Brookfield Renewable (BEP 0.30%) (BEPC 0.42%) is a global leader in producing hydroelectric power. It has 7.9 gigawatts (GW) of hydropower plants currently operating, which account for 64% of its cash flow. It's also a large-scale wind energy producer, with 4.7 GW of installed capacity, contributing 27% of its annual cash flow. However, management believes that solar energy could soar past them in importance to the company in the coming years.
Building a global renewable energy powerhouse
Brookfield Renewable has built one of the world's largest-scale renewable energy businesses over the past two decades. It currently owns more than $50 billion of operating assets consisting of 5,301 generating facilities that have the capacity to produce 19.3 GW of carbon-free electricity. To put that into perspective, 1 GW of power is enough to power about 190,000 U.S. households for a year. Its operations span the globe, with plants in North and South America, Europe, and Asia.
Solar is a more recent arrival to that portfolio. The company has acquired or developed 3 GW of solar power projects over the last five years. It built that portfolio in a variety of ways, but one of its more notable moves was acquiring TerraForm Power and TerraForm Global. The company also formed a couple of joint ventures. In 2018, it teamed up with leading global logistics provider GLP in a 50-50 partnership to develop rooftop solar projects in China. Meanwhile, last year, it bought a 50% stake in global solar project developer X-Elio. Brookfield Renewable also acquired several solar energy development projects in Brazil over the past year, including recently signing a deal to buy a 1.2 GW project, one of the largest in the world. As a result, the company has nearly 10 GW of solar projects under development, which puts that energy source on track to become a much more meaningful part of the company's financial picture.
A solar-powered future
CEO Sachin Shah highlighted the company's fast-growing solar business in his second-quarter investor letter:
As a result of technology advances and reductions in construction costs, solar can stand on its own without subsidies and more importantly, is now among the lowest cost sources of conventional power globally. To put this in perspective, solar costs over the last five years -- the period in which we have built our solar business -- have gone from over $4 per watt to install, to less than a $1 per watt in almost all jurisdictions around the world.
Those costs will likely continue coming down. According to utility holding company NextEra Energy (NEE 1.53%), which is one of the leaders in developing renewables, the cost of near-firm solar (installations which include battery storage, allowing them to provide power on an almost around-the-clock basis) is on track to fall below all but the most efficient natural gas power plants by some point in 2023 or 2024.
Because of those favorable economics, solar energy projects are increasingly attractive investments for companies like Brookfield. Add that to the "renewable nature and perpetual source of free energy," and Shah believes:
[I]t is possible that in ten years from now the majority of the production capacity of Brookfield Renewable will be solar capacity. It is not that we do not believe in wind or hydro but the growth in solar and the ability for us to develop and earn strong risk adjusted returns should enable us to grow our solar operations at a far greater pace.
The company's current development pipeline certainly backs up those sentiments. As noted, it has nearly 10 GW of solar projects under development, which amounts to more than half of its 18 GW pipeline. As it builds these projects and acquires new ones, solar could eventually become its top source of power and cash flow.
Solar-powered dividend growth
With costs coming down and returns rising, Brookfield has been active in locking up solar energy development projects to supercharge its long-term growth prospects. With a large pipeline already secured, the company should have what it takes to follow through on its plans to grow its already attractive dividend, which yields 4% at current prices, by 5% to 9% per year.