In 2020, Switzerland sourced 27.2% of its energy from renewable sources, placing it above the EU average of 22% for that year. For Switzerland to become carbon neutral by 2050 with its climate strategy, it urgently needs to expand its use of renewable energy sources. But this urgency doesn’t just apply to Switzerland: on an international level too, there has been a growing focus on renewable alternatives since at least the Paris Agreement.
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Investing in sustainable energy: what’s behind this market trend?
The climate is getting warmer, and we need increasing amounts of energy in our interconnected world. If we want to meet this demand in a way that is in line with international climate goals, sustainable energy sources are key. What are the most efficient renewable energy sources, and just how sustainable are the likes of wind, solar and hydropower really? These aren’t just questions for government and the economy, but investors as well. Together with ETH Professor Bjarne Steffen, we’re going to classify these energy sources, and tell you what you need to know if you are looking to invest in renewable energy.
Overview of topics
What does “renewable” mean with regard to energy?
Energy can be obtained from both exhaustible and non-exhaustible sources. Exhaustible sources primarily include fossil fuels, such as oil and natural gas, which still account for the majority of the world’s energy supply. But coal and uranium are also examples of exhaustible resources. By contrast, renewable energy comes exclusively from sources that cannot be exhausted, for instance wind and sunlight. In addition to renewable energy, there are also what are known as “alternative energy sources”. This sort of energy can be obtained from both exhaustible and non-exhaustible sources. An example of this is hydrogen, which can be produced using fossil fuels, or in an eco-friendly way with green electricity via electrolysis. Find out more about hydrogen in our blog post “Hydrogen: why it is essential for a green future”. Renewable energy sources, in contrast to fossil fuels, are very low in CO2 emissions, which makes themmore sustainable. This is, for instance, demonstrated by an overview of CO2 emissions from different energy sources in the report ”Technology-specific cost and performance parameters” by the IPCC. The emissions listed in the report include grey energy seeing as the sustainability of renewable energy sources does not just depend on their source materials. This means that, even within sustainable energy sources, there are differences in terms of CO2 emissions, even though they all perform relatively well.
What types of renewable energy are there?
Anyone looking to invest in renewable energy should be familiar with the main sources, as well as their properties and uses:
Solar power is obtained from sunlight, and is one of the best known and most widely used renewable energy sources. Using photovoltaic systems, the sunlight is converted directly into electrical energy (with solar modules) without generating any emissions. This energy is mainly produced during the summer, but it can still meet demand during the colder months when combined with fossil fuels or other renewable energy resources. As the intensity of sunlight varies, a lot of solar power requires addition storage systems, such as batteries, to guarantee a reliable supply of energy. But solar power is still one of the core components in the energy strategy of many countries.
Hydropower is the most widely used type of renewable energy in Switzerland. The power is generated using large hydropower plants (capacity of over 10 megawatts) and small hydropower plants (up to 10 megawatts of capacity), and these plants are very eco-friendly. They generate 60 – 80 times more energy than they require. However, they often come under fire from environmental organizations because they can, for instance, destroy the habitats of animal species that are already endangered. Questions are also raised over the energy supply in the long term because the risk of water scarcity and flooding is increasing due to global warming. But compared to other energy sources, hydropower plants do have the advantage of being able to generate electricity at times when little is generated elsewhere, but a lot is required, for instance during a windless evening.
Unlike solar power and hydropower, wind power actually generates the most energy during the winter months. This is why there is intense debate in Switzerland at the moment over wind power potentially filling the gap in the renewable energy supply, not to mention the fact its potential is still largely untapped. Currently, wind power covers 0.2% of Switzerland’s energy demand. By 2050, this should rise to 7% according to the energy strategy of the Swiss Federal Office of Energy. Wind power is generated with large wind turbines, which is generally collected in a “wind farm” located in areas exposed to the wind. Its positioning is crucial because the less wind resistance you have from hills, mountains and vegetation, the more energy you can generate with the wind turbines. Wind power is controversial amongst conservationists because it can pose a risk to certain species of bird. Additionally, the rotation of the wind turbines can constitute a form of noise pollution for people and animals.
