Investing in renewable energy stocks

Investing in renewable energy stocks
Everything you need to know about the firms producing renewable energy and how to invest in green stocks.
Gemma Boothroyd
Published
July 26, 2022

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Investing in renewable energy stocks 

“£1.4tn, please”.

That’s the size of the UK’s bill if it plans on actually hitting net-zero targets by 2050. 

One of the biggest factors in getting there will be the transition to green, renewable energy.

A heightened awareness of that has led to plenty of investors seeking out renewable energy stocks and other green energy companies to invest in. 

You can invest in renewable energy in plenty of ways. There are the companies behind the technology, the infrastructure creators, and the trusts investing in the overall transition too. 

So if you’re keen on going green, humming and hawing over how to invest in renewable energy, read on. 

What is renewable energy? 

Remember Blockbuster? In its prime, the good old-fashioned VHS and DVD rental chain made a lot of its money off renewable rentals. It cost £2.99 to rent a new release for the day, but any additional days would cost an additional pound. Even if you watched the flick that same night, some forgetfulness or procrastination could easily lead you down a rabbit hole of overdue rental fees until you shoved it back down the return slot.

And all Blockbuster had to do was buy the VHS or DVD. Then they’d rent it out for a base fee, plus any extra days that got tacked on from your renewal after the fact. 

It was a pretty good business model because one singular asset could generate a consistently renewing amount of income (so long as that flick remained popular and your cat didn’t scratch the disk up). 

Renewable energy is similar in the sense it comes from a source that’s not depleted when it’s used. You could rent a DVD after hundreds of others and, in theory, it would play the exact same. With renewable energy, it’s energy that similarly doesn’t run out with more use or more time. It’s not depleted the more it’s used, think wind or solar power. 

Types of renewable energy 

There are plenty of renewable energy sources out there. Solar, wind, geothermal, hydropower and ocean energy are among the most popular. According to the IEA, about 20% of global energy consumption comes from renewable sources, with electricity being 30% renewable across the planet.

But it’s not necessarily all green nor clean energy. Renewable energy sources can include some unsustainable alternatives too.

For instance, a less commonly known renewable energy source is biomass. It’s a plant-based material that can produce heat and electricity. Sometimes it’s made of wood or waste residues. The debate over whether it’s truly a sustainable energy source is somewhat contentious because the biomass has to be burned to produce energy. So although it’s renewable, since we’ll never run out of it, the process of creating the energy is likely not carbon neutral.

Why is renewable energy important? 

The major obvious benefit of renewable energy is that it’s never going to run out. On the other hand, we could run out of resources like coal. BP claims we’re a while off yet, estimating another 109 years of possible coal production ahead.

It’s a lot less about ‘when’ these resources will run out and more about what we can do to shift energy reliance in the meantime. 

Renewable energy’s a bright light of hope for just that question. Especially for countries and companies which have made lofty net-zero pledges, alleging their carbon footprint will be zero, either through offsets or outright energy transitions, in the coming years. 

The UN reports over 70 countries covering 76% of global emissions have set a net-zero target. Over 1,200 companies have joined the initiative, and more than 1,000 cities too. 

Inevitably, each one’s ambition varies in the timeline for achieving all of this. And many don’t provide clear road maps as to how they plan to rev fossil fuels down.

But there’s no doubt replacing coal, gas and oil-fired power with renewable energy will be vital to cutting global carbon emissions. 

And the awareness of just how integral renewable power generation will be is exactly why asset managers are throwing their hats into the net-zero ring too. 

30 asset managers are investing $9tn to help speed up that transition for companies with net-zero initiatives by 2050 or sooner. 

That said, some of the biggest companies to announce lofty net-zero ambitions include Shell and ExxonMobil, also two of the biggest greenhouse gas emitters. 

Whether these asset managers' decision to up their investment in net-zero firms was just a way to keep investing in massive polluters, or whether the firms announced their ambitions as a result of these massive pledges, is an ESG-themed chicken or egg scenario. 

