Renewable energy stocks have been on fire over the past six months as investors have realized the potential of this disruptive energy industry. But the transition to renewable energy has been taking place for years.
As the cost to build wind and solar power plants has come down and their efficiency has gone up, we've seen them replace coal, nuclear, and in some cases even natural gas power plants. Those trends should continue, which leads us to four big reasons to invest in renewable energy.
1. Renewable energy is grabbing a bigger piece of a growing pie
The chart below shows the long-term trends in solar, wind, coal, and nuclear energy production in the U.S. You can see that wind and solar are growing much more quickly than energy production overall and are taking market share from coal and nuclear power plants.
The reason for this shift is primarily cost. Wind and solar power plants can produce electricity at a lower cost than coal and nuclear in most of the U.S., and they're winning bids for power contracts as a result.
What this does is create a growing pie of investment opportunities for companies like renewable energy asset owners NextEra Energy Partners (NYSE:NEP), Brookfield Renewable Partners (NYSE:BEP), and Atlantica Sustainable Infrastructure (NASDAQ:AY). These are the companies that finance and own billions of dollars of renewable energy projects.
NextEra Energy Partners is one of the largest renewable energy asset owners in the world with 4,855 megawatts (MW) of wind power and 975 MW of solar power plants. Brookfield owns 19,400 MW of renewable energy assets with 64% of those being hydroelectric power plants. And Atlantica has 1,551 MW of renewable energy assets with 1,166 miles of transmission and transportation, natural gas, and water assets as well.
If there's a growing pool of assets and ample funding available to drive growth, each of these companies will be able to grow their asset base and dividends long term.
2. The technology is improving
Falling costs go hand in hand with improving technology. Solar panels are getting more efficient, bigger wind turbines provide more energy per dollar of investment, and small improvements in components like inverters are squeezing more energy from every project. But the big technology improvement that will drive the industry's growth for a decade is energy storage.
Battery storage is already being included in projects around the world. It allows power plant owners to better regulate energy supply to the grid instead of when the sun is out or the wind is strongest. This reduces stress on the grid and increases the value of energy coming from renewable power plants. But this may just be the start.
Batteries are now being included in home and commercial solar installations and both the installers and manufacturers supplying equipment to installers. Sunrun (NASDAQ:RUN) and SunPower (NASDAQ:SPWR) are playing a role in both installation and equipment design and manufacturing while Enphase Energy (NASDAQ:ENPH), and SolarEdge Technologies (NASDAQ:SEDG) are leading equipment suppliers, leaning on their installation partners to grow their installed base, including batteries. These companies are not only providing backup power, they're also adding the option to create virtual power plants that can aggregate thousands of energy storage systems together and bid energy into the grid.
There are also potentially disruptive technology and capacity increases in the pipeline in the form of hydrogen power storage and electric vehicles that could drive even more demand for renewable energy long term.
3. Corporate America loves renewable energy
It's great to see more solar panels on rooftops, but the real impact for wind and solar renewable energy is at the corporate level. Not only are utilities across the country building and buying more renewable energy, but corporate America is as well.
According to the Solar Energy Industries Association, commercial customers have acquired either the assets or power from more than 8,350 megawatts of solar cumulatively. That's enough to power 1.6 million homes, and the industry is growing. Between 2017 and 2019, installations were at least 1,100 MW per year and hit 1,286 MW last year. As solar energy becomes more cost-effective, we should expect this number to grow.
And that's just solar energy. Corporate wind-energy investment and electricity procurement now tops 17,000 MW, or enough to power 5 million American homes. Both of the main forms of renewable energy are getting a lot of corporate money right now.
Corporations are important in renewable energy because they're key to demand and financing. If companies are pushing renewable financing, it'll make projects more cost effective. And if big corporate customers push utilities for more renewable energy to hit their emissions goals, it can impact the utility's energy mix. It's a virtuous cycle once it gets going.
4. Government policy should be a tailwind starting in 2021
Solar energy already got a policy boost with the most recent stimulus package, extending a 26% investment tax credit for two years through the end of 2022. But that could be just the beginning now that the Biden administration is poised to take office.
Electricity markets are controlled by regulators like the Federal Energy Regulatory Commission, which sets the rules for regulated utilities. If policies are changed to favor wind or solar over coal, which was a favorite of the Trump administration, it could be a boon for the industry.
We don't know if subsidies will increase, but even regulatory policy changes could be a positive and drive more demand. And policy tailwinds are a big reason to like renewable energy right now.
Renewable energy is set for a great decade
The renewable energy industry has a lot of tailwinds. With new forms of energy storage and continuously falling costs, it's starting to answer some of the questions critics have raised. And with momentum on its side, it's time to be very excited about the renewable energy industry in 2021.