Monday, 22 June 2020

Security in Renewables

Written by Chris Hulatt

We’re currently witnessing one of the greatest challenges ever to face the UK economy. Recent figures show the economy shrank by 20.4% in the first full month of lockdown, and every sector has felt the strain.


The pandemic has also thrown the fossil fuel industry into turmoil. This has accentuated the need to shift towards renewable forms of electricity generation, providing the energy industry with a once-in-a-lifetime chance to undergo transformational change.

The UK’s transition to Net Zero will be largely driven by significant investment in renewable assets. It has been estimated more than £21tn of cumulative investment into renewable energy is required globally by 2050 in order to meet the Paris Agreement. With UK policymakers looking for ways to encourage a sustainable recovery and a fiscal event expected soon, there is a role for both government and the private sector to create a consistent regulatory framework and to provide the capital required to support investment.

Positive long-term outlook for renewables

For some time now, the oil industry has been impacted by a global price war. In normal circumstances, demand for cheap oil would help stabilise the market. However, the slowdown in economic activity has seen the oil trade dry up and forced companies such as BP to make substantial write-downs in the value of their assets.

The outlook for renewables is much more positive. Renewable infrastructure stocks and renewable-facing companies have been performing well during the volatile market conditions of the past few months. The IEA recently commented that renewable energy has so far been the energy source most resilient to lockdown measures.

As the UK’s largest investor in solar power we believe many of the factors that have driven investment into renewables over the last decade - especially from institutional investors like pension funds - are now more pertinent than ever.  

Pension fund trustees are increasingly conscious of the attitudes of their members towards investment decisions, which have seen a huge increase in impact investment and a renewed push for sustainability. This is something we’ve seen ourselves in discussions with pension funds both in the UK and overseas. Trustees feel they need to be taking a more proactive approach to investment into sectors that are helping to combat climate change.

Last year, we commissioned a survey of institutional investors from across the globe, representing $5.9tn in assets. Encouragingly, UK investors were found to be leading the way. Over the next decade, UK based investors plan to divest up to a quarter of portfolios from fossil fuels, while also investing up to 13.1% of their portfolios into renewable energy. It is clear renewable assets are now seen as a mainstream investment.

Recovery through renewables

There is an economic as well as an ethical argument for a global power system supported by renewables. A recent report from EY claimed a renewables-led recovery from Covid-19 will create almost three times as many jobs as a fossil-fuel-led recovery. With significant job losses elsewhere in the economy, this is too good an opportunity to miss. 

Following years of policy development to incentivise investment, including recent measures by this Government to promote affordable onshore wind generation, it’s clear the global investment community is ready to invest into renewable energy at scale. And with good reason: renewable electricity from solar and wind now costs less than electricity generated from gas and coal, and renewables can be easily implemented at a huge scale.

Despite this, there is still a perception among some investors that investing in climate change mitigation comes at the cost of returns. At Octopus, we are demonstrating to large institutional funds that investing in renewables can also deliver an attractive risk-adjusted return.

Building the green economy

There has never been a better opportunity to rebuild our economies with renewable power generation right at the centre. The Bank of England has announced an additional £100bn bond-buying package, on top of £200bn of stimulus as the UK recovers from the pandemic, and green investment will continue to be a key part of the UK recovery.

Policymakers have a unique opportunity to incentivise more institutional investment in renewables. After a temporary hiatus, the Pension Schemes Bill is being scrutinised in the House of Lords. This includes measures to allow funds to invest more into illiquid assets (i.e. those not listed on mainstream stock exchanges) that satisfy ESG criteria. While much of the detail is yet to be worked out, this could have a transformative effect on investment into wind and solar power infrastructure in the UK.

As a global leader in renewable investment, and with next year’s COP26 on the horizon, the UK has the opportunity to lead the world in showing the way to further decarbonisation of our power generation. 

Chris Hulatt is a co-Founder of Octopus Group.