Going green: What’s Good for the Planet may also be Good for your Portfolio!
March 24 2021 - Research@stockal
Renewable energy stocks have been buzzing lately as investors increased their focus on sustainability and climate change. The sector’s growth rate, too, has accelerated after de-carbonization initiatives expanded beyond the energy sector, with companies across the board doubling down on publishing environmental, social and governance (ESG) reports focused on cutting emissions.
Shares of such companies were in the limelight through 2020 when U.S. equities recorded stellar returns. Their movements are likely to be tracked further as U.S. President Joe Biden focuses more on bringing the world’s largest economy on a path to nationwide energy transition.
In fact, the U.S. Energy Information Administration (EIA) forecasts renewable energy’s share in U.S. electricity generation to grow from 17% in 2019 to 22% in 2021. Energy-related carbon dioxide (CO2) emissions are likely to decrease by 2% in 2020 and by 1.5% in 2021.
A summary of the contents in this report is:
- How the renewable energy sector is grabbing a bigger piece of a growing pie
- Falling costs and technology improvements are making a strong investment case
- Interesting investment opportunities in this space
Exhibit 1: US Renewable energy supply (2018- 2022 estimates)
Data as on January 2021 |Source: U.S. Energy Information Administration, Short-Term Energy Outlook
Renewable energy is grabbing a bigger piece of a growing pie
According to the EIA, renewables reached 30% of global electricity generation capacity in 2020 and is likely to overtake coal to be the largest source of power generation by 2025. This places clean energy to make up for one-third of total power generation in the world.. Wind and solar energy sources are growing rapidly, taking market share from coal and nuclear power plants and set to supply 70% of new power plant capacity built in the U.S. this year, federal government estimates showed.
Exhibit 2: U.S. Renewable Energy Production
Data as on January 2021|Source: YCharts
All new U.S. power plants built in 2021 to be carbon-free
Federal government data shows that cost-efficient sources like wind and solar power are likely to have a larger share among new power plants. Natural gas, the dominant fuel source for U.S. electricity, will make up for just 16%, while solar and wind are seen at 39% and 31%, respectively. (Exhibit 3). Battery storage, meanwhile, is likely to grow to 11% of the new capacity. This marks a remarkable shift as the renewable energy industry scales up and reflects continued cost declines with mature supply chains.
Exhibit 3: Estimated U.S. renewable energy electricity generation for 2021
Data as on October 2020 | Source: U.S. Energy Information Administration
Investing in the clean energy sector
With renewable energy companies seeking to reduce their carbon footprints, here’s a look at factors such as energy costs and tech improvements that form a part of key reasons to invest in the segment.
New installations are now cost-competitive
It must be noted that new installations are now cost-competitive and even cheaper than fossil fuels, in some cases. As per the U.S. EIA estimates, cost for new power generation projects entering into service in 2026, especially for onshore wind and solar PV (photovoltaic), is cheaper than the most efficient source of fossil-fuel-based power generation, a natural-gas fired combined-cycle plant.
Exhibit 4: Costs involved for new installation of renewable energy sources
|Plant Type||2026 Estimate (USD)/MWh||2019 Estimate (USD)/MWh||Change|
Data as of February 2021|Source: EIA Note* NB= Not built
Improved technology and falling costs to aid growth
Going forward, energy storage is set to drive the renewable energy industry growth for over a decade. Battery storage allows power plant owners to better regulate energy supply to the grid and increase the value of energy coming from renewable power plants.
Companies like Sunrun (RUN), SunPower (SPWR) have installation, design and manufacturing capabilities, while Enphase Energy (ENPH) and SolarEdge Technologies (SEDG) are leading equipment suppliers. These companies are not only providing backup power, but are also creating virtual power plants that can aggregate thousands of energy storage systems together and bid energy into the grid
Solar energy sector has never looked brighter
The solar energy market is accelerating and with the stimulus package extending a 26% investment tax credit for two years until 2022, solar energy companies are poised for long-term growth. According to the Solar Energy Industries Association (SEIA), solar accounted for 43% of all new electric generating capacity in Q3 2020 — a 9% increase from the Q2 installations in the U.S. The country installed 3.8 gigawatts (GW) of solar PV capacity in Q3 2020 to reach 88.9 GW of total installed capacity. EIA forecasts 15 gigawatts (GW) of solar PV will be added in the electric power sector in 2021, with an additional 12 GW forecasted for 2022. Large-scale solar capacity growth is likely to exceed wind growth in 2021. SEIA expects a 43% year-on-year growth for 2020, with a record 19 GW of new capacity installations this year and a total of 107 GW of installations over the next five years in the U.S. solar market.
Exhibit 5: U.S. PV installation forecast, 2010-2025E
Data as of December 2020 | Source: Solar Energy Industries Association (SEIA) * 1 Gigawatt=1000 Megawatts
Powering your portfolio
Investing in clean energy stocks and ETFs has given substantial returns to investors in 2020. Solar and wind power companies have soared in value,with the iShares Global Clean Energy ETF gaining more than 135%, while the SPDR S&P 500 ETF saw a return of 18.4% in 2020.
Here’s a look at some of the well-known firms in the sector:
First Solar Inc. (FSLR): The company is a global leader in developing solar energy solutions. Its advanced thin-film solar modules are large and help reduce the cost per watt, which is ideal for utility-scale solar energy projects. The company’s strong balance sheet and cash situation gives it the financial flexibility to build thin-film solar modules for utility-scale customers.
NextEra Energy: The company’s energy resource division is one of the largest solar and wind power companies, with 24 gigawatts of renewable energy capacity (total of 16 gigawatts of wind, 3 gigawatts of solar and 3 gigawatts of nuclear energy). It has also signed contracts to build another 12 gigawatts of solar and wind power and is moving aggressively into the energy storage space. The firm claims to have its renewables backlog to be among the largest in wind and solar portfolios of renewable companies in the world. This is likely to drive the earnings growth between 6%-8% through 2023. Investors can look forward to a dividend growth as high as 10% per year through 2022.
Brookfield Renewable Partners (BEP): This company is a global leader in hydroelectric power plants along with its rapidly expanding wind and solar energy platforms. The company sees greater opportunities in solar power and bets on it to occupy a major production capacity in the next decade. Brookfield targets solar-powered growth to expand the company’s cash flow per share by 11%-16% annually through 2025 which is likely to support a 5%-9% yearly increase in its high-yielding dividends.
SolarEdge Technologies (SEDG): The company’s focus on manufacturing low-cost power optimizers has helped it to increase market share. It has also invested to acquire and develop new products in the energy storage and energy management spaces, including smart modules which help grow its average revenue per installation. Added to its leading market position is the company’s strong, cash-rich balance sheet, which can help in expanding manufacturing capacity and technological lead over its competitors.
Exhibit 6: Clean energy ETFs one-year returns
Data as of Feb 2021| Source: YCharts
Greener pastures ahead?
Including renewable energy in your portfolio goes beyond personal or ethical beliefs about the energy source. Investing in alternative energy can help diversify your holdings while oil and other traditional energy resources experience volatility.
Investors could look at ETFs (some of them highlighted in Exhibit 6) or funds that track ESG companies (like our ESG Leaders portfolio) as an easier way to invest in a sustainable future.