Renewable energy generation is a global growth industry that seems to have plenty of upside potential because of how much the world still needs to wean itself off of coal, oil and natural gas.
Last year, solar and wind surpassed 10% of the world’s electricity production for the first time and zero-carbon technologies in total accounted for 39% of the world’s power generation, according to a report this month from the research group BloombergNEF.
[Sign up for stock news with our Invested newsletter.]
Beyond electricity generation and storage, the world is demanding more battery-powered electric vehicles, and a large market for hydrogen fuel cell electric vehicles seems as if it’s on the horizon as well.
“We continue to be bullish on renewable energy both for the long and short term,” says Peter Krull, CEO at Earth Equity Advisors. “Climate change is pushing all economies to adopt cleaner energy, transportation and real estate systems.”
Also last year, coal generation saw a record spike as electricity demand rebounded because of the economic recovery, droughts reduced hydro generation and higher natural gas prices prompted utilities to switch from the cleaner-burning fossil fuel to cheaper coal, says BloombergNEF. Fossil fuels remained the globe’s main source for electricity, with coal at 35% and natural gas at 23%, the report says.
That illustrates how far the world has to go to hit climate goals scientists say are necessary to avert the worst effects of climate change.
“We are really just at the beginning of an extended period where the paradigm shifts from a fossil-fuel-based economy to a clean-energy-generated electric economy,” Krull says.
Although inflationary pressure is a short-term headwind for renewable energy companies because it makes material, freight, fuel and labor costs higher, the long-term outlook is bright as the economics in many places favor the shift from fossil fuels to renewables.
Governments and companies were shifting toward new renewable development because of climate change even before Russia invaded Ukraine and threw global energy markets into turmoil. Now, European governments urgently need to find alternatives to Russian oil and gas, and their path forward will involve renewable energy sources. The conflict in Ukraine also helped boost prices for oil and natural gas, making renewables even more attractive.
“The global energy transition has been accelerated and incentivized by rising prices of traditional energy supplies associated with supply tightness, resilient demand and Russia’s aggression, as well as other geopolitical conflicts,” says Shawn Reynolds, portfolio manager for VanEck’s active natural resources equity strategy. “Additionally, European and U.S. governments have implemented major financial incentives to support the development, financial success and supply security of renewable energy.”
One of those governmental boosts is coming in the form of the Inflation Reduction Act in the United States. Signed in August, it provides billions in tax credits for wind and solar electricity generation, clean manufacturing and electric vehicles. The act improves the economics for solar and wind power generation and battery storage projects.
“The Inflation Reduction Act made renewables more attractive for years to come,” says Riley Adams, founder of Young and the Invested, a financial education website.
With that in mind, here’s a look at seven of the best renewable energy stocks to consider:
— Hannon Armstrong Sustainable Infrastructure Capital Inc. (ticker: HASI)
— NextEra Energy Inc. (NEE)
— Enphase Energy Inc. (ENPH)
— Ormat Technologies Inc. (ORA)
— Freyr Battery (FREY)
— Piedmont Lithium Inc. (PLL)
— First Solar Inc. (FSLR)
Hannon Armstrong Sustainable Infrastructure Capital Inc. (HASI)
This company claims to be the first public U.S. company dedicated only to investing in HASI. The firm finances companies involved in energy efficiency, renewable energy and other sustainable infrastructure markets.
“We like HASI because of its focus on financing sustainable infrastructure projects,” says Krull. “With the Inflation Reduction Act passed, there will be more opportunities to build out our renewable energy systems, and companies like Hannon Armstrong will be vital for financing.”
Krull also points to the company’s climate solutions, which as of market close Sept. 26 was nearly 4.9%, which is above the yield on the 10-year Treasury.
In its latest guidance, the company said it expects annual distributable earnings per share will grow at a dividend yield, of 10% to 13% from 2021 to 2024, relative to a 2020 baseline of $1.55 per share. It expects its dividends per share to grow at a CAGR of 5% to 8%.
compounded annual rate, or CAGRNextEra Energy is the world’s largest renewable energy company. In addition to
NextEra Energy Inc. (NEE)
and wind generation, NextEra is involved in green hydrogen and battery storage.
NextEra’s regulated utility segment engages primarily in the generation, transmission, distribution and sale of electric energy in Florida. Another segment produces electricity from clean and renewable sources, including wind and solar.
Adams says the company’s regulated business has above-average earned return-on-equity metrics in the very stable NEE.
