As the world shifts away from fossil fuels, the cost of new renewable energy sources is a key driver of the pace of the energy transition. The lower the price, the more likely a technology will be adopted.
Aside from a recent blip caused by inflation, solar and wind projects are getting cheaper. Based on a global benchmark for utility-scale electricity generation, new solar and onshore wind projects are about 40% cheaper than coal- and natural-gas-fired power plants, although individual markets vary, according to BloombergNEF.
“Renewables are critical to energy security and are very competitive with fossil fuels at these prices, so we believe renewables are a low-cost decarbonization solution,” says Ron Silvestri, portfolio manager of the Neuberger Berman Carbon Transition & Infrastructure ETF (ticker: NBCT).
In the short term, things don’t look that great for renewable energy companies. Inflation in material, freight, fuel and labor costs is causing the cost of new onshore wind and solar to rise — although it’s still cheaper than a decade ago. And the S&P Global Clean Energy Index of 100 clean energy-related companies in developed and emerging markets is down more than 15% in the year through July 11.
From Tesla (TSLA) on down, there are more than 200 clean technology stocks, says Pavel Molchanov, energy analyst with Raymond James. They span a wide variety of industries, business models and geographies, but the thing they most have in common is that many are speculative growth stocks.
In the broader market downturn, investors worried about inflation and higher interest rates have been selling those types of equities in favor of value stocks, bringing clean tech stocks down by an average of about 35%, Molchanov says.
But the longer-term outlook remains bright for renewable energy stocks, as the economics in many places favor the shift from coal and natural gas to wind and solar power generation and the companies that support it.
Demand, as governments and companies begin to prioritize new renewable development because of climate change, remains strong. That demand likely will increase now that European governments urgently need to find alternatives to Russian oil and gas because of the war in Ukraine. That conflict has also helped boost prices for oil and natural gas, making renewables even more attractive.
“The economics of energy transition of switching from oil and gas to more sustainable cleaner solutions have never been better,” Molchanov says. “The long-term solution will be wind, solar green hydrogen, energy efficiency, electric mobility. Demand for these things has never been better.”
With that in mind, here’s a look at seven of the best renewable energy stocks and ETFs to consider:
— ADS-TEC Energy PLC (ADSE)
— ReneSola (SOL)
— TPI Composites Inc. (TPIC)
— NextEra Energy Inc. (NEE)
— Edison International (EIX)
— iShares Global Clean Energy ETF (ICLN)
— Global X Renewable Energy Producers ETF (RNRG)
ADS-TEC Energy PLC (ADSE)
Molchanov sees the opportunity of the energy transition in Europe as the No. 1 theme relating to sustainable energy investing. The Continent has an urgent need to diversify from oil and gas because of the energy crisis resulting from the war in Ukraine, he says. Even before that, Europe already had the strongest climate policy of any major economy in the world, he adds.
This German company — which went public via merger with a SPAC, or special-purpose acquisition company, in December — makes and services battery-based charging technology that allows electric vehicles to receive what it says is an “ultrafast charge even on low-powered grids.”
More than 70% of the company’s 33 million euros ($33.6 million) in revenue last year came from Germany, Europe’s largest economy and a country that got roughly a third of its oil from Russia last year. To be independent from that oil, the country and others will have to ramp up electric vehicle sales, Molchanov says.
ADS-TEC said in April that it expects revenue for 2022 to hit 80 million to 100 million euros ($81.2 million to $101.6 million), with most of that coming in the second half based on a confirmed backlog of orders for charging units.
This solar project developer and operator is another company Molchanov points to that derives a significant slice of business from the European market.
Its operating assets are in China and the United States, but the bulk of its mid- to late-stage project development pipeline is in Europe, with the single biggest chunk in Poland, a country bordering Ukraine that has traditionally been heavily dependent on Russian natural gas before that was cut off earlier this year.
