Hydropower emerged as a dependable way to illuminate American cities in the late 1880s. Not much has changed in 2018; in fact, hydroelectric dams have been the largest source of renewable electricity generation in the United States for over 100 years. But that's all about to change.
A combination of decommissioning of older hydroelectric dams and cumulative investments of over $145 billion in the last decade will combine to knock hydropower into the number two spot in the rankings by 2019 -- to be replaced by wind power. Growth in wind power is expected to continue for the foreseeable future, promising to make the change permanent. Here's how individual investors can take advantage.
Hydropower has met its match
According to data compiled by the U.S. Energy Information Administration, hydropower is projected to account for about 6.5% of American electricity generation in 2018 and 6.6% in 2019. There's some wiggle room since hydroelectric dam output depends on annual water runoff volumes in various regions, but barring below- or above-average rainfall those are reasonable estimates.
Soon enough, not even higher water runoff will be able to keep hydropower in the top spot. According to the EIA, wind power is projected to account for 6.4% of American electricity generation this year, and to overtake hydropower with 6.9% in 2019. The expectations for continued steady growth come on the heels of an estimated 16.3 GW of new capacity installations in the next two years, which will push total American wind capacity to over 104 GW.
The expansion has been possible due to a mix of technology and economics. The latest wind turbines are more efficient at producing power, which means 1 GW installed today is more valuable than 1 GW installed a decade ago. New analytics software can even boost the output of older generation assets.
From an economics perspective, a healthy tax credit on production provides predictable cash flow for years after project completion. Meanwhile, wind farm owners have figured out they can actually lower electricity costs over time compared to, say, coal power plants since they don't need to purchase fuel. While many companies have caught on to wind power's potential, two companies in particular have been leading the charge.
Top stocks to buy in wind power
After dropping a cumulative $23.6 billion on wind power-generating assets over the years, NextEra Energy (NEE -1.11%) is the undisputed king of low-carbon utilities. It's the largest owner of wind capacity in North America, making up roughly 16% of America's total with 14 GW installed. That number could jump as much as 4.1 GW by the end of this year depending on project completion dates.
The company's massive bet on low-carbon wind energy has certainly paid off for shareholders, who have been treated to 10-year total returns of 235% -- well ahead of the S&P 500's 135%. In 2017 NextEra Energy generated 55% of its total net income from NextEra Energy Resources, which uses no-carbon sources for 94% of its installed generation capacity. That included a big one-time boost from tax reform, but even without the interest deduction it would have been a record year of profitability.
Given the company's healthy operating cash flow and plans to invest another $40 billion across its assets (not just wind) between now and 2020, investors should expect NextEra Energy stock to continue running laps around the broader market.
While NextEra Energy is far and away the largest owner of wind capacity, second-place Xcel Energy (XEL -1.08%) is furiously investing in new generation. The utility owns about 6.7 GW of wind capacity and delivered roughly 9% of the country's total electricity supplied from wind in 2017. But it's not stopping there.
Xcel Energy is undertaking an ambitious program to gradually replace coal production capacity with renewable energy. The goal: reduce coal capacity from 7 GW in 2016 to just 4.4 GW by 2027. The first phase of the initiative is well under way, and will see the company boost wind capacity 46% by 2021. If all goes according to the long-term plan, then the utility will go from generating 56% of its power from coal in 2005 to just 20% in 2027. Renewables -- mostly wind -- will jump from 3% to 47% in the same span.
Once again, heavy reliance on wind power has proven lucrative for shareholders. Xcel Energy stock has essentially matched the total returns of NextEra Energy in the last decade at 229%. The business has grown EPS from $1.95 in 2013 to $2.30 in 2017, and is expecting $2.42 at the midpoint of full-year 2018 guidance.
That has allowed the company to grow its dividend at a compound annual rate of return of 6.5% in that span. It yields a healthy 3.5% today. Given plans to continue growing low-cost wind power generation for the next decade at least, this renewable stock figures to continue creating value for shareholders.
Renewable energy continues to mature
Wind power's overnight rise has been pretty remarkable. In a span of just 11 years, from 2008 to 2018, it will go from generating only 1.5% of total U.S. electricity to 6.5%.
That said, there's a long way to go before clean power sources dominate the American electric grid. In 2017 fossil fuels accounted for 62.7% of all power generation. Nuclear (the ugly duckling of clean power) contributed 20%, while all other renewables combined for just 17.1%. Then again, that just means there will be plenty of renewable energy opportunities for investors for the foreseeable future.