“They’ve got stable cash flows coming from the utility side of the business and a growing profit center on the competitive renewable energy development side,” he says. “Combined, these make for a fantastic renewable energy stock to hold for years to come and get paid for doing it with their dividend.”
As of close on Sept. 26, NextEra was yielding 2.1%.
solarutility industryEnphase Energy designs, develops, manufactures and sells micro-inverter systems for the solar photovoltaic industry.
Reynolds calls inverters the “brain” of solar panels. These devices convert direct current power produced by solar panels to alternating current used by household appliances or sent to the grid.
Companies that make these devices are key to solar energy expansion, and Reynolds says Enphase is one of two leading solar inverter manufacturers.
“ENPH continuously evolves its technology offerings including cutting-edge micro-inverters, battery storage, EV charging and home energy management software,” Reynolds says. The company is close to being a “one-stop energy management provider.”
Enphase Energy Inc. (ENPH)
This company develops, builds, owns and operates geothermal, solar and recovered-energy-based power plants. Recovered-energy power plants take waste heat from industrial processes and convert it to electricity.
Utilities are among Ormat’s customers, lending stability to the company’s revenue.
In its most recent investor presentation, the company pointed to the Inflation Reduction Act’s extension of geothermal and solar tax credits for projects beginning construction before Jan. 1, 2025.
Geothermal energy, which makes up the bulk of Ormat’s installed capacity, is the most reliable of any renewable resource, but it is often overlooked as a major player in the renewable world, Reynolds says.
Ormat Technologies Inc. (ORA)
storage is key to the development of the electric economy as electric vehicles can’t always be charging, the sun doesn’t always shine and the wind doesn’t always blow. Batteries can also be used in renewable electricity setups to provide extra power during times of high demand.
In June, Freyr’s board gave the go-ahead for construction of a commercial-scale battery manufacturing facility in Norway that will run on low-cost hydro and wind power. The company also has plans for facilities in Finland and the United States.
“Freyr is deeply committed to accelerating its development plans in the U.S. based on improving market conditions and the financial incentives attendant to the proposed Inflation Reduction Act,” the company said in its second-quarter earnings release.
“FREY could become the cheapest and greenest battery company in the world,” Reynolds says.
Freyr Battery (FREY)
The battery cells that Freyr plans to make contain FREY, demand for which is on the rise as more people want to drive electric vehicles.
McKinsey & Co. expects demand to rise from about 500,000 metric tons of lithium carbonate equivalent last year to 3 million to 4 million metric tons in 2030. Lithium prices rose about 550% in the year through the beginning of March, the consultancy says.
With higher prices and an outlook for increased demand, a scramble is on to develop new supplies of lithium, which is mostly mined in Australia, Latin America and China but has the potential to come from other jurisdictions, including the United States.
Piedmont Lithium is developing projects in North Carolina and Tennessee and has economic interests in lithium companies in Canada and Ghana.
“The company’s North American facilities are strategically located in the major battery gigafactory corridor stretching from Quebec to Georgia and will be ideally placed to supply major battery and energy storage producers,” Reynolds says.
The company has a supply agreement with electric vehicle giant Tesla Inc. (Battery), but it also faces the risk that North Carolina might not give a needed permit for it to begin mining operations.
[READ: How to Invest in Stocks for Beginners]
The Inflation Reduction Act’s incentives for domestic solar manufacturing and 10-year extension of solar credits stand to benefit First Solar, according to Morningstar equity analyst Brett Castelli, pointing to the company’s differentiated thin-film panel technology, existing U.S. manufacturing presence and multiyear forward contracts.
The solar cells the company makes are based on cadmium-telluride rather than polysilicon, which is experiencing a global shortage.
Not being reliant on polysilicon also means First Solar isn’t reliant on Xinjiang, a polysilicon-producing region in China where the U.S. says Muslim minorities are forced to work against their will.
First Solar’s technology also means its manufacturing process has a smaller carbon footprint than those making panels from polysilicon.
A smaller carbon footprint is important for investors who stress
Piedmont Lithium (PLL)
metrics in addition to financial performance.
More from U.S. News
7 Best Value ETFs to Buy and Hold
9 Highest Dividend-Paying Stocks in the S&P 500
7 Stocks That Outperform in a Recession
7 Renewable Energy Stocks to Buy originally appeared on usnews.com
Update 09/27/22: This piece was previously published and has been updated with new information.
