Renewable energy production is booming around the world, with wind and solar leading the way. In the U.S., wind energy production has more than doubled in the past decade, while solar production has increased by a factor of more than 10 in the last eight years alone.
Amid the industry's overall growth, though, individual companies have still struggled due to falling costs and highly competitive manufacturing and finance markets. Yet even against that backdrop, here's why NextEra Energy Partners (NEP 1.98%), SunPower (SPWR 5.86%), and Canadian Solar (CSIQ 3.68%) are well-positioned for the future.
NextEra Energy Partners
NextEra Energy Partners owns and operates wind- and solar-power generating assets, paying up front for the projects and then collecting revenue over the course of decades as they produce electricity. Right now, the company owns 5.33 gigawatts of renewable energy assets, primarily wind energy installations. There's an average of 15 years remaining on its contracts to sell electricity to utilities, and due to some tax law advantages the company isn't expected to pay significant taxes for 15 years. This contracted cash flow provides stability that will help keep the company going for decades.
What separates NextEra Energy Partners from its competitors is the company's sponsor, NextEra Energy, which enjoys both financial strength and a large base of renewable energy projects. It can sell renewable energy assets to NextEra Energy Partners as a way to grow the dividend long term. Management says that it expects to boost the dividend by 12% to 15% annually through 2024, so even with the payout yielding 4.1% today, this dividend stock has a lot of upside ahead.
SunPower is about to spin off its high-efficiency solar manufacturing business as Maxeon Solar Technologies, but what's left should be a much stronger and more focused company. The new SunPower will still use Maxeon solar panels, but it'll design, sell, install, and finance residential and commercial solar installations. Instead of being vertically integrated from manufacturing through installation, it'll focus on the customer sales side of the business.
This model will allow SunPower to leverage what it has learned over the years in a broad range of markets. Today with the SunPower Design Studio, you can have a solar installation designed for your house and get a price quote online in a matter of minutes. That digitizes a process that was once cumbersome and costly.
To add to panel installation design, SunPower has built both residential and commercial energy storage solutions that could expand its market and generate value for customers and the company long term. Energy storage can be bid into some utility markets to generate revenue, which will then be shared with customers. Or it can provide energy savings by shaving off-peak demand that's now higher-cost at many utilities across the country.
SunPower has spent years building the technology to drive residential and commercial solar power growth across the country, but has been bogged down by low margins in its manufacturing business. I think this split will allow SunPower to generate more consistent returns with a better customer focus, and over the next few years it may even become the biggest residential solar company in the U.S., a title it already holds in commercial solar.
The solar industry is booming worldwide, and Canadian Solar is one of the industry's biggest manufacturers and project developers. The company has 13 gigawatts of solar module manufacturing capacity, enough to build panels sufficient to power 2.5 million homes every single year.
While the story of Canadian Solar has historically been a tale of low margins and weak profitability in the commodity solar industry, the last few years have changed that narrative. Competitors have consolidated or gone out of business, leaving just a handful of large solar manufacturers that typically have higher margins than the previous single-digit gross margins companies have faced at times. For example, in the first quarter of 2020 the company reported a gross margin of 21.6% for its manufacturing unit, and profitability was up as a result.
What has driven the sharp rise in profitability recently is the sale of solar projects from the development side of the business. Canadian Solar is one of the few manufacturers that is still building and selling large solar projects, and with a backlog and pipeline of 15.7 gigawatts of new projects, this business could generate billions of dollars of future revenue.
Solar manufacturing isn't en vogue the way it was a decade ago, but it can still be a profitable business long-term. Canadian Solar is proving that right now.
Renewable is the future of energy
Energy stocks have been in a transition period over the last few years as utilities have shifted away from coal and toward renewables -- and the trend is only intensifying. The U.S. Energy Information Administration estimates that three-quarters of new electricity generation capacity built in the U.S. this year will be wind or solar energy. That's a trend investors will want to take advantage of, and these three companies should be long-term beneficiaries.