% from wind power, 17% from nuclear and the remaining amount a mixture of solar and biomass, plus some imports from France and the Netherlands.
Our electricity system is less dependent on fossil fuels than ever before. In 2018, 53% of Britain’s electricity was produced from low-carbon sources. Fossil fuel generation was down by 7% on the previous year, its eighth consecutive fall. It is forecast that renewables could supply half of Britain’s electricity by 2025 and could overtake fossil fuels as early as 2020.1
Wind power has played a key role in this, although it hasn’t always been plain sailing. In the heat wave of last summer, those with solar panels on their rooftops basked in the glorious free power it produced, while the nation’s windfarms weren’t as productive. There were even days when wind turbines sat completely idle. While solar panels helped fill the gap, less environmentally-friendly gas-powered power stations were used to meet the demand.
To be really green the UK needs an optimum blend of wind and solar energy to power the country. It appears the ‘goldilocks’ temperature to achieve this is 16.5 degrees - not hot enough for air-conditioning and not too cold to put the heating on.
Green energy offers many opportunities for investors, sometimes in less obvious ways. Renewables can be a good option for those seeking income because they tend to be financed through long term contracts ranging from 10-30 years, providing a steady stream of cash that can be used to provide a regular income. Additionally, there is a very strong regulatory push to increase renewables into the energy mix, also boosting their long-term appeal.
As you would expect, green energy is one of many themes being followed by funds that invest in companies with high ‘environmental, social and governance’ (ESG) standards. If you look under the bonnet of an ESG fund you will see a range of companies on display, often including those focused on providing more environmentally-friendly energy, but it doesn’t stop there.
Take, for example, the Jupiter Ecology Fund. In its top 10 holdings you’ll find the Danish wind turbine manufacturer Vestas Wind Systems. But you’ll also find companies you’ve probably never heard of such as Xylem, a large US company focused on wastewater treatment and Norwegian firm Tomra, which specialises in ‘reverse vending machines’, devices that make recycling easy and convenient. We recently interviewed the manager of the Jupiter Ecology Fund. You can watch the video here.
However, just because a company operates in a ‘hot’ sector it doesn’t guarantee steady, risk-free growth. Vestas Wind Systems reported this week a larger than expected drop in first-quarter net profits as tariffs, raw-material prices and lower-priced orders hit its margins. As ever, diversification is important and being exposed to a range of stocks via a fund gives you a buffer against some of the bumps growing companies such as these face along the way.
Outside the new and emerging energy suppliers, the older, more well-known oil majors are increasingly moving towards greener ways of powering the planet. BP has been producing renewable energy for more than a decade and has the largest operating renewables business among its oil and gas peers. Arch-rival Royal Dutch Shell is also increasing capital expenditure on its new energies division. Both companies are in the top 10 holdings of the following Select 50 funds - Fidelity Enhanced Income Fund, Fidelity Special Situations Fund, Franklin UK Equity Income Fund, JOHCM UK Dynamic Fund, JOHCM UK Equity Income Fund, Liontrust UK Growth Fund and the Majedie UK Equity Fund.
The key takeaway from all of this is to remember the importance of diversifying. Just as the country’s electricity generation comes from a combination of gas, wind power, nuclear, solar and biomass, it would be wise to invest across a diverse range of energy sources as they each have a role to play - whatever the weather.
More on ESG investing
1Electric Insights, Drax, Imperial College London, February 2019
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.