Investing in Renewable Energy Stocks and Companies

What Is Renewable Energy and Why Is It Important?

If you’ve been following the news to even a minimal extent over the past years, you’ll be aware of the Intergovernmental Panel on Climate Change and its famous report on the effects of global warming of 1.5 degrees Celsius. The report paints a scary picture about humanity’s future unless the global population finds a way to curb emissions and make its use of resources more sustainable.

The subject has quickly become the basis of political debate, and we wouldn’t touch it with a ten-foot pole. The truth is, the debate is irrelevant, something best relayed by this cartoon.

Credit: Joel Pett 

Instead of waving signs and engaging in politics, let’s just start cleaning up some of the mess.

While the debate continues, the financials around energy resources have changed dramatically. One very powerful statement tells all. It is now cheaper to produce electricity using solar and wind rather than coal. Now there’s a solid investment thesis.

Investment bank Lazard issues a so-called Levelized Cost of Energy Comparison report every year where it looks at the cost of all the major energy generation technologies on an unsubsidized basis. Here are the latest November 2019 results:

Lazard Investment Bankhas shown solar and wind are the cheapest resources now, even compared to the operational costs of existing conventional power plants.
Credit: Lazard

Renewable energy (also referred to as alternative energy or clean energy) is simply energy that comes from resources which are naturally replenished on a human timescale. It’s not all about solar and wind. Rain, tides, waves, geothermal heat, and biofuels, are all considered sustainable energy sources. While there is some debate around nuclear energy being renewable, we consider fission and fusion to be a clean alternative to conventional sources like coal or natural gas.

The International Energy Agency expects global energy demand to drop by 6% in 2020, thanks to the Covid-19 crisis and its effect on the global economy. This is the largest drop in history in absolute terms. Renewables are the only type of resource expected to keep growing, thanks to low operating costs, preferential access to many power systems, and new projects coming online over the course of 2020.

Trends are clearly pointing in the right direction for renewables to be an interesting investment opportunity, but things haven’t always panned out for investors.

How Can You Invest In Clean Energy?

Investing in Solar Energy

The Development of the Solar Industry

The PhotoVoltaic (PV) effect was discovered by a teenager screwing around in his dad’s lab in 1839 but was only better understood in Einstein’s time. The first solar cell was made of silicon and patented by an American engineer in 1941, but solar cell efficiency only passed 2% by the mid-1950s. Today, large PV manufacturers can hit somewhere between 20% and 23% efficiency with the world record being held by an Oxford, UK startup at 28%. Another startup called Semprius developed the world’s smallest cell, about the size of a pencil point, to create photovoltaic modules with unmatched cost and performance advantages. The Semprius team claims to have achieved 35.5% performance on its solar panel’s active area.

Improved performance, manufacturing efficiency, longer cell lifespans, and innovative designs by startups have led to falling costs for solar. New installations (both residential and utility) reached a tipping point in 2016 when the US almost doubled its solar capacity. Growth hasn’t stopped since then, and solar power has posted an average annual growth rate of 49% for the past decade. Exciting? You betcha.

Credit: Solar Energy Industries Association

As the industry matures, further efficiency gains are being achieved by optimizing power flow from modules and using technologies like additive manufacturing to produce silicon wafers which push prices down even further. Additional financing has been coming online from channels like crowdfunding and solar-focused investment funds that provide capital for new projects. Subscription-based community solar projects now power urban homes as ESG investors funnel money into sustainable energy sources. In the utility-scale solar world, well-funded startups have carved out niches for themselves by creating solar-thermal power plants, optimizing manufacturing, developing even more efficient mechanics, or building massive floating solar farms.

A typical floating solar system.
Typical floating solar farm – Credit: World Bank

Solar Energy Stocks

With this kind of growth, solar investments should be going through the roof. Unfortunately, this is not what we have observed. Our go-to solar ETF – the Invesco Solar ETF (TAN) – has posted disappointing results in the midst of the greatest solar expansion ever. When we took a close look at TAN back in 2017, we found that falling prices were eating into the margins of manufacturers. Essentially, solar technologies developed so quickly and successfully that industry participants couldn’t make money off them. As of June 2020, TAN seems to be moving in the right direction with a rolling 1-year performance of +25% (compared to a Nasdaq return of +15%) but its five-year performance remains negative.

The fact that the broad solar market is stagnating doesn’t necessarily mean single solar stocks can’t do well. Here’s a look at publicly-traded solar companies we’ve covered over the years.