Cynicism aside, asset managers the world over have finally accepted that the sustainability of a business model has a clear link to the sustainability of revenues and profits. If you can be sure a firm won’t be fined for a huge oil spill or be taxed and regulated into oblivion because of harmful practices, that’s one less hit to the balance sheet to worry about.

And, given how much money is invested in traditional polluters, ignoring them and simply watching them burn would probably take a big hit on public purses too. 

Instead of cutting our noses off to spite our faces, the theory is that by applying shareholder pressure, these firms will transition into greener businesses, and not destroy value while they do.

Either way, as an individual investor, that means institutional funds will likely be piling into many of the big names in the net-zero claim space. Those firms could benefit from substantial growth opportunities if their support and investment allow them to take on new capital-intensive projects.

Renewable energy stock predictions for the future 

You can never be sure how a company, let alone an entire industry or sector, will perform. Though there are plenty of ways to glean some indicators that can aid in our analysis. 

Financial ratios are one way of forecasting a firm’s potential growth. These might take information from a company’s earnings releases or annual reports, and its share price. They offer up helpful information about the company’s health. For instance, Beta is a measurement of market risk that looks at how exposed a company is to broader market influences. 

While a company’s fundamentals are usually the most important metric of its success, it’s not to say it can’t be majorly boosted or hindered by external factors too.

Take the $1tn infrastructure bill passed in the US last year. $73bn will go to clean energy, including electrifying public transit, building electric car chargers and expanding electric transmission lines too. American companies with existing operations (or those looking to get involved) in these segments might be poised to benefit. Still, it’s not to say all green energy shares under the sun will inevitably get a boost. The people at the helm and the business underneath matter so much more than the headlines ever will.

How can you invest in renewable energy? 

Before diving in, if you’re considering investing, it’s important to remember that when you invest, your capital is at risk. This means the value of your investments can fall as well as rise, so you might get back less than you originally invested.

Everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets you choose and whether or not renewable energy investments belong in your portfolio.

Our resource hub for investing in the stock market might be able to help make that blend a bit clearer for you and our guide on how to invest in stocks is a great start for a first-timer's investment decisions.

And if you are still unsure of how to pick investments, speak to a qualified financial advisor to develop your own investment strategy.

If, after carefully assessing a stock’s investment case you determine you’d like to invest in renewable energy, there are plenty of ways to do it.

If you wanted to invest in tech companies, you wouldn’t assume that all software and hardware firms would perform similarly. The performance of Microsoft isn’t necessarily going to be correlated to that of a chip-maker. 

Sure, there could be some similarities or overlaps and hits or misses as a result of changing trends. But comparisons should merely be elements to consider in your analysis. Never make an outright assumption that the performance of one company will align with one in a similar industry.

Renewable or green energy stocks won’t all perform in the same way. 

You can ask yourself questions to narrow down what your aim is in investing in renewable energy, then work backwards.

Are you investing in renewable energy because you want to support the growth and proliferation of a certain energy source? Or are you looking for the option with the highest profit margin of the bunch? Once you determine your investing goals, you can better assess your options.

You might also decide that instead of picking your stocks individually, you’d rather invest in a basket of green energy stocks through an ETF for example. We’ll delve deeper into the main differences between these two paths further on. 

Should you invest in green or renewable energy? 

As we’ve said, the decision to invest in green energy first depends on whether you’re ready to start investing. These stocks will likely come with a higher degree of risk involved too. Many firms are still quite young, relying on external investment to fund growth as opposed to sustainable revenues. So they have more on the line and more to prove. But the green energy space has certainly demonstrated impressive growth over recent years.

In 2020, the only type of energy to see demand growth was renewable energy. Even as lockdowns drove consumption of other energy sources down, the renewables market grew.

Source: International Energy Agency (IEA) Renewable Energy Market Update, 2022.

In the past two years, the average amount of renewable energy being added to the global energy market mix has been vastly greater than in years prior. And hopefully, more capacity will lead to more green energy being created, sold and used.

How did renewable stocks perform in 2021? 

Because of the vast scope of green energy stocks, it’s tough to lump them together to evaluate performance. That's why if you're on the hunt for the best renewable energy stocks of 2021, you'll want to narrow down your research. For instance, there are ways of comparing certain segments, based on geography or energy source. Another way is by looking at ETFs, which tend to group stocks with certain characteristics as one investable package.

