3 reasons to invest in renewable energy stocks

Growth in renewable energy is accelerating like never before, as decarburization expands beyond the energy industry. Companies in each sector now publish environmental, social and governance (ESG) reports focusing on reducing emissions. As a result, businesses, not just countries, are setting aggressive targets to reduce their environmental footprint, targets that cannot be achieved without renewable energy.

Lower renewable energy costs, far-reaching growth and resilience in the recession are three important reasons to invest in renewable energy stocks. Here’s why.

Image Source: Getty Images.

1. Costs have dropped

If you follow renewable energy regularly, chances are you are aware that new installations are now competitive with or even cheaper than fossil fuels. It’s a remarkable achievement, but it did not happen overnight.

The first major progress was made between 2010 and 2014, during which the equal cost of energy (LCOE) of solar-powered solar power fell by 50% on the scale. LCOE is a way to measure the fixed and variable cost of power over the life of the asset, and provides a way to fairly compare different sources of electricity. As early as 2014, onshore wind became one of the most competitive sources of renewable energy, and in ideal conditions even cheaper than fossil fuels. But still, fossil fuels were generally cheaper than renewable energy.

Earlier this month, the US Energy Information Administration (EIA) released its estimates for new power generation projects to be commissioned in 2026. The report shows that costs are still falling, even for fossil fuel sources. But even the most efficient source of fossil fuel-based power generation, a combined cycle plant with natural gas, is now more expensive than onshore wind and solar PV. It is also noteworthy that there are expected to be few or no new installations in the US for energy methods such as coal, nuclear power, biomass and even hydropower, and therefore it is referred to as “NB” or “not built.”

Data source: US EIA. Data in Megawatt-hours (MWhs). 2026 data reflect the EIA’s 2021 estimated capacity weight LCOE of electricity for new resources to be deployed in 2026. The 2019 data reflect the EIA’s estimated capacity weight LCOE for 2014 for new resources to be deployed in 2019.

Subsidies used to play a key role in making renewable competitive costs with fossil fuels, especially with solar power. Today, subsidies reduce the cost of wind and solar, but they are no longer as important as they used to be. In summary, the profitability of renewable energy plants no longer depends on government subsidies, which offers many benefits for the long-term acceptance of increase in renewable capacity.

Plenty of room to grow

The cost of solar and wind energy has dropped, but both sources still account for a fraction of the total power generation. In the US, wind contributes about 7.1% of the electricity compared to the 1.7% of solar power. Globally, wind is 4.8% compared to solar power’s 2.1%. In the US, natural gas and renewable energy sources have grown significantly, so much so that coal accounts for only 23% of US-scale power generation, compared to the dominant 38% position of natural gas. Just ten years ago, coal accounted for 45% of U.S. power generation, natural gas produced 23%, nuclear power was 20% and renewable energy (including hydropower) only 10%.

It may not seem like it, but coal’s dominant world position is actually good news for renewable energy. This is because renewable energy is most beneficial when it adds new capacity or replaces existing coal plants. Referring to the table in the previous section, combined cycle gas plants cost about the same as renewable energy. Therefore, natural gas and renewable energy can grow together by replacing coal plants and adding new capacity where technological and geographical features are most favorable. In other words, places where the sun is shining and the wind is crying must see many new renewable investments retiring existing infrastructure. Places in the US where wind and sun are not practical should continue to see natural gas replace coal.

Image Source: Getty Images.

3. Recession’s resilience

2020 was the strength of renewable energy. While oil and gas companies have struggled to get by, many renewable energy companies have actually done so. has grown earnings, although at a slower pace than before. The result was another amazing year for renewable energy, especially solar supplies.

Apart from the pure-play renewable companies, several oil and gas companies and utilities have continued to increase their wind and solar investments even during a pandemic. All four European majors, Total, Royal Dutch Hull, BP, en Equinor, set aggressive targets for renewable energy and cut off oil and gas. Important utilities such as NextEra Energy (NYSE: NO) record high spending recorded, mainly due to renewable investments. In fact, NextEra’s electricity capacity can be renewed by a majority within a few years.

On the political front, the US accession to the Paris Climate Agreement is good for the long-term future of renewable energy. Outside the US, growing economies such as China and India still rely on coal for most of their power, but they have also invested in renewable energy. India aims at 450 GW of renewable capacity by 2030 and China continues to dominate global solar investments. However, even with China’s aggressive renewable targets, it continues to sharpen its coal and liquefied natural gas (LNG) infrastructure.

Patience is the key

The future of renewable energy has never been brighter, but that does not mean you have to worry about buying wind and solar supplies over hand. In fact, many leading renewable stocks like Enphase Energy may have run too far, too fast in 2020. And the meteoric rise in solar power has driven leading companies to valuable nosebleeds. Even though it is expensive, it is still worth adding many of these industry leaders to your watchlist if prices fall to a more reasonable level again. Apart from the well-known renewable stocks, there remain some hidden gems as well as larger diversified dividend stocks with exposure to renewable energy. Whatever your portfolio’s current renewable award, the sector is definitely worth following in the coming years.