Renewable Energy Stocks – Investing in the transition to clean energy

Renewable energy has been an investment theme for a few decades already. However, it has taken a long time for the industry to really gain momentum. But clean, sustainable energy is now finally gaining political support and momentum around the world.

Renewable Energy Stocks
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In this post we take a look at the industry, the types of alternative energy companies, and some of the important renewable stocks for investors to consider.

World’s transition to green energy

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It is now widely accepted that the world needs to move away from using fossil fuels to generate electricity. The world’s reserves of oil, natural gas, and coal are being depleted at an increasing rate. Perhaps more pressing is the need to reduce carbon emissions to combat global warming.

It has taken a long time for world leaders to develop the political will to invest in clean energy at the scale required to make a meaningful change. In the last 20 years the amount of energy generated from renewable sources has grown by about 129%. Yet, renewable energy’s share of the total energy generated has only increased from 6.6% to 10.7% during the same period. During the same period, the amount of energy generated from oil, gas and coal has increased by close to 45%. It’s likely that the total amount of energy the world produces will continue to increase.

Transitioning away from fossil fuel energy will require immense amounts of investment. One report estimated that moving the world to 100% clean energy by 2050 will cost $73 trillion. Realistically, the cost could be a lot higher or a lot lower, depending on future innovation and energy use. However, to give the number some context, the combined market value of all the green energy stocks is less than $1 trillion today. While governments and corporations are investing billions in renewable energy projects each year, investment in the space is still gaining momentum. However, this doesn’t mean renewable energy stocks are all good investments.

Types of renewable energy

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When you think of renewable energy you probably think of electricity generated from either wind or solar energy. In fact, around 60% of renewable energy around the world is generated from hydroelectric power. A substantial amount of electricity has been generated by hydro-electric projects for over 50 years. But, while hydro power can be quite efficient, it does have negative impacts on ecosystems and on access to water. In addition, the world is running out of locations to build new hydroelectric plants. For these reasons, and because of advances in technology, solar and wind power are quickly catching up with hydroelectric power.

Wind power now accounts for 20% of clean energy production, up from 8% in 2010. Wind power is more efficient than solar energy, but more capital intensive. The wind power industry has received a major boost over the last 15 years. The share of renewable energy generated from solar projects has grown even faster in the last 10 years. In 2010 solar power accounted for 1% of the world’s clean energy, and this number has now grown to over 10%. This has a lot to do with the rapidly decreasing prices of photovoltaic panels.

Other forms of renewable energy now account for around 9% of the total. Most of this power is generated from various forms of bioenergy. There are several ways in which plant materials are used to generate heat or turned into biofuel and biogas. A small percentage of clean anergy is generated from geo-thermal sources and from marine wave and tidal energy. For public market investors, opportunities are generally limited to companies involved with hydro, solar and wind power. Companies generating other forms of green energy have yet to reach the critical mass needed for public markets.

Types of renewable energy companies

Renewable Energy Companies
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The types of companies that operate in each renewable energy industry tend to offer different types of investment opportunities.

