Beating the energy crisis

As households all over the country struggle with the cost of living, calls are growing to drop the green levies now built into energy bills. Such demands are understandable, given the pressures so many people face. But the reality is these levies account for only a small chunk of people’s bills, so axing them isn’t going to make a material difference. In any case, there is a certain irony about this argument – had the UK invested more in the past in transitioning its energy system away from dependence on fossil fuels, we would not be so exposed to soaring gas prices today.

The Government’s official assessment is that the UK now needs to increase investment in its energy system by around £50bn a year by 2030 if it is to meet its pledge to achieve net zero carbon emissions by 2050. It is a daunting figure, but it also illustrates the scale of the opportunity here. For those prepared to contribute towards that investment, there is a real chance to secure handsome returns as the UK shifts to zero carbon energy sources – and to play a crucial role in combating disastrous climate change.

Growth in green

The environmental, social and governance (ESG) movement often talks about doing well by doing good. Investment in renewable energy and other tools and technologies that will propel us towards net zero is the ultimate example of that. This is an opportunity to put money into businesses and industries that will have to grow at break-neck pace in order to deliver the climate benefits we must secure.

It might seem strange to be having that conversation just now. For many people, getting through the next few months is the absolute priority – not thinking about where their energy might come from in a decade or more’s time.

Nevertheless, the point about fossil fuel dependence remains. The UK is in a strong position to decarbonise, with natural advantages from wind and tidal resources, as well as access to solar energy. Nuclear energy is likely to come into the mix, as well, and despite its failures to commission new facilities in recent years, the country has experience of incorporating nuclear into its energy system.

It's not as if we don’t know how to make the shift to cleaner energy. The International Energy Agency has set out a clear and credible roadmap towards transition based on three clear pillars: renewable and low-carbon energy generation, energy efficiency through storage and improved transmission; and reduced consumption through new technology and behavioural.

That roadmap also serves as a signpost for investors wondering where to put their money in any bet on transition. These are the areas where businesses and industries are set to grow fastest over the years to come – and therefore where the returns are likely to be most attractive.

The shape of those returns looks alluring too. Energy is a regulated industry in many countries, including the UK, with prices and returns to some extent set and guaranteed by governments. That provides investors with predictable and stable income – for withdrawal or reinvestment – over an extended period, often with explicit inflation protection built in.

How to invest

All of which begs a question, of course. How do ordinary investors get exposure to this transition story, given that the sums required are so enormous? How do they do well while doing good?

The investment companies industry provides the most obvious answer. Already, around 25 investment companies specialise in investing in renewable energy infrastructure. They pool investors’ cash and use it to back an enormously wide array of projects across the energy transition space, from wind and solar power generation to energy storage and technology – exactly the areas highlighted by the International Energy Authority.

This is a convenient and accessible way for investors to make a contribution to the multi-billion pound cost of energy transition – in the UK and worldwide – and to potentially earn a generous return while doing so. As with any investment, these funds will rise and fall in value over time, but it is difficult not to find their long-term proposition compelling given what is at stake.

Today, amid the gloom of a cost-of-living crisis and the very obvious effects of climate change we already see, it may feel difficult to be optimistic. But there are some reasons to be hopeful – the opportunity to build a long-term investment portfolio comprised of assets that can combat the climate crisis while delivering strong returns is one of them. And, of course, these are also the assets that will help the UK avoid the energy price crises of tomorrow.