The world is rapidly transitioning toward a future powered by renewable energy. In the last five years alone, global enterprises have invested a stunning $1.5 trillion in building renewable power–generation facilities to help power the global economy while working to mute the impact of climate change. Those investments have added 1 million megawatts (MW) to the worldwide power supply.
However, despite that massive spending, solar and wind still only account for less than 10% of the world's power supply. Because of that, there's a monumental opportunity ahead for investors as companies continue to invest in building new renewable-power generation, with one estimate pegging that number at more than $10 trillion, to replace the current carbon-based power systems in the world's largest markets. The opportunity is even larger when factoring in demand growth and the electrification of transportation, which means that renewable-focused companies could generate lots of growth for their investors in the coming years.
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Generating returns from renewables
One company focused on capturing its share of this multitrillion-dollar market is Brookfield Renewable Partners (BEP 0.13%). Over the past five years, the company has spent $3.3 billion to build or buy 12,500 MW of renewable capacity around the world, including purchasing a large stake in TerraForm Power (TERP +0.00%). Its investments have included wind and solar as well as hydroelectric and other technologies such as energy storage.
Brookfield plans to continue expanding in its core markets by developing new projects as well as buying renewable power assets from others. On the development side, the company aims to build 1,000 MW of new capacity over the next several years, including wind farms in Europe, Colombia, and Brazil, small hydro facilities in Brazil, and distributed (rooftop) solar generation in North America and China. In addition to that, it expects to continue buying operating assets when it can find high-quality facilities for a good price. Overall, it plans to invest about $700 million per year in expanding its renewables business.
However, what's different about Brookfield's approach is that it's not investing so that it can build a renewable-power empire but to generate returns for its investors, with the company targeting investments that will earn annual returns in the 12% to 15% range. That high-return growth should give the company the power it needs to continue increasing its 6.6%-yielding distribution to investors at a 5% to 9% annual rate over the long term, which positions it to continue generating total annual returns of around 15% going forward.
Same story, slightly different focus
TerraForm Power shares many similarities with Brookfield Renewable. The main difference is that it focuses on owning wind and solar assets in North America and Western Europe, whereas Brookfield Renewable has greater diversification both globally and by asset class. But even with that narrower focus, TerraForm has plenty of growth potential up ahead.
One opportunity the company is working to capture in the near term is expanding its existing portfolio by exploring the potential for repowering assets (including replacing existing wind turbines with more powerful ones), site expansions, and adding on-site energy storage capabilities. The company has identified more than $500 million of organic investment opportunities and has already started work on a couple of projects. In addition to that, the company owns the rights to acquire a large portfolio of projects that are currently under construction and has recently signed deals to purchase a couple of small assets. Those investments position TerraForm to grow its 6.8%-yielding dividend at a 5% to 8% annual rate for at least the next five years, which could give it the power to generate total returns of 12% to 15% per year.
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High-powered dividend growth
One of the biggest investors in renewables in recent years has been utility NextEra Energy (NEE 0.06%). The company's energy resources segment spent $11 billion last year to build new renewable assets and had 7,400 MW of renewable development projects in the pipeline at the end of the second quarter. Those and other expansion opportunities position NextEra to grow its earnings at a 6% to 8% annual pace through 2021, with it projecting even faster dividend growth of 12% to 14% per year over that time frame.
One of the ways the company plans to fund that high-powered growth is by continuing to sell clean-energy assets to its yield-focused subsidiary NextEra Energy Partners (NEP 1.88%). The companies recently sealed a $1.275 billion deal to transfer 10 wind farms and a solar facility to NextEra Energy Partners. That transaction will give the company some of the power it needs to achieve its ambitious dividend growth plan, which would see it increase its payout at a 12% to 15% annual pace through 2023. Add that fast-paced growth to the company's 3.8%-yielding dividend, and NextEra Energy Partners could generate total annual returns in the 16% to 19% range over the coming years.
The future of renewable investments remains bright
The world needs to invest trillions of dollars in building new renewable energy–generating capacity in the future, which is a massive opportunity for investors. Several companies are working to capture this opportunity by focusing on developing or acquiring cash-flowing renewable power–generating assets, which would give them the money to pay lucrative dividends that they could grow at a fast pace in the years ahead. That combination of income and growth positions these companies to generate high-powered total returns, which could enrich their investors over the long term.