  • Renewable energy utilities generate clean energy. Exchanges actually classify these companies as utilities and not in the energy sector. Utilities play an essential role in economies and need to be operated sustanably. To ensure they are stable and can easily raise capital, utilities often benefit from regulated pricing. This means they are very profitable even if they don’t grow rapidly. The stocks of these companies usually pay attractive dividends. As such they are typically regarded as defensive, income generating investments. In the US, these investments are often structured as master limited partnerships or ‘yieldcos’ which are more tax efficient.
  • Wind energy companies manufacture, install, and service wind turbines. Installing wind turbines is a major logistical challenge as the blades on wind turbines are 25 to 100 meters long. In addition, turbines are usually installed offshore or in remote areas. For this reason, location is an important factor when suppliers for projects are chosen. Wind energy companies have the potential for long term sustainable growth. They can also develop economic moats due to the high barriers to entry. At the same time there are risks due to the capital-intensive nature of the industry.
  • Solar energy companies manufacture and install solar panels. Some focus on manufacturing panels, while others install utility scale solar projects or residential systems. The solar industry is extremely competitive and cyclical. Solar panel manufacturers have to compete on price, while they have little control over input costs. However, solar stocks are often the first clean energy stocks investors turn to when sentiment rises. As a result, solar energy stocks are quite speculative and often trade at stretched valuations.
  • Fuel cell companies manufacture fuel cells to store energy and generate auxiliary energy when needed. The biggest challenge for both solar and wind energy is storage. Energy from fossil fuels like coal and natural gas are generated when needed. Solar and wind power is generated intermittently when wind and sunlight are available. These sources of energy need to be supplemented with energy stored in batteries or energy generated on demand. There are several competing methods of storing electricity, and of generating clean energy on demand. There is tremendous potential for new technologies that can improve efficiencies. For this reason, there is a lot of ongoing research and innovation happening in this space. As a result, the renewable energy stocks in this space are also quite speculative.
  • Electric vehicle companies are also closely related to the transition to green energy. The transport sector is responsible for carbon emissions equivalent to 60% of the electricity generation industry. So, transitioning transport away from fossil fuels is just as important as generating clean electricity. EV makers are also at the forefront fuel cell and battery innovation.
  • Materials producers supply the various renewable industries with raw and manufactured materials. This is a very cyclical part of the sector, but also particularly important. Some of the materials required to generate and store energy are rare and prone to significant price spikes.

Prominent renewable energy stocks to know about

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This post is not long enough to cover all the investable renewable energy stocks within each industry – so we have included the prominent and interesting ones to know about.

Clean energy utilities

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As mentioned, renewable energy utilities generate income and moderate. These are three of the largest utilities that produce clean energy.

  • NextEra Energy, Inc (NYSE: NEE) – NextEra is the largest electric utility in North America. The company generates power from coal, natural gas, nuclear, oil, solar and wind. It may be debatable whether NextEra can be counted amongst green energy stocks or not. On the one hand only 20-30% of the company’s energy generation comes from renewable sources. On the other, it is the largest utility in the US and generates more renewable energy than any other company. NextEra is also one of the biggest investors in the renewable energy segment. The company plans to be generating all of its power from renewable sources by 2035. NextEra has a market value of $141 billion and annual revenue of $17 billion. The operating margin is 22% and its dividend yield is 2%. The stock was recently added to the list of dividend aristocrats. These are companies in the S&P500 index that have increased their dividends for 25 consecutive years. You can also invest in NextEra Energy Partners (NYSE: NEP), a subsidiary of NextEra that is focused on renewable energy. NEP is valued at $4.9 billion and has a generous dividend yield of 3.8%. This yield is supported by an operating margin of 22%.
  • Orsted A/S (OMX: ORSTED, US OTC: DOGEF) – Orsted A/S is a multinational power company and the world’s largest developer of offshore wind farms. The company is based in Denmark and also operates in, Germany, Sweden, Netherlands, Norway, and the UK. Orsted currently produces 29% of the world’s offshore wind energy. The company is now embarking on plans to expand into Asia. Besides wind power, Orsted is also involved in bioenergy and thermal power and heating. Orsted and Siemens are joint owners of A2SEA, a company that specializes in installing and servicing offshore wind turbine farms. The company has a market value of $62 billion and annual revenue of $8 billion. Orsted is listed on the Copenhagen Nasdaq exchange, but also trades on the US OTC markets. It is 50% owned by the Danish Government.
  • Brookfield Renewable Partners LP (NYSE: BEP, Toronto: BEP-UN) – Brookfield is a Canadian limited partnership that owns a portfolio of renewable energy assets. The partnership is managed by Brookfield Asset Management which also manages portfolios of infrastructure assets and real estate. BEP owns and operates clean energy plants in North America, Europe, and Latin America. Currently around 50% of revenues come from hydro assets, but the company is adding wind and solar assets at a faster rate. With a market value of $11 billion and revenue of $3 billion, this is the largest pure-play renewable energy utility based in North America. BEP has very predictable cashflows due to the long fixed rate purchase agreements it commits to. Brookfield offers an attractive 3% dividend yield as well as the opportunity for price appreciation. Over the last 20 years the company has managed to increase its divided consistently at around 6% each year. Investors can also invest in the same energy portfolio via shares of Brookfield Renewable Corporation (NYSE: BEPC, Toronto: BEPC-UN).

