While Apple stole headlines this summer, becoming the first company to reach a $1 trillion market cap, the renewable energy industry celebrated a different milestone beginning with the letter "t." According to Bloomberg New Energy Finance (BNEF), global capacity for solar and wind power generation has exceeded 1 terawatt. And it won't be long before we celebrate the next terawatt. BNEF estimates that the second terawatt of generating capacity will be installed in 2023 at a cost 46% lower than the first.
Along with the growing acceptance of renewable energy, a variety of investment opportunities have emerged, presenting more diversity than solar panel and wind turbine manufacturers. So let's look at some of the different ways in which investors can electrify their portfolios.
A hankering for the hardware
Producing thin-film solar modules that use a cadmium-telluride compound instead of the more prevalent multi-crystalline silicon technology, First Solar (NASDAQ:FSLR) primarily provides its solar modules to utility-scale projects. Besides the production of modules, the company offers its customers operations and maintenance (O&M) solutions. In fact, Greentech Media, in late 2017, named First Solar, which has 6.3 GW of projects under management, the top O&M provider for the fourth year in a row. Indicating the bright future that lies ahead of it, First Solar recently reported that the total projects in its pipeline equal more than 6.1 GW. For context, the company, as of the end of 2017, had sold more than 17 GW of solar modules throughout its history.
With roots stretching back to 1898, Vestas Wind Systems (OTC:VWDRY) represents one of the most recognizable names in the wind industry -- an industry that has had the wind at its back so far in the 21st century. From 2001 to 2017, for example, global cumulative installed wind capacity has grown a whopping 2,156%. Demonstrating the company's large presence, it accounts for the second-most cumulative installed offshore wind capacity (a market much greater around the world than in the U.S.) in Europe. Vestas' footprint, in all likelihood, will continue to grow. The company's backlog, between wind turbine orders and service agreements, totals 23 billion euros as of the end of the second quarter. And peeking at its past proves how lucrative its business can be. Over the past five years, the company has averaged 1.2 billion euros in free cash flow, according to Morningstar.
Get paid while you wait
Yieldcos offer investors another viable approach. Inking long-term power purchase agreements (PPAs) to sell the electricity to a utility or other entity, yieldcos generate stable cash flows over extended periods of time; in turn, this cash is returned to shareholders. One such example is Pattern Energy (NASDAQ:PEGI), which is primarily focused on wind power facilities, although the company's 2,860 MW portfolio includes 24 utility-scale projects, representing wind, solar, transmissions, and storage projects in the U.S., Canada, and Japan.
One of the greatest risks facing Pattern Energy is the potential for its counterparties to default on their PPAs. Management, however, mitigates this risk by partnering with entities with high credit ratings. The average credit rating (from Standard & Poor's and Moody's) of its off-takers is an A. Currently, Pattern Energy pays out more than 90% of its cash available for distribution (CAFD), but, according to a presentation from 2017, it intends to take a more conservative approach, targeting a CAFD payout ratio of 80% by 2020. For dividend-minded investors, Pattern Energy's appeal is clear, as its dividend yield is currently north of 8.3%.
Instead of a yieldco perhaps a master limited partnership like Brookfield Renewable Partners LP (NYSE:BEP). which also secures PPAs will pique investors' interests. With 876 generating facilities, including hydroelectric, wind, solar, and storage, Brookfield Renewable Partners has a portfolio of projects that represents 17,400 MW of installed capacity. Looking ahead, the company targets annual investments of $600 million to $700 million in high-quality assets, which will provide 12% to 15% returns on investment. Similar to Pattern Energy, Brookfield returned more than 90% of its CAFD to shareholders in 2017; however, unlike Pattern Energy, Brookfield Renewable Partners identifies a long-term payout ratio of 70% from its CAFD. Of greater appeal to conservative investors may be the fact that the company maintains an investment-grade balance sheet based on credit ratings from both Standard & Poor's and DBRS.
A third opportunity to be charged up about
Instead of investing in a single business, some investors may be more comfortable with choosing a basket of stocks. In this case, there are several exchange-traded funds (ETFs) from which they can choose. For example, the Invesco Solar ETF (NYSEMKT:TAN) offers investors 23 holdings that represent various companies in the solar industry, ranging from solar panel manufacturers to utilities to financiers. The ETF is not actively managed -- it tracks the MAC Global Solar Energy Index -- so it has a moderately low expense ratio of 0.74%. And shareholders can expect their portfolios to heat up in December when the ETF makes its annual distribution, which yields about 1.95% based on last year's amount.
For those afraid of getting burned with the solar ETF, the iShares Global Clean Energy ETF (NASDAQ:ICLN) may be a more attractive option since the fund's stated objective is to "track the investment results of the S&P Global Clean Energy Index." The fund's 30 holdings represent global leaders in renewable energy, ranging from solar power to geothermal to waste-to-energy. Like the Invesco Solar ETF, the iShares Global Clean Energy ETF is not actively managed and carries a fairly low expense ratio of 0.47%. Distributions are made semiannually and currently offer a trailing-12-month yield of 2.34%.
Which opportunity is most electrifying for you?
Investors charged up about the prospects of renewable energy have a variety of approaches from which they can choose, whether pure plays in solar and wind via First Solar and Vestas, respectively, a yieldco, a master limited partnership, or ETFs. Moving forward, investors should look to see that backlogs in products and services continue to grow for First Solar and Vestas. Similarly, the development of projects in the pipelines -- and addition of new projects -- of Pattern Energy and Brookfield Renewable Partners should energize investors' optimism.