The renewables industry is one sector that’s on a certain path of global growth as the switch to greener energy solutions and cheaper power remains at the top of most government agendas.
According to the International Energy Agency (IEA), renewable capacity will meet 35% of global power generation by 2025, while the Energy Information Administration (EIA) predicts that solar power will make up more than half of new capacity in the US in 2023.
Moreover, a report published on 25 May by the IEA said global investment in clean energy is on course to rise to $1.7 trillion (£1.37trn) in 2023, with solar set to eclipse oil production for the first time.
As a result, there are a number of stocks in the space that could benefit from the transition – some more under the radar than others. However, despite the sector’s growth, there’s no guarantee investor choices will turn a profit.
Dominic Rowles, lead ESG analyst at Hargreaves Lansdown, said: “Governments around the world have committed to dramatically lowering their CO2 emissions in a bid to combat climate change. With limited supplies of fossil fuels, concern over their environmental impact and a need to decrease reliance on Russian energy sources, renewable sources of energy like wind and solar are gaining big momentum.”
He also noted that any form of energy infrastructure normally involves lots of debt to finance construction and upkeep. This, combined with a reliance on emerging technologies means an investment in the renewable energy sector isn’t without its risks.
“If you’re prepared to take on the risks, there are lots of ways to play the sustainable energy trend. We’ve pulled out a fund and an investment trust that we think are well-placed to benefit from the shift towards cleaner power. They both invest in quite a niche area of the stock market, so should make up just a small part of a well-diversified portfolio,” he said.
Let’s take a look at some renewable stocks on the trading radar, including Greencoat UK Wind and FP WHEB Sustainability, as highlighted by Rowles.
Greencoat UK Wind (UKW.L)
Greencoat UK Wind in the FTSE 250 operates wind farms across the UK, which is a high-priority area of investment for the British government.
“Wind is currently the UK’s largest source of renewable energy. UK wind farms produce power and sell it under long-term agreements to utility companies who are obliged to produce a certain percentage of power from green sources. Greencoat UK Wind lets you invest directly into these wind farms,” Rowles said.
He also highlighted that it invests in over 40 operating wind farms that produce enough clean energy to power over 1.8 million homes per year.
“In 2022, the trust had approximately 6% market share of operating UK wind farms. Revenues depend on the ongoing attractiveness of wind-farm investments in general, as well as wind conditions, which the trust has no control over. That said, the managers are encouraged by what they believe is an attractive pipeline future investment opportunities,” Rowles added.
FP WHEB Sustainability (GB00B8HPRW47.L)
The FP WHEB Sustainability fund takes a more diversified approach, Rowles highlighted, aiming to make a positive impact across nine sustainable investment themes, ranging from cleaner energy and sustainable transport to education and wellbeing.
“Investments in the fund’s cleaner energy bucket include First Solar, a US-based maker of solar panels. The company is pioneering new solar technology and operates a sector-leading approach to the manufacture and recycling of its solar modules, according to the managers. The fund also invests in Vestas Wind Systems, the world’s largest maker of wind turbines,” Rowles added.
The AES Corporation (AES)
Michael Cerasoli, a portfolio manager of energy infrastructure strategies at Eagle Advisors, also cited AES, Ormat Technologies and RWE as being are among the renewable stocks that could benefit from the sector’s growth.
AES helps businesses transition to cleaner energy and has a growing renewable footprint that predates the Inflation Reduction Act’s (IRA) passage.
On 4 May, the company reported its financial results for the quarter ended March 31, 2023.
"Our first quarter results put us on track to meet our 2023 guidance and longer-term growth rates," Andrés Gluski, AES president and chief executive officer, said.
It reported first quarter 2023 net income of $189m, an increase of $18m compared to first quarter 2022 results, while first quarter 2023 Adjusted EBITDA was $628m, an increase of $7m compared to first quarter 2022.
The company also reaffirmed its 7% to 9% annualised growth rate target through 2025.