Wind energy engineering companies

Wind Energy Engineering
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The following renewable energy stocks belong to four of the most established wind turbine manufacturers in the world.

  • Vestas Wind Systems A/S (OMX: VWS, US OTC: VWDRY) – Vestas is based in Denmark and manufactures and installs wind turbines. Vestas is a highly regarded company and currently has the highest market share at about 20%. Vestas also earns recurring revenue servicing existing turbines.
  • Siemens Gamesa Renewable Energy SA (BME: SGRE, US OTC: GCTAY) – Siemens Gamesa is a Spanish company that manufactures wind turbines and other equipment used to generate electricity from the wind. The company operates around the world and currently installs around 12% of the new turbines each year.
  • General Electric Co (NYSE: GE) – GE Renewable Energy, a manufacturer of wind turbines, is a subsidiary of General Electric. The business unit only contributes around 18% of GE’s total revenue and is barley profitable. However, GE has significant market share of around 10% of the global wind turbine market. The unit is also considered an important growth driver for GE as other business units are growing very slowly. GE has been in a state of decline over the last decade and renewable energy is an important part of its future.
  • TPI Composites Inc (Nasdaq: TPIC) – TPI Composites manufactures wind blades for wind turbines. The company supplies all the major manufacturers and has a relatively small market value of $1.7 billion. The company has very tight margins at present but is worth keeping an eye on as it is well positioned in the industry.

Solar stocks

Solar Panels
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As mentioned, the solar energy industry is very competitive and there are a lot of competing companies. We mention four stocks here, though there are quite a few other viable companies to consider.

  • First Solar Inc. (Nasdaq: FSLR) – First Solar manufactures thin-film solar panels. These panels are more efficient during periods of low light and hot or humid weather. They are also favored for utility scale installations. Like most renewable energy stocks, First Solar’s stock price rallied hard in 2020 and has since fallen around 30%. This leaves the company with a market value of $8 billion on 12-month revenue of about $3 billion.
  • Canadian Solar Inc (Nasdaq: CSIQ) – Canadian Solar is a leading manufacturer of solar panels with global market share of around 10%. The company also installs and operates large solar projects around the world. It has installed projects as large as 258MW in North America. Canadian Solar has a strong project pipeline and is thus trading on a fairly steep price multiple of 40.
  • SolarEdge Technologies Inc (Nasdaq: SEDG) – Solar Edge, which is based in Israel makes inverters and power optimizers for solar panels. SolarEdge’s inverters are very efficient, and it is often the preferred supplier for large solar projects.
  • Enphase Energy Inc (Nasdaq: ENPH) – Enphase Energy manufactures equipment and software to manage energy for homes. Its solutions allow consumers to generate solar energy and store and manage energy. In particular, the company sells microinverters that draw energy from individual panels and are more efficient and flexible for home use.

Fuel cell technology stocks

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Fuel cell technology is an area where there is a lot of crossover between green energy stocks and EV stocks. We covered Tesla, BYD Company, and NIO previously in the post on EV stocks. These companies are all at the forefront of research into energy storage using lithium-ion batteries. While these companies all offer some exposure to energy storage, their stocks prices are more dependent on vehicles sales. FuelCell Energy and Bloom Energy are two other green energy stocks involved in fuel cell technology.

  • FuelCell Energy Inc (Nasdaq: FCEL) – FuelCell Energy manufactures fuel cell power plants that generate energy from natural gas and bigas. While its plants are not free of carbon emissions, they are a lot cleaner than those that use fossil fuel.
  • Bloom Energy Corporation (NYSE: BE) – Bloom Energy Corporation sells fuel cells that use a different mechanism to generate power. Its cells generate energy using solid oxide fuel cell technology which is more efficient for larger installations. Bloom’s fuel cells can supply back up power to large buildings and utilities rather than to homes.

Materials producers

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The following three companies are leading producers of the materials used by renewable energy companies.