The below table evaluates the performance of three different renewable and clean energy ETFs. The iClima Distributed Renewable Energy ETF (DGEP), HANetf S&P Global Clean Energy Select HANzero UCITS ETF (ZERP) and the iShares Global Clean Energy ETF (INRG) are all available on the Freetrade app.

Past performance is not a reliable indicator of future returns. 

Discrete calendar year performance
Investment 2017-18 2018-19 2019-20 2020-21 2021-22
DGEP - - ---21%
ZERP - - ---12.3%
INRG 2.7% 29.8%28.6% 54.6% -3.4%

 

Source: FE, as at 13 Jul 2022. Basis: bid-bid in local currency terms with income reinvested.

 

Discrete calendar year performance
Investment 3 mo. 6 mo. 1 yr. 3 yr. 5 yr.
DGEP -12.1% -15.4% -21%--
ZERP 0.6% 8.3% -12.3%--
INRG 1% 12%-3.4% 91.9% 155.7%

Source: FE, as at 13 Jul 2022. Basis: bid-bid in local currency terms with income reinvested.

 

In no way do these ETFs reflect the entire renewable energy market. They simply paint a broad picture of how large slews of firms behave when combined into one investment, over time. 

Green energy ETFs  

Clearly, not all ETFs perform the same. And part of that has to do with what they say on the tin.  

DGEP is focused on renewable energy, while ZERP and INRG look to invest in companies involved in clean energy production. As we’ve seen, those aren’t necessarily one and the same. 

As of 14 July, DGEP’s top holding is BYD, a Chinese holding company. One of its arms is car manufacturing, producing electric, hybrid and fuel-powered cars too. It makes solar panels and rechargeable batteries as well, but BYD isn’t exclusively in the business of renewable energy. After all, gas and diesel are finite resources which power some of its automobile production line.

INRG’s top holding, on the other hand, is Enphase Energy, an American solar company, and ZERP’s top holding is Siemens Gamesa Renewable Energy, a wind-power generator.

All three of these ETFs seem to prefer different types of renewable energy. And not all of them exclusively bear renewables within their holdings. But when you compare their fund factsheets to ETFs labelled ESG, they seem to be much more specific in their preferences.

It’s always worth giving the fund sheet a look to make sure the investments in an ETF are what you’re looking for. Otherwise, you risk ending up with an investment that’s dirtier, riskier or more volatile than you’d hoped.

Top UK renewable energy stocks 

Here are some examples of renewable energy stocks on the Freetrade platform. These aren’t necessarily the best renewable energy stocks in the UK though, and this is not a recommendation or inducement to buy any of the stocks listed here. Instead, it’s a list of some of the most popular renewable energy stocks on Freetrade. You might consider investing in these, or they might be useful as a launch pad to discover other firms in similar markets.

Top UK renewable energy stocks on Freetrade Ticker Description
SSE Renewables £SSE UK energy group with renewable energy assets and electricity networks
ITM Power £ITM Clean energy materials and technology developer, focused on hydrogen production
PodPoint £PODP EV charging
HydrogenOne Capital Growth £HGEN Investment fund focused on clean hydrogen opportunities
Active Energy £AEG Renewable energy company focused on biomass generation

Listed in no particular order.

SSE

SSE is a Scottish energy company with a focus on renewables. Its stock got a boost earlier this year after the firm escaped the UK government’s windfall tax, which hit many of the biggest names in oil like BP and Shell.

SSE is the UK’s second-largest energy supplier and reported full fiscal-year profit growth of 23% to £1.2bn for 2022. The firm also boosted its dividend to 60p from September, giving it a 5.1% yield. As always, that yield isn’t guaranteed to stick around but it did sit well above the UK market’s payout level.

SSE supplies electricity to 3.8m homes and businesses in the UK and plans to broaden its capacity by investing £12.5bn into renewable energy projects in the next four years. But SSE doesn’t only produce renewable energy. 

