What is renewable energy?
A better place to start is with non-renewable energy. This covers all energy sources that will eventually run out, as it either does not replenish, or replenishes at a rate far slower than it is consumed. The usual examples include oil, gas, and coal.
By contrast, renewable energy comes from a source that does not deplete when it’s used, such as wind and solar power. A key advantage of renewables is that once a renewable asset is generating electricity, it will continue to do so forever with the right maintenance.
There is some debate about what constitutes a renewable or non-renewable energy source. For example, wood burning from replanted forests and uranium mining for nuclear energy can be considered either renewable or non-renewable dependent on the source or even an investor’s philosophical bent.
Types of renewable energy
There are many renewable energy sources in the world. Renewable energy stocks include:
- Solar stocks
- Wind stocks
- Hydropower stocks
- Geothermal stocks
- Hydrogen stocks
According to the International Energy Agency, 29% of global electricity generation came from renewable sources in 2020, up from 27% in 2019. [3]
Should I invest in green or renewable energy?
Many investors confuse the financial markets of renewables and green energy. While renewable energy comes from an infinite source, many types also cause harm to the environment. On the other hand, green energy does not harm the environment while also coming from an infinite source.
Renewable non-green energy sources include:
- Biomass – burning replanted forests is sustainable but emits carbon
- Blue hydrogen – produced using gas rather than the clean energy sources used in green hydrogen production.
- Nuclear – zero emissions but creates dangerous waste that lasts for millennia.
Why is renewable energy important?
Renewable energy companies are the ultimate long-term investment. Dire predictions from climate scientists have constantly warned that most fossil fuels must stay in the ground to reverse high-risk global heating and climate change.
It’s worth noting that the IPCC’s 2-degree upper limit for catastrophic warming will happen if we burn just 20-30% of available reserves. [4]
The impact of mass fossil fuel use is becoming obvious: major world rivers are drying up, Pakistan is flooding, and record heat waves are lashing the world. Copernicus Climate Change Service data shows August 2022 in Europe was the warmest on record by ‘a substantial margin.’ [5]
Climate change isn’t near, it’s here.
CEO of BlackRock, Larry Fink, the largest investment manager in the world, now argues that investing in clean energy stocks through the renewables market is a profit-driven necessity. [6]
And Oxford University research shows that the switch to renewables could save the world $12 trillion by 2050. [7]
Further, whether by politics or economics, fossil fuels burnt at the current rate are expected to run out by 2060. [8] If this feels like a long time, this is only the same timeframe as from 1984 to now.
Moreover, renewable energy shares have two unavoidable economic advantages that will see them eclipse oil and gas in the long run.
They allow countries to be entirely energy-independent. And after the initial outlay for a wind farm, solar panel array, or hydropower station, a maintained asset continues to generate electricity, and therefore revenue, forever.
Are oil and gas companies transitioning?
In a word, yes. The two UK stock market oil majors, BP and Shell, both have net-zero ambitions, as does ExxonMobil.
The current argument is centred around the pace of their transitions, especially given the sky-high profits being made by energy producers due to post-pandemic demand and the Ukraine War sending commodity prices to multi-year or even record highs.
Many renewable energy investors believe that companies like BP and Shell could become the best renewable energy investments over the long term, given their fossil-fueled capital to drive the shift to renewables.
UK energy producers are set to make £170 billion in excess profits over the next two years, and the key battleground is likely to be how much of this money is reinvested, and how much is returned to shareholders. [9]
Why invest in renewable energy stocks?
Enthusiasm for net zero is rising inexorably. Whether the Paris Agreement, Kyoto Protocol, or COP26 climate summit, even countries operating on damaged relationships are being forced to work together to combat climate change.
Sweeping legislative change is upon us. ICE vehicle sales will be banned entirely in the EU by 2035, and by 2030 in the UK. Similar policies are being proposed by President Biden in the US.
Looking at the UK, the pace of legislative change is rapid indeed. It was only in April that the Johnson government unveiled the British Energy Security Strategy that promised a ten-point plan primed to increase renewables production. [10]
Importantly, a fundamental restructuring of the energy market is coming that could include uncoupling renewables from the gas price peg. [11]
With the UK’s average annual energy bill previously set to hit £3,549 in October, newly appointed Truss has also announced a package of support that will limit most consumer bills to £2,500 per annum for the next two years, at enormous expense to the taxpayer. [12]
Further, her government plans huge strategic changes on top of the previously announced National Energy Strategy to better secure energy supply.
