3 reasons to invest in renewable energy stocks

The growth of renewable energy is accelerating like never before, as decarbonization expands outside the energy industry. Companies in all sectors now publish environmental, social and governance (ESG) reports with a focus on reducing emissions. The result is that companies, not just countries, are setting aggressive goals to reduce their environmental footprint, goals that cannot be achieved without renewable energy.

Lower renewable energy costs, long-term growth drivers and resilience to the recession are three main reasons for investing in renewable energy stocks. Here’s why.

1. Costs have decreased

If you regularly follow renewable energy, there is a good chance that you are aware that the new facilities are now cost competitive or even cheaper than fossil fuels. It is a remarkable achievement, but it did not happen overnight.

The first major advances occurred between 2010 and 2014, during which the level energy cost (LCOE) of solar photovoltaic energy on a utility scale fell by 50%. LCOE is a way to measure fixed and variable energy costs over the asset’s useful life, providing a way to fairly compare different sources of electricity. In 2014, onshore wind energy became one of the most competitive sources of renewable energy and, under ideal conditions, could be even cheaper than fossil fuels. Even so, fossil fuels were generally cheaper than renewables.

Earlier this month, the US Energy Information Administration (EIA) released its estimates for new power generation projects that will come on stream in 2026. The report showed that costs continue to fall, even for fossil fuel sources. But even the most efficient source of fossil fuel-based power generation, a combined cycle plant powered by natural gas, is now more expensive than onshore wind and photovoltaic solar energy. It is also important to note that energy methods such as coal, nuclear, biomass and even hydropower must have few or no new installations in the United States, which is why they are marked as “NB” or “not built”.

Data source: US EIA. Megawatt-hour (MWhs) data. The 2026 data reflect the EIA’s estimated weighted electricity LCOE for 2021 for new resources entering into service in 2026. The 2019 data reflect the EIA’s estimated capacity weighted electricity LCOE for 2014 for new resources entering service in 2019.

Subsidies used to play a key role in making renewable energies competitive with fossil fuels, especially solar energy. Today, subsidies continue to reduce the costs of wind and solar energy, but they are no longer as big a factor as before. In short, the profitability of renewable energy plants no longer depends on government subsidies, which bodes well for the long-term adoption of renewable capacity increases.

2. Plenty of room to grow

Solar and wind energy costs have fallen, but both sources still represent a fraction of total energy generation. In the USA, wind contributes about 7.1% of electricity, compared to 1.7% of solar energy. Globally, wind energy is 4.8% compared to 2.1% for solar. In the USA, natural gas and renewable energies have grown substantially, so much so that coal represents only 23% of energy generation on a public service scale, compared to the dominant position of 38% of natural gas. Just 10 years ago, coal accounted for 45% of the United States’ power generation, natural gas provided 23%, nuclear power accounted for 20% and renewable energies (including hydroelectric power) were only 10%.

It may not seem like it, but coal’s dominant global position is, in fact, great news for renewable energy. This is because renewable energy is most beneficial when it adds new capacity or replaces existing coal plants. Returning to the table in the previous section, combined cycle gas plants cost almost the same as renewables. Therefore, natural gas and renewable energy can grow together, replacing coal-fired plants and adding new capacities where technological and geographic characteristics are more favorable. In other words, places where the sun shines and the wind howls must have many new renewable investments that retire the existing infrastructure. Places in the USA where wind and solar energy are not practical should continue to see natural gas replace coal.

3. Resilience to the recession

2020 proved the strength of renewable energy. While oil and gas companies struggled to survive, many renewable energy companies actually grown up gains, albeit at a slower pace than before. The result was another great year for renewable energies, especially solar stocks.

In addition to pure renewable companies, several oil and gas and utility companies continued to increase their investments in wind and solar energy, even during a pandemic. All four major European oil companies, Total, Royal Dutch Bark, BP, and Equinor, released aggressive renewable energy targets and dumped oil and gas. Major utilities like NextEra Energy (NYSE: SEN) recorded record expenditures, largely due to renewable investments. In fact, NextEra’s electricity capacity can become mostly renewable in just a few years.

On the political front, the US reentry into the Paris Climate Agreement bodes well for the long-term future of renewable energies. Outside the US, growing economies like China and India still depend on coal for most of their energy, but they have also invested in renewable energy. India targets 450 GW of renewable capacity by 2030 and China continues to dominate global investments in solar energy. However, even with China’s aggressive renewable energy targets, it continues to increase its coal and liquefied natural gas (LNG) infrastructure.

Patience is the key

The future of renewable energy has never looked brighter, but that does not mean that you should go out and buy wind and solar stocks on hand. In fact, many of the main renewable stocks, such as Enphase Energy it may have gone too far, too fast in 2020. And the meteoric rise of the solar sector has caused leading companies to plummet in ratings. Although expensive, it is still worth adding many of these industry leaders to your watch list, should prices return to a more reasonable level. In addition to the well-known renewable stocks, some hidden gems remain, as well as larger stocks of diversified dividends with exposure to renewable energies. Whatever the current renewable allocation of your portfolio, it is definitely worth following the industry for many years.