It still has thermal energy under its wing, which means it's creating gas-fired power. While it has phased out coal-generating power plants, SSE is still transitioning towards its “net-zero emissions future”.

ITM Power (penny stock in renewable energy)

ITM Power designs and manufactures electrolysers. These machines basically make green hydrogen power using renewable electricity and tap water.

Electrolysers convert renewable energy into a clean fuel source, which is a green alternative to fuels like natural gas.

ITM Power’s sales revenue grew by 30% last year to £4.3m, mostly from selling its electrolysers, conducting consulting services and performing maintenance support on its systems.

But operating costs, particularly in production and engineering, ate away at any chance of profitability. ITM’s 2021 loss was £27.8m, as it still struggles to scale up its hydrogen fuel technology. It’ll likely be a while until the firm turns profitable. 

And as a penny stock, it’s important to remember that the volatility and low liquidity in this firm’s share price will render the unprofitable firm an even riskier investment.

HydrogenOne Capital Growth

This London-listed investment fund is all about hydrogen. While its return this year has been on a steady decline, it’s perhaps no surprise given the performance of most burgeoning growth stocks this year.

Hydrogen technology is very much in its infancy. And if you’re prepared to take on the extra risk involved in a sector that has yet to prove scalability, let alone profitability, you’re better off separating the more promising firms from the duds.

That’s why investing in an investment trust can help do that legwork for you. Active fund management allows the managers to leave out the laggards and hold onto the potential winners.

Trusts can also give access to private firms that you otherwise wouldn’t be able to invest in, and can use gearing (borrowing funds) to double down on their best investments.

Active Energy

Active Energy is a renewable biomass business, taking biomass waste and transforming it into usable fuel. Its pellet technology can be implemented in existing coal powerplants to transform biomass into power, without requiring that the plant be modified. 

So it leverages existing coal powerplants to create sulphur-free, carbon-neutral energy. 

It’s only just constructed the first plant to use this technology, meaning the firm’s not yet generating revenue. Its loss for 2021 was $3.8m, but the firm has at least managed to take the step from concept to application.

A large part of its loss was due to a business segment it’s now exited, but Active Energy will probably stay in the red for a while to come.

Top US renewable energy stocks 

Plug Power

Plug Power is another hydrogen stock. Initially, several hydrogen stocks saw their shares get a boost after Russia’s invasion of Ukraine. Investors clearly saw the need for an energy shift away from carbon-emitting energy sources in favour of more reliable and renewable power instead. 

But Plug Power’s share price has since fallen from those brief spikes. While its falling share price could be to do with the market’s broader move away from growth stocks, due to their inherently riskier status as an emerging technology, the firm’s performance probably isn’t helping matters.

On one hand, the firm secured a contract with Walmart earlier this year to deliver 20 tons, daily, of green hydrogen power for the firm’s trucks. That helped Plug Power usher in a 133% increase in Q1 revenues up to $108.8m, which was significantly higher than fellow hydrogen firm ITM’s figures. 

On the other hand, Plug Power’s gross loss nearly trebled up to $35.3m. While ITM’s costs mostly stemmed from ongoing research and development, Plug Power’s were in selling and administrative related expenses. So even though Plug Power is relatively further along in the development of its products and services, it’s now paying a larger chunk of money to get those offerings in the hands of customers. 

Ballard Power

Yet another clean fuel developer on the list, Ballard Power is listed on the US NASDAQ exchange and Canada’s TSX. The firm’s hydrogen fuel cell technology powers cars, trucks, trains and boats. 

In Q1, Ballard’s revenues grew by 19% to $21m, largely thanks to an increase in orders across Europe. Though its loss tumbled a further 16% down to $40.5m in the red. 

Ballard blamed higher overhead costs, inflated wage pressures and heightened freight charges. Rising interest rates could curb some of those inflationary pressures, but Ballard will likely struggle to slash those expenses in the near future.

Bloom Energy

This firm uses a clean hydrogen production process to generate commercial nuclear power. Bloom Energy signed a deal with Westinghouse Electric in June to partner on its initiative and pulled in $201m in its first quarter revenue. Meanwhile, its net loss also grew by 213.6% to $78.4m.