Already, 43.1% of the UK’s electricity generation came from renewable sources; and this percentage could increase as the cost of renewables falls, fossil fuel prices remain elevated, and support for energy independence skyrockets to the top of the political agenda. [13]
In the US, President Biden has pushed multi-billion-dollar green energy initiatives, such as the Build Back Better plan and the Inflation Reduction Act, which is expected to create 550,000 new jobs in the renewable energy sector, more than doubling the cleantech sector. Already, Honda, Toyota, and First Solar have made new plant announcements. [12]
Overall, UN analysis shows over 70 countries representing 76% of global emissions have set a net-zero target for the future. [13] Moreover, the Net Zero Asset Managers initiative now has 273 signatories pledging to support net zero by 2050 with $61.3 trillion AUM. [14]
And with ESG investing in renewable energy on the rise, the shift could accelerate faster than many believe. For some, financial returns are a secondary investment factor, with saving the planet as the primary goal.
The first powered flight launched in 1903. By 1969, humans had landed on the moon. Ford’s Model T first rolled off the production line in 1908, and by the 1930s, cars had replaced horses as public transport.
And the internet only began in 1983. Similar advances are not impossible.
Renewable Energy ETFs
Of course, while I’ve listed ten of the top renewable energy stocks, there are hundreds to choose from, ranging from those dedicated to one renewable energy source, to those transitioning from fossil fuels to those where renewables form only a small part of the business.
Tesla, for example, is primarily an electric vehicles stock, but also boasts a growing renewables division, offering batteries and solar panels.
Many investors prefer to invest in the best renewable energy stocks through themed Exchange Traded Funds, in order to mitigate risk while still reaping the rewards of these complex instruments.
Three of the most popular ETFs in the UK are:
- iShares Global Clean Energy UCITS ETF, a $6 billion fund which tracks the S&P Global Clean Energy Index and holds some of the world’s biggest renewable energy companies, including Vestas Wind Systems, Plug Power and SSE in its portfolio.
- Lyxor New Energy UCITS ETF, a smaller $1.3 billion fund which tracks the World Alternative Energy Index, the world’s 40 largest companies which derive at least 40% of revenue from renewable energy activities. Holdings include Orsted and Schneider Electric.
- Invesco Solar ETF, which is based on the MAC Global Solar Energy Index, comprised almost solely of solar-focused stocks. Holdings include Enphase, First Solar, and SolarEdge.
A special mention should also be given to:
Renewables Infrastructure Group, a popular FTSE 250 investment trust that can be bought as an individual share but invests in multiple wind and solar projects in the UK and EU.
Brookfield Renewable Partners, a Canada-based company which operates one of the world’s largest publicly traded, pure-play renewable power platforms. The Brookfield Renewable portfolio consists of hydroelectric, wind, solar and storage facilities in North America, South America, Europe and Asia.
While ETF investing is viewed as less risky than individual stocks, your capital is still at risk and many investor accounts lose money.
Risks of renewable energy stocks
Sadly, every investment strategy comes with risk, and this includes when you invest in renewable energy.
In addition to the generic risks, choosing to invest in renewable energy comes with future performance risk factors including:
- Capital-intensive start-up costs. Debt is becoming more expensive as interest rates rise, and newer green energy stocks may find themselves losing money rapidly.
- Technological advancement. Paradoxically, more advanced solar panels, wind farms, or batteries can make some stocks obsolete. For example, a breakthrough in hydrogen renewable power could see all lithium EV batteries replaced.
- Political changes. The upcoming global recession could see political support for net zero wane, as well as capital investment, affecting future results. Conversely, nationalisation of energy infrastructure is not impossible if prices continue to rise.
- Transition competition. The likes of BP and Shell could steal market share rapidly when they seriously start to transition to clean energy production.
- Falling energy prices. Current profitability is due to high energy demand coupled with low supply. Peace between Russia and Ukraine, or a new nuclear deal with Iran, could rapidly increase energy supply even as more renewables come online.
This is by no means an exhaustive list, and past performance is no guarantee. But would-be investors should be warned there is no such thing as a risk-free investment, even though the sector is comparatively likely to deliver over the long term.
