Things to consider when making a renewable energy investment
Are renewable energy investment opportunities going to blow away or are they here to stay? We take a look at the market
As concerns surrounding climate change grow, interest has surged in renewable energy investment opportunities. Crunching the numbers, it isn’t hard to see why.
The S&P Global Clean Energy Index, which tracks 30 major companies in this industry, delivered annualised returns of 28.63 per cent over the past 12 months. And just look at how Tesla has performed recently. The electric carmaker’s stock has leapt up from $650 (£500, €770) at the end of January to $870 in just four short days – that’s a rise of 33.8 per cent.
Even though these figures are tantalising, investing in renewable energy can have pitfalls. Businesses in this burgeoning industry are having to spend astronomical sums of money to get infrastructure in place – and often this expenditure is being achieved through borrowing. In other cases, companies can be overly reliant on funding from government initiatives, and they can become a lot less attractive once these subsidies are removed.
As the world continues to experiment with different forms of clean energy, some alternatives for fossil fuels will become more widely used than others. This presents the risk that, in a few years, once-innovative approaches for keeping the lights on will be left on the scrapheap.
So… is renewable energy a good investment? Who are the leaders in this industry? Let’s take a look at how the marketplace looks right now.
Investing in renewable energy: the options
If you want to invest in green energy, the first golden rule is to contemplate your appetite for risk. Some opportunities in the industry are riskier than others. Bonds are one especially popular fundraising method that businesses are beginning to turn to. Figures from the Climate Bonds Initiative suggest the value of this market was a record-breaking $255bn in 2019 – with $107bn of this being issued from inside the European Union. On a national level, the United States came top on $50.6bn, followed by China on $30.1bn. Forecasts suggest that bond issuance could be as high as $400bn in 2020, a 60 per cent increase on last year’s levels.
There’s no question that these are incredibly healthy figures, but it’s also worth bearing in mind that this approach to investing in renewable energy has its downsides. Green bonds only represent a small portion of the wider market, and a lack of liquidity means they can be difficult to sell quickly. In certain cases, there can also be little transparency over how funds are used — and equally, investors often face a challenge as they search for detailed research that will help them make an informed decision.
Another viable alternative can be renewable energy stocks. Companies that have been publicly listed will usually have a much smaller market capitalisation than big players in this sector, meaning that prices may be subject to more volatility. A sizeable number of businesses are unquoted, meaning they cannot be found on a stock exchange. This makes buying and selling shares more of a challenge, and interested investors often face barriers to entry – not least because they often require a high minimum contribution.
Investment trusts and exchange-traded funds are useful for those who want to gain exposure to unquoted renewable energy stocks. Many investment trusts focus on one particular aspect of clean energy – such as solar – with specialists hand-picking the businesses that they feel have the most potential. Investors’ money is pooled together, opening up opportunities that may have been unaffordable to an individual. Exchange-traded funds also deliver access to dozens of green stocks from around the world – but despite this diversification, you should ensure that your portfolio isn’t overly exposed to the sector.
Examples of leading renewable energy stocks
Tesla’s dominance in this sector is well-established, but let’s look at a couple of other companies that could be ripe for a renewable energy investment.
One of the world’s biggest providers of wind and solar power is NextEra Energy, an American company that has been in operation since 1984. The company says it is planning up to $55bn in US infrastructure between now and 2022, and currently has 45,500MW of net generating capacity. NextEra had earnings per share of $1.44 in the fourth quarter of 2019. According to CNN Business, the high-end forecast for this stock over the next 12 months stands at $290, a 9.1 per cent rise from their price of $265.75 at the time of writing. The median estimate is $261.50, and the low estimate is $242.
Another market leader is the solar panel manufacturer First Solar. The company was founded in 1999 and currently has a market cap of $5.5bn. Its share price currently stands at $52.13 – some way off the highs of $311 seen in May 2008. According to CNN Business, the stock has a low-end forecast of $49 for 2020, down 6 per cent. The median forecast is $72 – an increase of 42 per cent – while the high-end forecast predicts a 63.1 per cent rise to $85.
Ultimately, it can be difficult to know which way the wind blows when you invest in green energy. Keeping a close eye on government policy, and on the bottom lines of companies who are ploughing substantial amounts of cash into infrastructure, can help uncover stocks that will shine in future.
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