The renewable energy industry enjoyed a banner year in 2020. According to the International Energy Agency (IEA), the global economy installed a record amount of new renewable capacity in 2020, primarily powered by surging demand in the U.S. and China. Overall, 90% of the new electricity generating capacity added in 2020 was renewable energy.
And as good as 2020 was, 2021 could be an even stronger year for renewable energy. Here are three things investors should keep an eye on in the coming year.
1. A continued acceleration in renewable energy
While 2020 was a great year for renewable energy, the pandemic held it back slightly as the global economic slowdown caused some delays. For example, sales of solar panels and other components like inverters were below their pre-pandemic levels in the U.S. during the third quarter.
But those headwinds should fade in 2021. Meanwhile, new tailwinds should grow stronger. For example, the IEA anticipates that the European Union and India will join the U.S. and China in accelerating their shift toward renewables in the coming year. This tailwind started picking up in the third quarter. Solar inverter maker SolarEdge Technologies (SEDG -1.08%) noted that its "third-quarter results reflect significant growth in Europe" as its "solar business outside the U.S. reached an all-time high."
Add that to the U.S. solar market showing signs of returning to its pre-pandemic installation levels and emerging markets like India and China accelerating their renewable energy efforts, and 2021 looks like it will be another record year for renewables.
2. The continued rise of solar plus storage
The cost of battery storage has fallen dramatically over the years. A decade ago, it cost between $71 to $81 per megawatt-hour (MWh) for a four-hour battery storage adder to a wind or solar energy project. But by 2020, the cost of adding a battery storage component had plummeted to between $6 to $12 per MWh. And it's currently on track to fall to a range of $4 to $9 per MWh by 2022.
Because of the dramatic decline in costs, more projects will include battery storage in the future. Only 28% of the utility-scale solar projects built in 2019 had battery storage, but most projects developed in 2021 will likely feature it as companies like NextEra Energy (NEE -1.11%) want to supercharge the country's battery storage capacity. In addition to including battery storage in newly developed projects, companies will likely also retrofit more existing ones with it in 2021.
3. More green hydrogen projects getting the green light
Most energy forecasters don't believe that the world can reach the aspirational goal of becoming emissions-free on wind and solar energy alone. Many leading developers of renewable energy like utility Xcel Energy (XEL -1.08%) believe that "we will need new carbon-free dispatchable technologies -- technologies not yet commercially available at the cost and scale needed to achieve our 2050 aspiration."
One emissions-free technology that has enormous potential is green hydrogen. This technology uses renewable energy to power an electrolysis system that produces hydrogen that can, for example, replace natural gas in a power plant.
Several companies are investing in this emerging technology. NextEra Energy unveiled a $65 million pilot project in 2020 that it hopes to have in service by 2023 to replace some of the natural gas consumed at one of its power plants. Meanwhile, Brookfield Renewable (BEP 0.34%) (BEPC -0.29%) teamed up with Plug Power (PLUG -3.68%) to supply it with 100% of the renewable energy it needs for its first green hydrogen plant.
The renewable energy industry will likely see several more project announcements and partnerships in 2021. Plug Power, which aims to get 50% of its hydrogen from renewable sources by 2024, is exploring a broader collaboration with Brookfield Renewable to pursue other green hydrogen solutions. Meanwhile, NextEra has about 50 additional potential green hydrogen projects in its pipeline that it could green-light in the coming year. Because of that, 2021 could be a huge year for green hydrogen.
Expect another bright year for renewable energy
The global economy continued its transition toward renewable energy in 2020, and that trend shows no signs of slowing in 2021. It appears poised to be another record year for installations and will likely also feature a surge in energy-storage additions and more green hydrogen projects. Given all the growth ahead, leading renewable energy stocks could generate market-beating total returns in the coming year.