As a result of the energy crisis renewable energy has been one of the most attractive investment opportunities in recent times. Yet many are wondering if it is still worth jumping on this investment bandwagon or whether the best timing has already passed.
The imbalance between energy demand and supply is greater than it has ever been. Investing now will not solve the current energy shortage, but it is not too late to jump on the renewables bandwagon. The current energy crisis has accelerated what will be inevitable at some point in time. We need to replace fossil energy production, and that replacement is renewable energy. The energy transition will require a huge amount of investment, and investors will be attracted by the fact that there is more demand than supply.
The need for renewable energies is growing all the time. The need for electricity and energy will be even greater in the future than it is today, as transport and industry become more electrified. Depending on the region or country, the demand for electricity will increase by 50–100%, which means that there will have to be much more power generation in future than today.
As long as demand grows and production lags a little behind, electricity prices will remain high. This makes investing in renewable energy attractive. Large investors in particular have been interested in renewables for several years before the energy crisis. I believe that interest will remain high even if things return to normal. There will be enough appeal for a few decades to come.
What should to be considered when investing in renewables?
Investing in renewables is a complex issue. There are three key things an investor needs to consider before making an investment decision: the natural conditions and the local electricity markets and financial markets.
For example, the natural conditions where a power plant is located determine what kind of return can be expected. It costs the same to build a power plant in Finland or Spain, but Spain has twice the solar irradiance of southern Finland. In that case, the same investment will produce twice as much in the south of Europe and thus be more profitable there.
In addition to the natural conditions of the location, it is good to understand how the local electricity market works, how it is evolving and how this will be reflected in the price of electricity sold. For example, if you make an investment in an area where there is a lot of solar irradiance or wind combined with a market where there is little power generation capacity relative to demand, the price of electricity will remain expensive for longer.
There are electricity interconnection lines between different countries, and a European market is being formed, but in reality, the electricity market is very local. For example, the Iberian Peninsula is a local electricity market. There is just a little transmission connection to France and only a bit to Africa, so the electricity price is formed by the local market.
Power plants are a capital-intensive operation, involving investments of at least tens of millions, even hundreds of millions. The functioning of the financial market and the availability of debt financing are key factors in determining the return to the investor.
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