It’s not necessarily uncommon for emerging technologies like the ones in this article to be en route to profitability. Not only are they often at early stages in the company lifecycle, but they’re also researching brand new technology and trying to sell products into a tough-to-disrupt industry. They do, however, need to show signs of how they’re going to get there.

Any chance for profitability among most hydrogen firms will rely on expanding technology at a profitable scale. Partnerships with a singular nuclear power creator is a small start and wide-scale commercial use to power homes will be key if this firm is ever to flourish. 

ChargePoint

ChargePoint is a US-based EV charging company. Unlike Pod Point, which only has charging stations in the UK, ChargePoint has locations across 14 countries. 

It has a much wider network of customers, with over 78% of the US Fortune 50 companies using one of ChargePoint’s products or services. Still, the firm’s not yet profitable. Even with revenue growth of 102% for Q1 to $81.6m, and over 188,000 activated charging stations, its net loss was $89.3m.

Enphase Energy

This American firm has both NASDAQ and LSE listings. It creates solar power technology like microinverters, which are very small devices that go underneath a solar panel to  maximise solar energy production. 

It also sells energy generation monitoring software (the microinverter lets the software know how much energy it's generating and how much your home’s using), and battery energy storage. 

Enphase’s main customers are residential homeowners across the US. 

Q1 revenue grew by 46.5% to $441m, mostly thanks to demand for its recently innovated technology which can leverage sunlight during a power outage to create backup power, without the need of a battery. Although its first-quarter net income fell 1.5%, the firm is still profitable, reporting $51.8m in net income for the quarter. 

Renewable energy stocks paying dividends 

Brookfield Renewable Partners

Brookfield is an asset manager operating a number of different trusts. Brookfield Renewable is one of these, and it operates over 5,300 renewable energy facilities around the world. That portfolio spans hydroelectric, wind, solar and energy storage too. The Canadian firm has historically paid a dividend and aims for 5-9% annual dividend growth. Though that isn’t to say it’ll necessarily achieve that, and a dividend is never a guarantee.

In its Q1 update, the firm paid a dividend of $0.32 per share. That quarter, it generated 7,425 GWh of energy. For scale, Northern Ireland’s energy consumption between April 2021 and March 2022 was only slightly above that, at 7,599 GWh.

Brookfield Renewable is forecasting to meet or exceed its targeted returns this year and has just acquired two solar development businesses to help it achieve it. Still, lofty depreciation costs and borrowing fees mean it's operating at a net loss to unitholders.

NextEra

This US energy company has announced plans to cut its scope 1 and scope 2 (aka the direct and indirect emissions that result from its operations) emissions down to zero. Though, it provided a pretty drawn-out timeline to achieve it, saying the feat will be complete by 2045.

Such extended timelines are the name of the game for plenty of energy generation firms, kicking the can down the line to a far, far away date 

Though in fairness, NextEra plans to get there without carbon offsets, which are a somewhat controversial way of achieving net-zero ambitions. That’s a result of factors including a lack of industry regulation as well as geographical dispersions between where the pollution took place and where the offsets are occurring.

For now, the firm’s acquiring plenty of wind farms as well as solar projects. In its latest results, the firm flopped from profit to a loss, as earnings dropped $1.6bn to $451m. NextEra pointed the finger at hedges it had made on the price of natural gas, which has surged to its highest level since the 2008 financial crisis. Its dividend increased though, by 10% up to $0.43 per share for the quarter.

Algonquin Power

Algonquin Power is a renewable energy firm with $16bn of assets. Its customers are mostly residential electricity, water and natural gas users scattered across North America.

Currently, the firm’s portfolio has around 3 GWh of energy generating capacity, with over 4 GW under construction.

64% of its portfolio is invested in wind, with a 24% investment in Atlantica, a sustainable infrastructure company that owns and manages the assets needed to create renewable energy. The remainder is solar, hydro and thermal energy investments.

The firm’s annual dividend yield was 5.4%. And while it has a track record of over ten consecutive years of double-digit dividend growth, it’s important to remember those figures are never set in stone. 

