The global economy is slowly switching power sources, pivoting away from fossil fuels toward renewable energy. How fast is green energy growing?
Renewable energy is growing at an exponential rate. Renewable reached 30% of global electricity generation capacity in 2020. We see renewable energy overtaking coal to become the largest source of electricity generation worldwide by 2025, supplying one-third of the world's power.
A bright future for solar energy, projecting that this technology will power the majority of that growth. Supporting that view is the expectation that solar will be cheaper than new coal- or gas-fired power plants in most countries because new solar projects currently offer some of the lowest-cost electricity it has ever seen. Also with a bright future for wind and other low-carbon power sources as the global economy transitions to a cleaner future.
One potential headwind for clean energy development, however, is funding. There's more investment needed than available capital, which is both a challenge and an opportunity.
Renewable energy companies that generate free cash flow and have strong balance sheets have a competitive advantage over financially weaker rivals, since they have greater access to the capital needed to finance growth. That's why investors should focus their attention on financially strong clean energy companies.
The sheer growth potential of the renewable energy sector provides the opportunity for any company focused on the industry to thrive. However, not all will, because growing for the sake of growth won't enrich shareholders. Instead, investors should seek companies that wisely allocate capital to renewable energy projects that generate attractive returns on investment. Smart capital allocation is essential to maintaining a strong financial profile.
The clean energy sector represents a massive opportunity for investors. Two key characteristics to look for are a strong balance sheet and a solar energy-focused growth profile, since those factors could give a company the power to generate higher returns.
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