Investing in energy can be a lucrative endeavor, but it also carries certain risks. Three of the most common risks associated with investing in energy are the volatility of commodity prices, the reduction in dividend payments for companies that pay them, and the possibility of an oil spill or other accident during the production of oil or natural gas. Long-term investments in oil and gas companies can be profitable, but they also face challenges such as land acquisition and community relations. In emerging markets, local communities often challenge large land acquisitions for renewable projects due to underdeveloped land ownership rights and complex land use regulations.
In more advanced economies, large scale renewable energy projects face activism from local residents who don't want them in their backyard. To effectively manage community relations, project developers must understand the dynamics of local power to assess which groups are likely to be most affected by the project and which groups exert the most influence on local governments and regulators. It is also important to start community participation from the beginning to avoid potential conflicts, which can leave a lasting legacy. The risk of investing in onshore wind and solar photovoltaic energy is being studied in Germany, Italy and the United Kingdom.
Political and technological risks have become relatively less important. The driving factors include the creation of learning and investment ecosystems, the availability of data on the performance of technology, and the creation of credible policies. Building an energy system compatible with the Paris Agreement requires a large scale investment in renewable energy technologies (RET). Designing effective energy policies, therefore, requires understanding the dynamics of investment risk in RET.
This study is based on data from the RET project and on 40 interviews with investors from Germany, Italy and the United Kingdom. Five types of investment risk in RET were identified: reduction risk, policy risk, price risk, resource risk and technology risk. Risk premiums and investment risk have declined in solar photovoltaic and onshore wind technologies in these countries due to increased reliability of technology at a lower cost, availability of data, best evaluation tools and credible and stable policies. Reduction and price risks are becoming increasingly important as political and technological risks become relatively less important over time.
To accelerate the transition to an energy system compatible with Paris Agreement goals, policy makers should consider these factors when designing effective energy policies. Oil companies generally invest in stable states, but ultimately they have to go where the oil and gas are. Regions dominated by developing and emerging economies are expected to generate a greater share in additional renewable capacity over the next two decades than Europe and North America according to the IEA. Governments are adapting new forms of state support to maintain stable and attractive investment environments while ensuring long-term reliability of the energy system and its profitability.
Investors can mitigate regulatory risks by performing policy-focused due diligence and planning country-specific scenarios in the early stages of the investment cycle. Adequate market research should be conducted on the company, its products, oil wells and exploration before investing in stocks. Many investors are looking to make their portfolios more sustainable, offering renewable energy source (RES) projects as investment opportunities. Before investing in oil stocks, make sure that the company does not operate in countries with unstable dictatorships or a history of sudden nationalizations.
Be sure to thoroughly study geologists' research reports before investing in oil stocks backed by active drilling projects. Investments in renewable energy are increasingly subject to laws to control foreign investment in the United States and Europe, especially if these investments come from non-Western jurisdictions. Hydrogen is an example of how regulations from a variety of other sectors indirectly affect the risks and rewards of renewable energy.