  • Sunnova Energy – The first solar IPO in many years that debuted in July 2019. This residential solar provider is in their growth phase and isn’t profitable yet. Sunnova faces a handful of business risks including maintenance costs, customer loans, the broader residential solar market, and competition from electric utility providers. They’ll need to effectively manage these risks to move out of the red.
  • Savo Solar – This Finnish company builds and sells solar thermal systems for the heating of buildings, industrial processes, and domestic hot water. Its primary focus is on large scale industrial applications and they’ve sold products to over 17 countries on 4 continents. However, Savo’s stock price has been going downhill consistently over the past five years.
  • PowerFilm – Manufacturer of flexible thin-film solar panels which trades on AIM in the UK. The company is not only posting losses but also decreasing revenues. Consequently, its share price has been declining consistently much like Savo Solar’s.
  • Ascent Solar – Ascent develops and manufactures flexible thin-film portable solar modules for consumers with a 19.5% efficiency in real-world conditions. Must not have been going that well, as they were delisted from Nasdaq in February 2016.
  • Natcore Technology – Manufacturer of solar cells made with black silicon that have an energy efficiency of 18.6%. We couldn’t find information about Natcore’s delisting but the original listing on the Toronto Stock Exchange was last traded in November 2018. The latest financial report available on company’s website is from 2017.
  • Dyesol – the company started out developing dye-sensitized solar cell technology and later moved on to develop perovskite solar cells. In December 2018 Dyesol entered administration.

One company that’s notably absent from the above list is SolarCity, a company that was acquired by Tesla. In a past piece, we looked into how much solar exposure that acquisition gave Tesla. Turns out not much, and the division has been generating losses for shareholders so far.

For the time being, there just doesn’t seem to be any attractive ways to invest in solar. Fortunately, there are other renewable energies that have proved more lucrative.

Investing in Wind Energy

While solar was getting most of the publicity, wind quietly became the leading clean energy source globally. Onshore wind is currently the cheapest energy source thanks to the emergence of larger and more efficient wind turbines. Wind electricity generation capacity is growing at a stable lower double-digit rate, and turbine manufacturers keep receiving so many orders that their main issue seems to be backlogged orders. That’s why investing in the world’s largest wind turbine manufacturer is a great pure-play opportunity.

Offshore wind is still significantly more expensive than onshore because of building and maintenance costs, but power generation is more stable with offshore farms, thanks to stronger, more consistent, and more abundant wind. This is why offshore installations grew by almost 30% annually over the past few years (albeit from a low base) and the operator of the largest offshore wind farm in the world is in a good position to capitalize on this growth.

Offshore wind is expected to grow with a CAGR of 16.4% until 2030.
Offshore market outlook – Credit: Ørsted

While there aren’t too many pure-play wind stocks, an additional pick-and-shovel investment opportunity for wind is to invest in the company that manufactures wind blades. Unlike solar, investing in wind power looks stable and promising, but not all wind players make it. The 2015 IPO of Northern Power Systems is a great example of what happens if business risks are not handled properly. The company has sold its assets and ceased operations since then.

One stock we’ve been invested in for a long time is NextEra Energy (NEE), the biggest electric utility in the world with over 42% of the electricity they generate coming from renewable sources. This makes NextEra Energy the world’s largest generator of solar and wind power. They’re also a dividend growth champion having increased their dividend every year now for the past.

If you live in the U.K., check out Ecotricity. They’re an electric utility that sells bonds to customers so that they can use the proceeds to generate even more renewable energy. It’s truly a win-win.

Investing in Biofuels

Biofuels are fuels produced from organic material including plant materials and animal waste. The global biofuels market was $168.18 billion in 2016 and projected to reach $246 billion by 2024. Biofuel startups are developing different fuels from algae, plant waste, and solid waste. One startup called Cool Planet is building biorefineries that can convert non-food biomass (wood chips, corn cobs, and stalks, palm plantation waste, etc.) into biofuels and soil enhancing biochar. Other processes can turn industrial waste into bioethanol.

The concept sounds good in theory, but biofuel stocks can’t seem to find any footing. Promising startup Harvest Power still hasn’t had an IPO. Algae.Tec stopped producing biofuels altogether. Global Bioenergies, a company that converts renewable resources into hydrocarbons through fermentation, has lost 87% of its value since its IPO. Joule, a company that created a genetically altered organism that uses the sun’s energy to convert carbon dioxide and water directly into ethanol or hydrocarbon fuels, went bankrupt in 2017 after they couldn’t compete with dropping oil prices.

While there is a case to be made for biofuels, the few investment opportunities available to retail investors just aren’t very attractive. This might change as synthetic biology promises some real breakthroughs.

Investing in Nuclear Energy

Nuclear power plants generate electricity using heat from the splitting of uranium atoms. This process is called fission, and it creates energy which is used to heat water to about 270 degrees Celsius. The heated water is then used to spin turbines that are connected to generators, producing electricity.

Nuclear energy is nothing new – the first nuclear power plant started its operation in 1954 in Russia – but it’s in a stage of revival. One of the catalysts to revive nuclear energy is that it can reduce carbon emissions and ratchet down the greenhouse effect from heat-trapping gases. Advanced nuclear technology is something of a catch-all term for nuclear energy solutions outside of the typical nuclear plants that exist today. The next generation of nuclear reactors promises to be safer, cheaper, and to produce less nuclear waste. One such technology is the molten salt reactor that a handful of startups are slowly progressing towards.

