The future is leaning towards renewable energy.
However, investing in the landscape of renewable energy companies historically tends to be very risky, due to the combination of developing technology and changing political headwinds or tailwinds.
Fortunately there are ways to reduce the risk, and even generate a lot of income, if you know where to look.
This article discusses several methods that investors can use to invest in renewable energy, including some higher-risk ways and some lower-risk ways.
The Growth Potential
According to research by McKinsey & Company, 77% of new global electrical generation capacity from now until 2050 will come from wind and solar.
In particular, their research shows:
- Total global energy usage will continue to grow.
- Electricity generation will increase from 18% to 25% of all energy demand, due to the rise of electric vehicles.
- Installed capacity of wind and solar will grow 4-5x faster than other energy sources for electricity generation.
- China and India alone will account for more than two-thirds of new electrical generation capacity.
- Fossil fuels will continue to exist for a long time due to large existing infrastructure, but natural gas will gradually take market share from coal.
Here’s how fast solar growth has already occurred in recent years:
Source: Greentech Media
India in particular has an aggressive plan to reach 100 gigawatts of installed solar capacity by 2022, which is massive:
Source: World Economic Forum
And here’s a projected chart from Energy Innovation about America’s long-term electrical energy mix, showing how fast wind and solar are expected to multiply:
Source: Bloomberg, Energy Innovation
While political leaders can influence the pace of renewable energy growth by giving incentives or mandates to accelerate its use, or try their best to slow its progress, the real long-term determinant for adoption will be cost.
The price of renewable energy, and particularly solar, keeps declining every single year:
Source: National Renewable Energy Laboratory (US Department of Energy)
Furthermore, many densely populated cities have smog problems, and are pushing for more electric vehicles and more electrical generation from renewable sources and natural gas, rather than gasoline-powered cars and coal for electricity generation. Especially in less-developed countries with high population density and fewer restrictions on vehicle emissions.
This is a massive multi-decade global growth story.
But growth doesn’t always mean good investment returns. High valuations, low profit margins, changing technology trends, political changes, and other factors can leave investors without good returns even if they invest in a successful area.
There are several different ways to have exposure, depending on your goals and risk tolerance.
4 Ways to Invest in Renewable Energy
1) Solar/Wind Product Manufacturers
One of the higher-reward, higher-risk ways to invest in renewable energy is to go directly to the source: the companies that are on the leading edge of new solar and wind technologies.
These companies usually are growth-oriented, don’t pay dividends, often have high valuations, and may or may not be profitable at the current time. They have to constantly iterate their products to stay competitive, and companies that fall behind can quickly go bankrupt.
For this reason, it’s not a great area for the casual investor. For someone like me, with a background in both electrical engineering and finance, I do take positions in solar technology companies from time to time and I regularly talk about one in particular within my newsletter. But still, I don’t take large individual positions due to the risk.
First Solar (FSLR) is a large American producer of utility-scale photovoltaics, and is exempt from President Trump’s solar tariffs. They have a strong global position, and utility-scale solar is the cheapest and most efficient type of solar energy production.
SunPower (SPWR) is a medium American producer of residential, commercial, and utility-scale photovoltaics, but they really shine in the residential and commercial space because they have the highest-efficiency panels on the market, which makes them good for smaller installations. They are majority-owned by French oil major Total SA.
Vestas (VWS) is a leading Danish maker of wind turbines, employing over 20,000 people with revenues of nearly 10 billion euros.
Siemens Gamesa (SGRE) is also a leading wind turbine maker. It is the result of a merger between Siemens and Gamesa, and is headquartered in Spain.
General Electric (GE) is one of the largest wind turbine makers, but because the company is so big, wind turbines only make up a small part of their revenue.
You can also invest in companies that make solar inverters and other accessories. For example, SolarEdge (SEDG) makes power optimizers, solar inverters, and monitoring solutions for solar arrays.
2) YieldCos (High Dividends)
A more stable alternative to invest in the renewable energy space is YieldCos.
