When Does It Make Sense To Choose Clean Energy Over Fossil Fuel?

By: Wayne Duggan

As the world has become more aware of the harmful effects of greenhouse gases, an increasing amount of effort and money has been invested in developing renewable energy to displace fossil fuel as the leading source of global energy.

With a limited amount of global fossil fuel remaining, it’s inevitable that it will eventually be replaced. However, the timing of the transition from fossil fuel to renewables is the most critical part of the equation for investors.

The Renewable Revolution

The renewable energy world has witnessed staggering growth recently. Over the past few years, more than half of new investments in electricity generation capacity have been devoted to renewable sources.

The cost of solar energy is down more than 80 percent since 2008, and wind turbines now generate more than 15 times as much electricity as they did in 1990.

Deutsche Bank projects that solar-system costs will decline by another 40 percent within the next five years.

Uphill Battle

While the idea of the global energy market transitioning away from fossil fuels on principle is a noble one, the reality is that economic feasibility is the number one driver of the global energy market.

“The United States is blessed with large amounts of fossil fuel reserves, a capitalist economy that encourages investment in the extraction of fossil fuels and a free market that allows consumers of energy to make rational choices of the best sources of transportation fuel, heating fuel or source power generation,” Steve Pruitt, CEO of energy company Elevation Resources argues.

Pruitt also points out that the rapid growth in renewable energy is impressive, but its share of global energy demand is still dwarfed by fossil fuel’s share.

According to the U.S. Energy Information Administration, renewables accounted for only about 8.0 percent of primary energy consumption in 2013. Looking forward 25 years to 2040, the EIA projects that renewables’ share grows to only 10 percent, while fossil fuels continue to make up 80 percent of the 2040 energy mix.

Primary Energy Consumption

How To Play It

There’s no question that renewables are the place to be for growth, which is a key element of a good long-term stock investment. For investors, many renewable energy stocks, such as SunEdison Inc (NYSE: SUNE), SolarCity Corp (NASDAQ: SCTY) and Tesla Motors Inc (NASDAQ: TSLA), already have steep valuations, and most names come with a relatively high degree of risk as the fledgling industry finds its footing. There’s certainly no arguing the massive long-term growth potential in the space.

However, the EIA projections make clear that fossil fuels are not going away any time soon. While growth potential might not be particularly impressive, the recently-depressed valuations and healthy, reliable dividend yields of oil majors such as ExxonMobil Corp (NYSE: XOM), Chevron Corp (NYSE: CVX) and Valero Energy Corp (NYSE: VLO) offer the potential for solid returns through 2040 and beyond.

Disclosure: the author holds no position in the stocks mentioned.

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