As the world shifts away from fossil fuels, there is a great market opportunity for companies that produce alternative energy technologies. These include renewables like solar, wind, and hydroelectric power as well as auxiliary technologies that help with the transition, such as improved battery technology or smart grids.
Investing in green energy stocks requires research into individual companies. However, a simpler way to gain exposure is through ETFs.
In 2023, investors will invest in technologies that replace fossil fuels with alternatives that run efficiently on electricity. This will include electric vehicles (EVs), industrial electrification, and heating and cooling systems powered by high-efficiency electric heat pumps.
Global renewable capacity additions broke records in 2022, fueled by expanding policy support and competitiveness against fossil fuel alternatives. That trend will continue, even if rising interest rates and supply chain disruptions elevate costs.
In the United States, renewable energy component manufacturing is growing rapidly, while energy storage helps balance power networks and decarbonize buildings. Energy equity sees new pathways thanks to the Inflation Reduction Act’s emphasis on spurring renewable providers to pursue opportunities in low-income communities. And, long-sizzling interest in green hydrogen may finally ignite at scale as IRA-driven economics make it price-competitive with higher carbon “gray” hydrogen. Investing in these trends will complement a comprehensive climate spending bill if it is enacted this year, and help lay the groundwork for future more ambitious decarbonization policies.
Biofuels derived from organic matter such as plants and animal waste are renewable energy sources. By displacing liquid fossil fuels, they reduce GHG emissions but also have indirect impacts such as land-use changes.
Governments use a variety of incentives, including grants, income tax credits, and subsidies to promote biofuels research and development and the blending of ethanol into gasoline. However, critics argue that the large amounts of land required to grow biofuel crops could better be used for food production and contribute to issues such as soil erosion, deforestation, fertilizer run-off and salinity.
Investors concerned about climate change, energy security and food prices see potential in a range of alternative energy options that go beyond first-generation ethanol. These include cellulosic ethanol, renewable diesel and sustainable aviation fuel (SAF). However, investors are facing challenges in the current market, including low subsidy levels, high financing costs and limited availability of finance.
Geothermal energy draws its heat from hot water buried below the Earth’s surface, which is then used to generate electricity. It’s an inexhaustible source of renewable electricity that is able to run at night, and it can provide “load follow” power to complement solar or wind.
Unlike conventional fossil fuel plants, no emissions are produced when generating power from geothermal. It’s also relatively cheap to operate. However, geothermal faces a few challenges. For example, land is often unprotected and subject to expropriation by local governments. Hence, some investors shy away from investing in geothermal companies located in developing countries.
Despite these challenges, large investors and companies are beginning to take notice of this green energy alternative. Berkshire Hathaway (NYSE:BRK-A, BRK-B), for instance, has invested in a portfolio of companies involved in the geothermal sector. Quaise Energy, a startup with researchers from MIT, recently raised $40 million to explore new ways of accessing hard-to-reach natural heat sources.
The solar industry is rapidly maturing, offering transparent returns on mature technologies and delivering 10-year tax credits with direct pay options. The sector is also attracting more capital. First Solar, for example, has a solid balance sheet that gives it the financial flexibility to continue expanding and make acquisitions to enhance its technology.
Solar energy is the cheapest way to generate electricity, but it has its challenges. The cost of critical raw materials is driving up input prices for solar and wind turbines, while regulatory and permitting issues are holding back investment in some regions.
The good news is that the global economy is working on switching to renewable energy. If the increase in clean energy investment seen since 2021 continues, aggregate spending on low-emission power, grids and storage, end-use solar and efficiency improvements could exceed what is needed to meet the world’s emissions targets.