Where to invest as the heat rises on Australia’s power generation capacity

Loy Yang power station in Victoria’s La Trobe Valley is scheduled for closure in 2035. Picture: Aaron Francis

The Bureau of Meteorology has declared that El Nino conditions are present and we are in for a hot, dry summer. We are also being told by energy experts to prepare for electricity blackouts because Australia’s ageing coal fired power stations are predicted to struggle to meet energy demands.

In addition to the millions of airconditioning units which will be turned on across the country over the next few months as temperatures rise, we have also seen a recent spike in the sale of electric vehicles which all require an electricity source to recharge. For those who cannot install solar panels such as apartment residents, their vehicles will be charged from the grid adding further strain to the system.

The federal government has an ambitious renewable energy target in order to reduce greenhouse gas emissions. Led by federal Climate Change and Energy Minister Chris Bowen, the government is pushing for renewable electricity generation to increase from 35 per cent to 82 per cent by 2030.

Most electric vehicles will ned to be charged from the grid. Picture: Naomi Jellicoe

In terms of energy polluters, NSW, Victoria and Queensland are the worst offenders with approximately 60 per cent of electricity generation coming from coal-fired power generators.

And at the other end of the spectrum, Tasmania has zero coal-fired power stations and obtains the majority of its electricity needs from a network of 30 hydro-electric power stations.

With the energy transition away from coal being a firm medium to long-term theme for both state and federal government, investors should take a look at their own portfolios and review what exchange traded fund investments are likely to benefit from this theme over the next 10 years.

Although Australia holds around a third of the world’s uranium reserves – and apart from the Lucas Heights nuclear reactor in NSW which is used to produce medical radioisotopes – we have no nuclear power stations given the blanket ban from every state and territory government.

Whereas in France, 70 per cent of electricity is generated by nuclear power. And in China, they are aggressively building their nuclear power infrastructure with 21 new reactors under contribution while in the United States there are already 93 operating nuclear reactors.

There are many great uranium mining companies on the ASX. However, a uranium ETF such as Betashares’ global uranium ETF (ASX: Code: URNM) provides a diversified portfolio with both domestic and global uranium companies, such as ASX-listed Paladin Energy through to the world’s largest uranium company, Canadian-based Cameco Corp.

With it seeming unlikely that the Australian government will change its position on nuclear power in order to achieve its clean energy targets, there will need to be an increase in the supply of renewable energy.

South Australia is the leader with 70 per cent of electricity generated from renewables while the Northern Territory is the worst offender with less than 10 per cent of power from renewable sources; albeit over 80 per cent is produced from natural gas which is considered a transition source from coal to renewable energy.

Cooling towers of France’s nuclear power plant in Saint-Laurent-Nouan. Picture: AFP

If clean energy targets are not met, a reintroduction of the very unpopular Gillard-era carbon tax may be necessary for the federal government to force companies to comply.

As an investor, to get a jump start on carbon credits there is a carbon credit ETF on the ASX run by VanEck called the global carbon credits ETF (ASX Code: XCO2).

The rationale to consider this investment is that future tightening of regulation around achieving net-zero carbon emissions may support an increase in carbon credit prices, and as such produce a return for investors who are exposed to fluctuations in the prices of carbon credits.

A more direct pathway to invest in renewable energy is to look at ETFs such as Betashares’ solar ETF (ASX Code: TANN) which provides exposure to some of the worlds largest solar energy companies such as US solar panel manufacturer First Solar through to German solar farm operator Encavis AG.

And if you would like a more diversified approach to renewable energy investments, VanEck offers a global clean energy ETF (ASX Code: CLNE) that invests in 30 clean energy companies exposed to sectors such as geothermal, hydro, solar, biomass and wind energy production.

Finally if you are a fan of hydrogen, there is an ETF from Global X (ASX Code: HGEN) which invests in companies that produce hydrogen energy systems and fuel cells which can be used to power electric vehicles and power individual homes via emissions-free hydrogen generators.

Whether you like it or not, there is an energy transition under way, where we are moving away from fossil fuel power stations to clean energy renewables.

Many are concerned that the rate of change is too quick and we will be left with an energy shortage and rising energy prices due to the higher cost of renewables. But in terms of the overall direction, there is no avoiding this is where we are headed.

Although these are not necessarily “must do” investments for today, these types of investments should be considered as a long-term portfolio thematic.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au