A YieldCo is a business that develops and owns renewable energy generation, and pays high dividends to their unitholders. In other words, rather than manufacturing solar panels or wind turbines, they buy lots of solar panels and wind turbines and build utility-scale power generation assets.
Pattern Energy (PEGI) primarily invests in wind turbine projects, and in addition to holding assets in the Americas, is currently making a big push into Japan where energy prices are higher and the country has a large renewable energy mandate.
NextEra Energy Partners (NEP) is a leading holder of solar and wind assets in North America, and is part of the NextEra Energy (NEE) umbrella of companies. NextEra is one of the largest and lowest-cost providers of electricity in the United States.
Brookfield Renewable Partners (BEP) primarily holds hydro dams globally (especially in South America), but is diversifying into wind and solar. They are backed by the might of Brookfield Asset Management (BAM).
However, the YieldCo industry was stained by the bankruptcy of Sun Edison in 2016. The company loaded up on debt and went bankrupt, and it had a major negative effect on its two YieldCos: Terraform Power and Terraform Global. Brookfield ended up buying TerraForm Global at a discount.
The key risk for YieldCos is that if management loads up on debt, the whole structure can collapse. In addition, YieldCos give most of their cash flow to their investors as dividends, so to generate new capital for growth they generally have to issue new shares. This means that if their share price declines, it can seriously hurt their capacity to generate new capital, leading to a liquidity trap.
For that reason, the conservative way is to stick to the most cautious investment-grade YieldCos like Brookfield and NextEra. These ones are well-managed, well-capitalized, and are positioned to take advantage of other faltering YieldCos. Paying slightly higher valuations for best-of-breed businesses is smart in this industry.
3) Exchange-Traded Funds (ETFs)
Another way to reduce risk is to buy ETFs that focus on renewable energy for instant diversification.
While you’re still subject to the risks of renewable energy in general, it protects you from the risks of investing too heavily in any individual company.
Here are some of the top ETFs available:
You can pick one that suits your goals.
The Guggenheim Solar ETF gives you broad exposure to the solar industry, including all the names mentioned above. The iShares Global Clean Energy ETF gives you exposure to solar, wind, and other renewables. The Global X YieldCo ETF gives you access to a big collection of all the top YieldCos.
The downside to this approach is that you’ll be investing in both winners and losers. Some of the under-performers will drag the indices down compared to how some of the strongest names will likely perform.
Plus, most of these ETFs are weighted by market cap rather than equally-weighted, which means they invest more heavily in the most highly-valued (often over-valued) companies.
4) Mining Companies
With the rise of electric vehicles comes drastically increased demand for rare earth metals:
A transition from gasoline or diesel powered vehicles to electric vehicles essentially means a transition from a reliance on fossil fuels to a reliance on various rare and semi-uncommon earth metals. The batteries in particular, but also other parts of electric vehicles, require large amounts of these materials.
Mining companies can benefit from higher prices and higher production volumes.
However, the platinum group of metals will likely face reduced demand because their largest use is for catalytic converters in vehicles, which are not used in electric vehicles. Approximately 50% of all platinum demand is for catalytic converters, with the rest being jewelry and every other application.
The iShares MSCI Global Metals & Mining Producers ETF (PICK) can give you broad exposure to metal miners, but the bulk of production is not focused on rare earth metals.
I particularly like Norilsk Nickel (NILSY), since it’s the cheapest producer of nickel in the world and has exposure to cobalt and other elements as well. It pays a great dividend, but there are risks associated with Russian politics, and they have to spend a great deal of money in the coming years to improve their environmental standards.
Renewable energy doesn’t have to be a part of every investor’s portfolio.
Just by holding a set of broad index funds, and perhaps a few blue chip dividend stocks and other asset classes like real estate or precious metals, investors can have exposure to the global market and all the changes associated with it over the long term.
However, for enterprising investors with higher risk tolerance that want direct exposure, the renewable energy industry is a huge area of growth. I personally hold some exposure to Brookfield Renewable Energy Partners (BEP) and SunPower (SPWR), but only as part of a diversified portfolio.