Biomass consists, among other things, of biowaste, e.g. food leftovers, compost, crop residues, manure/dung and wood waste. By fermenting it, the biomass can be converted into biogas, and used for similar purposes as natural gas, in particular for generating heat and electricity. If dry, woody biomass is burned, this generates steam and heat that can be used to generate energy. This process releases the amount of CO2 that was previously locked up in the form of biomass, making this type of energy essentially carbon neutral. In Switzerland, a fifth of renewable energy comes from biomass, and its potential has still not been fully harnessed.
Heat from the Earth’s interior – known as geothermal energy – can be obtained even just a few meters below the surface of the Earth, and has many uses: heating, hot-water production, industrial processes, cooling and electricity generation. Geothermal probe heat pump systems are widely used for heating or even cooling buildings. In Switzerland, 4.6 terawatt hours of energy were generated in 2021 with geothermal systems, which is 15% more than the previous year. Geothermal energy is considered clean and eco-friendly – provided the electricity it requires is obtained from renewable energy sources. It is also a reliable source of renewable energy due to its stability. However, the boreholes can be costly and require a lot of time and effort.
Nearly all studies suggest that solar and wind power will become firmly established in future due to their huge, largely untapped potential. Professor Bjarne Steffen is of the same view, adding: “to my mind, this means solar photovoltaic power is the most promising choice because, for one thing, the costs are relatively low, and for another, installation is relatively quick and straightforward. What’s more, solar power systems have less of an impact on the landscape than wind power systems, which means this energy source is not faced with as many issues of acceptance as other sources.”
What technical impact will the shift towards sustainable energy sources have?
In the past, far more oil and natural gas was used for transport, electricity/heat generation and industry. This is changing now because the increased use of more sustainable energy sources means that electrical power is growing ever more important in all sectors, and demand is rising. It is clear that electricity absolutely needs to be sustainable to meet international climate targets. Electricity, regardless whether it’s sourced sustainably or not, does still have a disadvantage: it is hard to store, and it must be used when it is on hand. For it to be stored successfully, the electricity has to be converted into other sources of energy. Typically, impoundment facilities or lithium ion batteries are used to do this, with the latter being widely used in the automotive industry in electric vehicles. According to Professor Steffen, they are well suited to short-term storage, for instance day/night mode. But it isn’t just the automotive industry that uses batteries. Private households also use them, as does the public electricity sector. In the latter case, batteries are already used today to stabilize the grid and to provide an operating reserve as a safeguard in cases where energy demand or electricity feed-in deviates from planned volumes.
How can you invest in sustainable energy as an investor?
As an investor, you have various options for investing in renewable energies, as in other areas . We will present these options in more detail to you:
Investing directly with shares
Because renewable energy technology is advanced for the most part, less is being invested in research, and more in development, which is primarily conducted by the manufacturers themselves. This is why acquiring a stake in these companies directly is one way of investing in renewable energy. Here are some potential industries for investment:
- Manufacturers of solar and wind power systems
- Manufacturers of (solar) inverters
- Installation companies
- Electricity suppliers
- Tech suppliers for electricity suppliers
If the companies are listed on the stock exchange, you can acquire a stake directly by purchasing shares. Remember that these are investments in growing markets, meaning they do come with a greater risk. Find out more in our article “Growth investing as an investment strategy”. So make sure you check whether these shares are a good fit for your portfolio and strategy before purchasing them, and carefully weigh up the risks and opportunities. Pay particular attention to ensuring you diversify enough.
Thematic funds and ETFs
If direct investments seem too risky, you do have the option of investing in thematic funds or ETFs, which are more diversified. ETFs in particular offer a great selection when it comes to sustainability. For instance, you have specialized ETFs that focus on a specific sector or technology (e.g. solar), and others that also consider ethical exclusion criteria in addition to sustainability. You also have the option of investing in various funds, or supplementing your portfolio with shares. As we’ve said already, you need to be aware that the prices are subject to fluctuations, and that losses are possible even with sustainable funds and ETFs.
Prof. Dr. Bjarne Steffen is head of the climate financing research group and – at the ETH Zurich. In his research, he analyses political measures relating to decarbonization in the energy and finance sector.