Important information: 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.
Easter Monday offered up the perfect cocktail of sunny yet windy weather and lower-than-average electricity demand to deliver the “greenest ever” day for Britain’s electricity system.
Over the period, zero-carbon power sources generated almost 80% of the country’s power, with 10% coming from gas plants and none from coal, according to The National Grid Electricity System Operator (ESO).
Among those zero-carbon sources, wind power made up 39%, solar 21% and nuclear 16%.
The Bank Holiday was a high point for what has been a good 12 months for renewable energy. Since the first lockdown a year ago, demand for energy has plummeted with office blocks and leisure venues shut for vast periods. That’s allowed renewable energy sources to cover most of the country’s demands, while also accelerating the overall shift away from traditional carbon-based sources.
That’s been clear in the side-lining of coal to power the country’s electricity.
When Britain first went into lockdown, the National Grid took power plants off the network, and Britain’s four remaining coal plants were among the first to be closed. Over the summer, we enjoyed more than two months without burning any coal to generate power.
That’s a serious shift. A decade ago, coal counted for about 40% of electricity; wind and solar made up a measly 3%. By comparison, Britain’s remaining coal plants will be shut down for good within the next five years, while the UK has since become home to the biggest offshore wind industry in the world.
The direction of travel is clear. Even when economies reopen and demand for electricity increases, the intention to provide it from renewable sources will be here to stay.
But we’re still a long way off our goals. Over 2020, the ‘carbon intensity’ of Britain’s power system was its lowest on record, at 181g of carbon dioxide per kilowatt-hour of electricity. Under the UK’s current climate targets, however, carbon intensity needs to stand at around 50g of CO2/kWh in 2030, 10g of CO2/kWh in 2035, and 2g of CO2/kWh by 2050.
Ensuring that renewables build on last year’s momentum and stay ahead of carbon-based sources will require further investment in the UK’s green infrastructure system, with new wind and solar farms to be built across the country.
All this presents opportunities for investors. For income seekers, renewables can be a good option 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. That’s the thinking of Mark Brennan, manager of the FP Foresight UK Infrastructure Income Fund, one of our experts’ Select 50 choice of favourite investments and one of Tom Stevenson’s five ISA fund picks for 2021.
When Tom interviewed Brennan earlier this year, he explained how the underlying source of revenue for most his fund’s assets comes from long-term contracts held with the government. That makes for, in his eyes, “a very reliable source of income”.
Brennan also explained that the government’s pledge for an “infrastructure revolution” focussed around green energy sources is good news for investors. He explains: “Given where government balance sheets are post-COVID, the government really needs private capital to get involved so it’s a big opportunity for private investors.”
Looking more broadly, 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. Indeed, many funds focus exclusively on green energy opportunities.
But all this comes with a note of caution. As Tom Stevenson points out in his upcoming Investment Outlook, the green energy sector caught the attention of many investors last year. Over the last six months of 2020, the World Renewable Energy Index doubled. In the past three months, it’s lost almost all those gains. That looks a lot like ‘bubble’ territory. Renewable energy clearly is the future, but valuations should remain a key consideration for prospective investors.
Green energy is just one of many topics Tom will be looking at in his Q2 Outlook, in which he assesses the investment landscape as we begin to emerge from lockdowns.
As ever, Tom will be answering your questions in the accompanying webcast and podcast, both to be published on Wednesday 14 April.
You can submit your questions here.
Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Please note that Tom’s picks are not a personal recommendation for you. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. The Foresight UK Infrastructure Income Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund also uses currency hedging. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Foresight UK Infrastructure Income Fund investment policy means it invests mainly in units in collective investment schemes. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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