  • Daqo New Energy Corp (NYSE: DQ) – Daqo is a Chinese company that produces the polysilicon used to manufacture solar panels. China is the leading manufacturer of solar panels, so Daqo is ideally located. The price of polysilicon rises and falls with demand, so Daqo’s share price behaves like cyclical stocks.
  • Albemarle Corporation (NYSE: ALB) – Albemarle is a leading producer of Lithium. The company operates in the US, Chile and Australia. Lithium is an essential material for modern batteries, and there are very few deposits around the world.
  • Glencore plc (LSE: GLEN, US OTC: GLNCY) – Cobalt is another metal that is essential for batteries. Cobalt is also used in several other modern industries, so demand is rising. Glencore is the world’s largest producer of cobalt. It mines for cobalt and other metals in Africa, Australia, Canada and Norway.

Exchange traded funds

ETF Investing
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For a lot of investors, ETF investing is sensible way to invest in renewable energy stocks. There are quite a ETFs that invest in green energy stocks and the way they define their universe varies a lot. With a portfolio of ETFs, you can manage risk and still ensure you have exposure to certain parts of the industry. Another advantage of these ETFs is that you will have exposure to some of the more obscure emerging markets renewable energy stocks. If you invest in ESG investing ETFs you will also have exposure to renewable energy stocks, alongside other shares.

  • iShares Global Clean Energy ETF (ICLN): This is the largest renewable energy stocks ETF in the world with $5.4 billion in AUM. A large proportion of the fund is invested in the largest green energy stocks from around the world. This means the fund owns a lot of utilities and is more defensive than others.
  • Invesco Solar Energy ETF (TAN): Invesco’s solar ETF has become a go to fund for speculating on renewable energy. The fund holds all the key solar stocks from around the world, which means it has the potential for strong trends. However, performance can also be quite volatile.
  • Global X Global Renewable Energy Producers ETF (RNRG): This global fund is a good alternative if you want exposure to green energy stocks around the world. The fund holds 44 stocks from 20 countries. There’s also a good balance between utilities and other types of stocks.
  • First Trust Global Wind Energy ETF (FAN): First Trust’s wind energy fund is the largest fund with a focus on companies in the wind energy industry. The fund holds a large number of utilities as well as all the major wind turbine manufacturers.
  • Global X Lithium & Battery Tech ETF (LIT): This fund invests in companies involved in energy storage. This includes rare earth companies, chip makers and companies that sell batteries.
  • ALPS Clean Energy ETF (ACES): The ALPs fund has a very broad definition of green energy stocks. This means it includes EV stocks and stocks of companies that produce energy saving lightbulbs, amongst others. This fund will give you exposure to a wide range of industries within the clean energy space.

Investing in green energy stocks

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It is almost certain that vast amounts of capital will flow into the renewable energy sector over the next few decades. However, this doesn’t mean the prices of green energy stocks will rise consistently. It also doesn’t mean that green energy stocks all make good investments. When an industry is associated with a good narrative, there’s an inclination toward speculation. In 2020, as it became clear that Joe Biden had a good chance of becoming US President, some renewable energy stocks rallied as much as 300%. The reality is that when the momentum slows, valuations do matter.

The stocks in very completive industries, like the solar industry, should probably be treated as momentum stocks – unless they are really trading at bargain valuations. If you are looking for sustainable growth stocks, you will need to find companies with a competitive advantage that can’t be replicated. This can often take the form of barriers to entry related to regulations and licenses.

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The companies involved in wind energy and established battery makers fit into this category. The stocks involved in fuel cell technology and rare earth minerals are also quite speculative, but some of them should ultimately produce very strong returns. The most reliable renewable energy stocks are the utilities. They are unlikely to evolve into multibagger stocks but can still generate very respectable returns over time – along with an income stream.

You can reduce risk by paying attention to asset allocation. If you build a core portfolio of utilities and other established green energy stocks, your volatility should be manageable. You can then consider stock picking to find a few stocks with more risk that have the potential for multibagger returns.

Conclusion: Investing in renewable energy stocks

It’s almost certain that the wave of capital flowing into renewable energy projects will continue to grow in the coming years. As this develops into one of the decade’s big megatrends there will be plenty of opportunities for investors. However, along the way it’s likely that a series of speculative bubbles will form. So, investors will need do need to pay attention to fundamentals and the types of companies they are investing in.

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