Other startups are developing an alternative nuclear technology called fusion. Fusion generates electricity by using heat from the process of atomic nuclei merging to form one heavier nucleus. This is what happens in the core of the sun and other stars. The catch? Current fusion reactors require more electricity to operate than what they produce. Fusion is currently a moonshot technology that always seems to be a decade away from commercialization. There are promising developments in the field like cold fusion, but so far the technology remains theoretical.

Tokamak Energy has managed to generate temperatures that are hotter than the center of the sun - 27 million degrees Fahrenheit or about 15 million degrees Celsius. When the company can reach positive net output remains to be seen.
Tokamak Energy has managed to generate temperatures that are hotter than the center of the sun using the ST40 tokamak reactor – Credit: Tokamak Energy

While startups are developing the next generation of nuclear technologies, investors can look for opportunities with existing providers. A pick-and-shovel play on nuclear energy is the only manufacturer of large reactor components in North America. Some Chinese nuclear energy utilities are also available on the international stock market. The growth story here is that China is projected to become one of the largest producers of nuclear-based electricity by 2030.

Investing in Other Clean Energy Resources

There are a few lesser-known clean energy resources investors can use to diversify a renewable energy portfolio with. Geothermal power plants – harnessing the heat in Earth’s core – are not affected by weather and provide a more stable output than solar or wind. Their downside is that they require a much larger upfront investment, and have longer payback periods.

Fuel cells use hydrogen and oxygen to generate cheap and clean electricity with the only byproduct being pure water. The technology is mainly used to propel vehicles, but one Californian company listed on the NYSE builds utility-scale “energy servers” that can power 160 average US homes using fuel cell technology. Check out our comprehensive Guide to Investing in Fuel Cell Stocks which looks at the many names out there working in this space, most of which seem to be spinning wheels when it comes to wide-scale adoption.

Thermoelectric generators use computer chips to transform extreme temperatures to electricity or vice versa. As you can imagine, the cost of producing these chips would need to be quite low before you could replace your air conditioning unit with a compact little box of chips. There are a number of startups tackling the problem using nanotechnology, and some well-established players using the technology for smaller use cases like heating and cooling car seats.

Of course, some ideas just never get traction because they weren’t good ideas to begin with. A startup called Ice Energy planned to use large blocks of ice to cool commercial buildings instead of air conditioning. When an idea doesn’t even sound good on paper, it should be no surprise when it crashes and burns.

Investing in Energy Storage

Most renewable energy requires certain conditions to generate electricity. When the sun shines, you’re making power. When the sun sets, the power goes away. The renewable energy industry requires energy storage solutions that can help us produce hay when the sun isn’t shining. That’s the general idea behind “grid energy storage”. The traditional method here is pumped-storage hydroelectricity that requires mountains and reservoirs. Startups like SustainX and LightSail Energy are working on compressed air storage systems that have no such constraints. Another alternative is to use liquid air which stores energy at about the density of some lithium-ion batteries. 

Investing in Renewable Energy ETFs

We love Exchange Traded Funds (ETFs) because they offer rules-based diversified exposure to an investment theme. Aside from the fact that over 80% of active fund managers can’t consistently beat their benchmarks, ETFs offer diversified exposure and liquidity with lower fees than mutual funds. Aside from the aforementioned solar ETF that hasn’t performed very well over the long term, there are some other clean energy ETFs for investors.

iShares, the world’s leading ETF provider, offers an ETF that invests in 30 clean energy stocks including clean energy producers and technology & equipment providers. Looking at the ETF’s composition, we found many familiar names and concluded that it provides real pure-play exposure to the clean energy theme. The fund’s poor performance since inception can be attributed to its launch date, right before the 2008 financial crisis.

Another ETF for the clean energy theme would be the Global X YieldCo ETF, a fund that invests in yield companies or “YieldCos” that bundle renewable and/or conventional long-term electricity generating assets in order to generate predictable cash flows from the sale of electricity through long term contracts. Exposure to hydro, solar, wind, and natural gas is bundled together in this instrument.

Beware of Penny Stocks

We will never get tired of reminding our lovely readers about the dangers of penny stocks. Also called over-the-counter (OTC) stocks, 99% of these “investment opportunities” are just steaming piles of garbage. Here are some names we covered over the years for renewable energy:

Even companies that trade on major exchanges can and will fail. Look no further than BioAmber with their “proprietary technology platform” that was supposed to reduce our dependence on oil by allowing us to create chemicals from feedstocks. After being listed on the NYSE for five years, they went bankrupt and lost their investors a lot of money. It’s just another reason why we prefer good old boring dividend growth investing.

To sum up, renewable energy sounds like a great investment thesis on paper, but it hasn’t panned out that well for retail investors (aside from a few success stories like NextEra Energy). There is still plenty of opportunities to be had thanks to advances being made in the areas of synthetic biology, artificial intelligence, and nanomaterials.

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