There are many good reasons to consider renewable energy investment. In parallel, there is a number of bad reasons to avoid renewable energy investment.
Let’s start with them.
One is that renewable energy investment is a niche area for which specialist – almost scientific – knowledge is required. This is no more true than the notion that you need a geophysics degree to trade traditional energy stocks such as BP or Royal Dutch Shell.
“Unthinkable a few years ago”
Then there is the claim that renewable energy “doesn’t work” when the sun fails to shine or the wind to blow, and that it is hopelessly low-tech and labour intensive. In fact, the technology is developing swiftly, making renewable energy cost-competitive and reliable.
Finally, there is the claim that renewables have been oversold since at least the Seventies, when they were described as “alternative energy”, and that investors should put their money in an industry with a rather more reliable track record.
In reality, the reverse may be true, with traders and investors only now beginning to grasp the full potential of renewable energy investments.
And the good reasons to invest in renewable energy?
1. First is the growth potential. This is a sector that has come of age and is going in one direction only – bigger.
2. Second, there is vanishingly little about renewable energy that is “niche” or “alternative”. In November last year, The Guardian reported that: “The capacity of renewable energy has overtaken that of fossil fuels for the first time, in a milestone that would have been unthinkable a few years ago.”
The capacity of wind, solar, biomass – plant or animal material used for energy generation – and hydro-electric power totalled 41.9 gigawatts, the paper said, exceeding the 41.2-gigawatt capacity of coal, gas and oil-fired plants. The British Government has pledged to make the UK net carbon neutral by 2050.
3. Third, there is a wall of money heading for this sector as more and more investors demand their funds are invested according to ethical standards such as “environmental, social and governance” (ESG) criteria. High quality companies in this field will find their stocks much in demand.
Finally, there is, as we shall see, a broad “opportunity set” in terms of renewable energy companies to invest in, not least in terms of geography.
In a moment, we shall look at some of these companies as we consider how to invest in renewable energy. But first, what principles should guide us in selecting our investments?
The first, which is specific to renewable energy businesses, is to avoid any company that is overly dependent on either state subsidies or tax breaks – or both. Governments can withdraw these in the blink of an eye, leaving investors stranded. This is not a theoretical worry – the UK authorities, for example, have been criticised for a stop-start approach to support for renewables.
Second, as with any market segment, seek out companies that enjoy significant barriers to competition – “moat stocks”, in the jargon, as they have a defensive barrier rather like the moat around a medieval castle. This “moat” can take the form of economies of scale, of proprietary intellectual property, of any other built-in advantage, but it needs to be there.
Third, look for companies that invest significant amounts in research and development (R&D). The pace of change in this sector is such that successful firms will be those that can ride the waves. Sitting back and watching your wind turbines rotate is not a recipe for long-term growth.
Reinvesting excess cash flow
Finally, bias your selection towards doers rather than talkers. Does the chief executive seem to spend a disproportionate amount of time in front of congressional or parliamentary committees or in the television studio? It may make sense to look elsewhere for your investments.
Renewable energy companies come in all shapes, sizes and locations, but let’s start with one of the biggest: Tesla. Best-known for its electric cars, Tesla, based in Palo Alto, California, has a specialised subsidiary that makes solar panels and provides solar energy services.
SolarCity Corporation, in its own words, “markets, manufactures and installs residential and commercial solar panels in the US…and now offers energy storage services through Tesla”.
It adds: “Solar panels produce renewable clean energy while securing low utility rates. Our panels exceed industry standards for durability and lifespan.”
Across the Pacific to Shanghai, home of JinkoSolar, a leader in the world’s solar power industry. In its own words: “The company distributes its solar products and sells its solutions and services to a diversified international utility, commercial and residential customer base in China, the United States, Japan, Germany, the United Kingdom, Chile, South Africa, India, Mexico, Brazil, the United Arab Emirates, Italy, Spain, France, Belgium and other countries and regions.”
Lest you run away with the idea that solar is the only game in town, Greencoat UK Wind, based in London, “invests in operating UK wind farms”, and “is invested solely in operating onshore and offshore…farms that are currently producing income”.
It adds that it aims to preserve the real value of capital by reinvesting excess cash flow in additional wind farms and through the “prudent use of portfolio leverage”.
Norway: a brisker climate
Elsewhere in the world of wind power, Germany’s giant Siemens engineering company has spawned an offshoot, Siemens Gamesa, based in Spain. Created in 2017 by the merger of the wind business of Siemens with Gamesa, the company describes itself as “a leading supplier of wind power solutions to customers all over the globe”.
It adds: “A key player and innovative pioneer in the renewable energy sector, we have installed products and technology in more than 90 countries, with a total capacity base of more than 89 gigawatts and 23,000 employees.”
Also in Spain, Madrid-based ENCE’s power generation encompasses solar and biomass. It says: “For ENCE, sustainability is a strategic priority. We are moving towards a business model that contributes to the ‘circular economy’, promoting the re-use of raw materials, and that bases its activity on the production of renewable and fully recyclable products, as well as in the generation of renewable energy.”
It adds: “We promote the highest respect for the environment by applying the most advanced and responsible management systems.”
Meanwhile, First Solar’s HQ is in Tempe, Arizona – a mountain and desert state that knows all about the power of the sun. It makes solar panels and power plants, using the photovoltaic (PV) method of converting sunlight into electricity. It says of itself that it has “developed, financed, engineered, constructed and currently operates many of the world’s largest grid-connected PV power plants””, adding that “no company invests more in R&D”.
Using the measure of “levelized cost of energy” (LCOE), which seeks to make possible consistent comparisons among different sources, the company says: “First Solar delivers an LCOE that is cost competitive with fossil fuels…[our] technology
Delivers power during peak energy use, smoothing costs for energy consumers against fuel-price volatility”.
From the heat of Arizona to the brisker climate of the Norwegian capital, Oslo, Scatec Solar describes itself as “a leading integrated independent solar-power producer, delivering affordable, rapidly deployable and sustainable clean energy worldwide”.
Scatec “builds, owns and operates solar power plants”, with a total of 1.8 gigawatts in operation and under construction in countries including Jordan, Malaysia, Argentina, Brazil and the Czech Republic.
It adds: “With an established global presence and a significant project pipeline, the company is targeting a capacity of 3.5 gigawatts in operation and under construction by the end of 2021.”
Over in Essen, Germany Innogy is an established European energy company. With its three business areas of renewables, grid & infrastructure and retail, it is well equipped for the work ahead in a modern, decarbonised, decentralised and digital energy world”.
A key operator of European wind farms, Innogy adds that it “plans, erects and operates plants for electricity generation and production from renewable energy sources” and that: “Our goal is to expand renewables in Europe as quickly as possible on our own initiative and with partners. Together we will have the power to make the energy transition a success.”
Finally, across the North Sea to Britain, the home of the The Renewables Infrastructure Group (TRIG), an investment trust specialising in assets generating electricity from renewable sources. In its own words, it “seeks to provide investors with long-term, stable dividends, whilst preserving the capital value of its investment portfolio”.
It adds: “As at March 2019, TRIG was invested in 63 assets in the UK, France, the Republic of Ireland and Sweden comprising wind farms, solar PV projects and battery storage with an aggregate generating capacity of 1,323 megawatts.”
This spread, says TRIG, offers “diversification for investors by jurisdiction, power market, energy source and weather system”.
To sum up, renewable-energy companies make up an endlessly-fascinating asset class with enormous growth potential. There is no better reason to get invested in renewables.