3 Reasons to Invest in Renewable Energy Stocks

Growth in renewable energy is accelerating like never before as de-carbonization expands outside the energy industry. Companies in every sector now publish environmental, social, and governance (ESG) reports focused on cutting emissions. The result is that companies, not just countries, are setting aggressive targets to reduce their environmental footprint, targets that can't be achieved without renewables.

Lower renewable energy costs, far-reaching growth drivers, and recession resilience are three key reasons to invest in renewable energy stocks. Here's why. 

Image source: Getty Images.

1. Costs have come down

If you regularly follow renewable energy, there's a good chance you're aware that new installations are now cost-competitive with or even cheaper than fossil fuels. It's a remarkable achievement, but it didn't happen overnight.

The first major strides were made between 2010 and 2014, during which the levelized cost of energy (LCOE) of utility-scale solar PV fell by 50%. LCOE is a way of measuring the fixed and variable costs of power throughout the asset's useful life, providing a way to compare different sources of electricity fairly. As early as 2014, onshore wind became one of the most competitive sources for renewable energy, and in ideal conditions, could even be cheaper than fossil fuels. But still, fossil fuels were generally cheaper than renewables.

Earlier this month, the U.S. Energy Information Administration (EIA) released its estimates for new power generation projects entering into service in 2026. The report showed that costs continue to come down, even for fossil fuel sources. But even the most efficient source of fossil-fuel-based power generation, a natural-gas-fired combined-cycle plant, is now more expensive than onshore wind and solar PV. It's also worth noting that energy methods like coal, nuclear, biomass, and even hydroelectric are expected to have few to no new installations in the U.S., which is why they are marked "NB" or "not built."

Data source: U.S. EIA. Data in Megawatt hours (MWhs). 2026 data reflects the EIA's 2021 estimated capacity weighted LCOE of electricity for new resources entering into service in 2026. 2019 data reflects the EIA's 2014 estimated capacity weighted LCOE of electricity for new resources entering into service in 2019.

Subsidies used to play a key role in making renewables cost-competitive with fossil fuels, particularly with solar. Today, subsidies continue to reduce the costs of wind and solar, but they are no longer as large of a factor as they once were. In sum, the profitability of renewable energy plants no longer hinges on government subsidies, which bodes well for the long-term adoption of renewable capacity increases.

2. Plenty of room to grow

Solar and wind energy costs have come down, but both sources still comprise a fraction of total power generation. In the U.S., wind contributes about 7.1% of electricity compared to solar's 1.7%. Globally, wind is 4.8% compared to solar's 2.1%. In the U.S., natural gas and renewables have both grown substantially, so much so that coal makes up just 23% of U.S. utility-scale power generation compared to natural gas's dominant 38% position. Just 10 years ago, coal made up 45% of U.S. power generation, natural gas provided 23%, nuclear was 20%, and renewables (including hydroelectric) were just 10%.

It may not seem like it, but coal's dominant global position is actually great news for renewable energy. This is because renewable energy is the most beneficial when it adds new capacity or replaces existing coal plants. Referring back to the table in the previous section, combined cycle gas plants cost around the same as renewables. Therefore, natural gas and renewable energy can grow together by replacing coal plants and adding new capacity where technological and geographical characteristics are the most favorable. Put another way, places where the sun shines and the wind howls should see plenty of new renewable investment that retires existing infrastructure. Places in the U.S. where wind and solar aren't practical should continue to see natural gas replace coal.

Image source: Getty Images.

3. Recession resilience

2020 proved the strength of renewable energy. While oil and gas companies struggled to make ends meet, many renewable energy companies actually grew earnings, albeit at a slower pace than before. The result was another great year for renewable energy, particularly solar stocks.

Aside from the pure-play renewable companies, several oil and gas companies and utilities continued to ramp up their wind and solar investments, even during a pandemic. All four European oil majors, Total, Royal Dutch Shell, BP, and Equinor, posted aggressive renewable energy targets and divested away from oil and gas. Major utilities like NextEra Energy (NEE 0.94%) recorded record-high spending, largely due to renewable investments. In fact, NextEra's electricity capacity could become majority renewable in just a few years.

On the political front, the reentry of the U.S. into the Paris Climate Accord bodes well for the long-term future of renewable energy. Outside the U.S., growing economies like China and India still rely on coal for the majority of their power, but they have been investing in renewables as well. India is targeting 450 GW of renewable capacity by 2030 and China continues to dominate global solar investments. However, even with China's aggressive renewable targets, it continues to ramp up coal and liquefied natural gas (LNG) infrastructure. 

Patience is key

The future of renewable energy has never looked brighter, but that doesn't mean you should go out and buy wind and solar stocks hand over fist. In fact, many leading renewable stocks like Enphase Energy may have ran too far, too fast in 2020. And the solar sector's meteoric rise has pushed leading companies to nosebleed valuations. Although expensive, it's still worth adding many of these industry leaders to your watchlist in case prices return to a more reasonable level. Aside from the well-known renewable stocks, there remain a few hidden gems, as well as larger diversified dividend stocks with exposure to renewables. Whatever your portfolio's current renewable allocation, the sector is definitely worth following for years to come.