And for a firm that’s constantly investing in new projects, if it decided to set aside some cash to up the ante in a new project, for instance, that might mean a dividend gets cut. Currently, its quarterly dividend to shareholders is $0.18 per common share.

Vestas

Vestas has historically been a dividend-paying share. But after a brief bump this year, its share price has since plummeted to its 2020 levels. 

Clean energy already has an assortment of headwinds it’s butting up against. Supply chain hiccups, lockdowns slowing production, and a highly established fossil fuel industry are some of the biggest threats.

Still, Vestas is not a new player in the industry. It’s been working in the wind turbine space since 1945 so it’s managed to stand the test of time for now. Upcoming Q2 results in August will paint a clearer picture of how the firm plans to increase investment and get shareholders a bolstered return.

Green energy penny shares 

Pod Point

Pod Point is a London-based EV charging company. Earlier this year, the firm signed a deal with BMW to be its preferred supplier for UK customers, essentially meaning Pod Point’s responsible for any ‘at-home’ charging point installations for BMW customers.

It also linked up with Tesco and Lidl to install charging ports at some of the grocers’ locations.

Revenue in 2021 grew by 98% to £40.3m, but only 2% of that was deemed to be recurring. Pod Point’s network fees and revenue share from its commercial customers’ charging stations aren’t reeling in nearly as much money as its direct-to-consumer (DTC) charging stations built through partnerships like that of BMW.

Repeat revenue is much preferred by investors and businesses alike, and the firm may increasingly need to tap into its existing network of clients to heighten those repeat returns.

Green energy investment trusts 

Greencoat UK Wind

This UK trust invests in onshore and offshore wind generation. Because it’s a trust, you can expect to pay an ongoing charge through your investment. 

In its 2021 annual results, Greencoat reported its investment portfolio grew from six to 43 wind farms with an additional £570m invested throughout the year. 

And while it expanded on the number of wind-generating opportunities it’s invested in, that’s still no guarantee the winds will blow in the firm’s favour.

Unfortunately, last year, they didn’t. Wind speed dropped by 12% and wind production fell by 20%.

This year, however, might paint a different picture. The UK’s National Grid had to stop certain wind turbines after wind-power production hit record-breaking highs. 

That’s one of the challenges with wind power generation: it can be erratic and unreliable. But because Greencoat is a trust, if it can manage its investments to buffer out the lulls in power generation with the highs, it could mitigate some of the risks of investing in one single wind-power firm instead.

In conclusion, is renewable energy a good investment? 

The table below shows just how diverse renewable energy investments can be.

Top UK renewable energy stocks on Freetrade Ticker Description
SSE Renewables SSE UK energy group with renewable energy assets and electricity networks
ITM Power ITM Clean energy materials and technology developer, focused on hydrogen production
PodPoint PODP EV charging
HydrogenOne Capital Growth HGEN Investment fund focused on clean hydrogen opportunities
Active Energy AEG Renewable energy company focused on biomass generation
Plug Power PLUG Hydrogen fuel cell development
Ballard Power BLDP Clean-energy fuel cell development
Bloom Energy BE Manifactures solid oxide fuel cells and produces electricity
ChargePoint CHPT EV charging stations
Enphase Energy ENPH Solar power technology
Brookfield Renewable Partners BEP Managing a renewable energy trust
NextEra Energy NEE Electric utility holding company
Algonquin Power AQN Canadian renewable energy firm
Vestas VWS Danish manufacturer, seller, installer, and servicer of wind turbines
Pod Point PODP UK EV charging stations
Greencoat UK Wind UKW UK onshore and offshore wind generator

And there’s no question that global green energy demand is on the up, with the EIA estimating it’ll grow 50% by 2050.

When you invest in firms spearheading the green energy revolution, you aren’t just investing in that net-zero transition taking place. It’s not enough to merely believe green energy is the future. Because when you’re investing in a firm, you’re banking on its ability to take that dream into a reality.

While some of the firms discussed here do generate revenue, most aren’t yet profitable. If they haven’t proven a plan to get there, even the most “sustainable” business will end up with an unsustainable future.

If you can weed those ones out from the rest, you might be ready to ride the green wave. 

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