Ormat Technologies (ORA)
Ormat, meanwhile, is an “overlooked” leader in geothermal production with a strong cash flow stream and has geographical diverse growth opportunities, Cerasoli noted.
As a result, analysts believe the US company is favourably positioned to benefit from the energy storage trend, which has also been bolstered by tax credits from the IRA in the US.
On 11 May, the company’s first-quarter 2023 earnings per share came in at 51 cents, which outpaced the Zacks Consensus Estimate of 49 cents by 4.1%. The bottom line also improved 54.5% on a year-over-year basis.
It also reported revenues of $185.2m, which missed the Zacks Consensus Estimate of $212m by 12.8%. The top line, however, rose 0.8% on a year-over-year basis, driven by higher revenues from the electricity segment.
The company said it projects revenues in the range of $823-$858m for 2023. ORA also continues to anticipate annual adjusted EBITDA in the range of $480-$510m.
RWE describes itself as the world's number two in offshore wind power and Europe's third largest in renewable energy – moreover, described by Cerasoli as one of the best energy stocks in Europe.
“RWE is the unequivocal leader that’s accelerating Germany’s ambitious transition plans and is expanding globally, as evidenced through its recent acquisition of ConEd’s clean energy business,” he recently explained.
The company has became the sole owner of a 1.6 GW cluster of offshore wind farms in the German North Sea by buying out its Canadian partner Northland Power in a deal worth around €35m. The move has cheered investors with its stock climbing nearly 2% following the announcement.
The energy group has also started the construction of a large-scale battery storage project at two locations in North Rhine-Westphalia, investing approximately €140m.
The battery storage facility, with a capacity of 235 megawatt hours, is scheduled to supply balancing energy from the second half of 2024, and will also be deployed in the wholesale market.
GCL New Energy Holdings Limited (0451.HK)
Giles Coghlan, chief market analyst, consulting for HYCM, recently highlighted how energy stocks in China could benefit from the renewable investment surge.
“As a big driver of green energy and a key source for rare earth metals, any stocks in the clean energy industry in China should provide investors with good value for money as the global renewables sector continues to enjoy significant growth.”
GCL New Energy Holdings Limited (0451.HK), for example, has enjoyed a huge price gain.
Simply Wall St highlighted how shareholders might be concerned after seeing the share price drop 17% in the last quarter.
“But over three years the performance has been really wonderful. In fact, the share price has taken off in that time, up 697%. Arguably, the recent fall is to be expected after such a strong rise. The thing to consider is whether there is still too much elation around the company's prospects,” its analysts said.
First Majestic Silver (AG)
It is also worth noting that mining stocks could benefit from the renewable sector's growth – copper, gold and silver, in particular, could profit.
That’s because silver is used in solar panels, while gold is used in most of the technologies that will shape the future of the sector.
First Majestic Silver gets half of its revenue from silver and half from gold, so could benefit from renewables growth – and can also expose investors to both silver and gold at the same time, Coghlan also highlighted.
Solar stocks to watch
Big US solar panel companies are also worth watching – with growth in the area also set to widen considerably in the next few years with significant government support.
Many investors have been monitoring US solar suppliers, that provide solar panels and related services, like Enphase Energy (ENPH); SolarEdge Technologies (SEDG); First Solar (FSLR); Sunrun (RUN) and SunPower (SPWR).
There are also some engineering firms like Aecom (ACM) providing a lot of the support for renewable energy investments, which gets less attention.
The switch to renewables, such as wind and solar, has been fast-tracked since Russia’s invasion of Ukraine in February 2022 as countries opted to move away from Moscow’s fossil fuels, such as its crude oil and natural gas, and scrambled to source alternative energy sources.
Moreover, as energy prices soared and continue to do so, governments have been forced to act promptly to build the required infrastructure to support alternative energy sources – that are also more closely aligned with the Paris Agreement targets.