Renewable energy stocks have been on fire over the past year as investors begin to recognize the industry's growth and maturation over the last few years. It didn't hurt that President Biden's election is likely to lead to some policy gains for wind, solar, and energy storage over the next four years.
If you're still on the fence about renewable energy versus other energy stocks, there are three reasons renewables are the future.
Image source: Getty Images.
Growth is with renewable energy
Oil, natural gas, coal, and nuclear energy may still be bigger energy sources from an absolute consumption basis than any source of renewable energy -- but they're not where the growth is. You can see below that wind and solar energy are by far the fastest-growing sources of energy in the U.S. since 2000, and the same trends hold worldwide.
U.S. Solar Energy Production data by YCharts
Despite all of this growth, wind energy only accounts for about 8.4% of all electricity consumed in the U.S. and solar energy is 3% of the electricity supply, so there's a lot of growth potential ahead. And there's one big reason wind, solar, and other renewable energy assets will keep growing.
Renewables are cheaper than fossil fuels
Maybe the biggest reason to believe in renewable energy is the trajectory in which costs are heading. As it becomes more expensive to build nuclear power plants, oil becomes more difficult to find, and coal becomes less competitive by the day, renewable energy costs are plummeting.
Below is the unsubsidized cost of wind, utility-scale solar, natural gas, nuclear, and coal power plants according to Lazard's Levelized Cost of Energy Analysis, which it publishes every year. You can see that between 2010 and 2020, the cost of wind and solar have plummeted and the only fossil fuel that's gone down in cost is natural gas.
| Energy source | 2010 Cost per MW-hr | 2020 Cost per MW-hr | Change at Midpoint |
|---|---|---|---|
| Wind | $99-$148 | $26-$54 | (68%) |
| Solar (Utility) | $226-$357 | $29-$42 | (88%) |
| Gas combined cycle | $67-$96 | $44-$73 | (28%) |
| Nuclear | $77-114 | $129-$198 | 71% |
| Coal | $69-$152 | $65-$159 | 1% |
Data source: Lazard Levelized Cost of Energy Analysis Versions 4.0 and 14.0.
What's more impressive is that the cost of wind and solar energy now beats fossil fuels in most locations. This is no longer an industry that's driven by subsidies or environmentalists -- it's cost-effective and winning cost-competitive bids long-term. The next step it needs to really take over the energy industry is making energy storage a viable business.
Innovation leads the way
What gives me the most confidence about renewable energy long-term is the fact that innovation continues to drive the industry. Innovation helps lower cost, build better business models, and drive new technologies. Here are a few innovations I'm excited about on the horizon.
- Solar plus storage: Battery storage is becoming increasingly viable for homeowners, commercial buildings, and utilities. SunPower (SPWR 5.85%) and Sunrun (RUN 5.97%) are growing their energy storage businesses for homes by enabling lower utility bills along with backup power. And long-term they may play a role in making homes and EV charging smarter.
- Hydrogen fuel cells: The big opportunity for renewable energy is when long-term energy storage is viable. This would enable cheap solar power plants to manufacture hydrogen via electrolysis to transport energy, which would fundamentally change how we use electricity. Bloom Energy (BE 10.99%) is a leader in this space, building large fuel cells to turn hydrogen into electricity, but it's also launching an electrolyzer to turn cheap renewable electricity combined with water into hydrogen fuel. As this technology becomes more cost-effective, it could replace fossil fuels altogether.
- Electric vehicles: Not only are electric vehicles helping replace fossil fuel vehicles, they could eventually be a great energy storage location in the home. Imagine using your charged car to power your home during an electricity outage or store electricity from your rooftop solar for use at night.
- Smart homes: Another area of innovation today is making our demand sources smarter. Homes can heat and cool at more efficient times, use less energy during peak hours, and pull supply when wind and solar production are high. Companies like SunPower and Sunrun are building the tools to make homes smarter and use renewable energy more efficiently, and that will likely continue over the next decade.
As with any innovation or new product, we don't know what's going to win and different companies are taking different strategies to market, so there are still lots of risks for investors. But one way or another, I think innovation will drive the renewable energy industry forward.
How to invest in renewable energy stocks
If you're diving into renewable energy, I've mentioned three stocks that should do well as the companies grow. I like SunPower in residential and commercial solar and storage and Bloom Energy in hydrogen fuel cells.
If you're more risk-averse and are looking for dividends, Brookfield Renewable Partners (BEP 0.19%) and Hannon Armstrong Sustainable Infrastructure (HASI 2.12%) are spending billions to build and buy renewable energy and energy storage projects around the world. They'll generate cash flow from these projects, which drive dividends that yield 3.2% and 3% respectively. No matter where you invest, renewable energy clearly has the tailwinds in the energy industry.