In May, the European Commission presented a plan to address the climate crisis and its dependence on Russian fossil fuels, proposing a boost in renewable energy to 45% by 2030, a doubling of the European Union’s photovoltaic SOLsolar capacity and a halving of permitting time for major renewable projects.
“In Europe, our largest market, the solar industry continues to receive increasingly favorable policy support, which is leading to an acceleration of market opportunities,” the company said last month.
For 2022, ReneSola expects sales of $100 million to $120 million compared with the nearly $80 million in revenues the company booked last year.
TPI Composites Inc. (TPIC)
This Arizona-based multinational makes blades for wind turbines, a market that has tail winds behind it.
The United States has been a leader in onshore wind energy for some time but is only just now beginning to build commercial-scale offshore wind farms. That seems like it would be an expansion market for TPI Composites, which already has a facility in China that enables it to serve global onshore and offshore markets by land and water.
Beyond potential U.S. offshore wind market expansion, the company has taken steps to expand in Europe, including opening a new training center in Spain, establishing a new entity in the U.K. and signing several new agreements.
As part of TPI’s global footprint, it has a manufacturing facility in Turkey, from where Molchanov says it is well positioned to supply the European wind market.
“Just as Europe needs solar to disentangle from Russian gas, it needs wind for the same reason,” he says.
NextEra Energy Inc. NEE
Utilities that generate electricity from solar panels have hit a rocky patch amid a Commerce Department investigation into solar cells from four Southeast Asian nations, notes Travis Miller, energy and utilities strategist with Morningstar.
That has pressured NextEra Energy’s stock. Shares of the world’s largest renewable energy company are down 15% year to date through July 15, while the broader utilities sector is down only about 2.5%.
The stock had also been overvalued for a long time, Miller says.
“We think the pullback in NextEra shares offers an interesting entry point,” he says. “It’s a high-quality utility that deserves a premium to its peers.”
While government policy can have material effects on renewable energy companies, the recent headwinds are only a pause in a larger expansion story, Miller says.
“Renewable energy continues to grow globally and particularly in the U.S.,” he says.
Edison International (EIX)
Utility investors — who tend to invest in the sector as a defensive play — love to hate California because of regulations, policy uncertainty and wildfire activity, Miller says. That has led to Edison International becoming oversold, he adds.
He says Edison International, which is based near Los Angeles in Southern California, has been a steady performer through company and industry changes, pointing to its history of growing its dividend. It had a yield of 4.4% as of July 15 on a trailing 12-month basis.
“They’ve got some of the best renewable energy and energy transition growth stories in the sector,” Miller says. “We think growth is going to pick up because Southern California will be at the center of the energy transition story.”
iShares Global Clean Energy ETF (ICLN)
Exchange-traded funds, or ETFs, also offer people an avenue to invest in the renewable energy sector. Advantages can include instant diversification among companies, industries and jurisdictions with a single ticker symbol. But keep in mind that this diversification can mean an ETF doesn’t perform as well as a single blockbuster company.
Speaking of company diversification, the iShares Global Clean Energy ETF holds positions in more than 90 equities, including stocks of companies involved in wind and solar electricity generation.
As of July 15, the fund had net assets of nearly $5 billion and a 30-day average volume nearing 5 million that indicates plenty of liquidity for investors.
The ETF has an expense ratio of 0.42% and according to Morningstar has returned an average of 19.65% for each of the past five years.
Global X Renewable Energy Producers ETF (RNRG)
This fund focuses on utilities that produce energy from renewable sources including wind, solar, hydroelectric, geothermal and biofuels. To be included, companies have to generate at least 50% of their revenues from these renewable energy sources.
“In general, utilities can see less risk during economic downturns due to the potential for more stable and predictable demand and cash flows, and a smaller competitive landscape,” says Madeline Ruid, research analyst with Global X ETFs.
“In addition, it can be possible for utilities to pass rising costs onto consumers, and some companies’ contracts are indexed to inflation,” she says.
The ETF has an expense ratio of 0.65% and according to Morningstar has returned an average of 7.05% for each of the past five years.
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