Renewable energy sources provide a very intuitive way to fulfill the world's energy needs. While fossil fuels may deplete sooner or later, renewable energy sources are there forever. Yet, higher renewable energy costs and uneven availability have restricted the profits and growth of renewable energy companies to some extent. This is changing fast. Here are five reasons why investing in renewable energy stocks makes eminent sense.
1. The fuel of the future
Several factors are contributing to the rapid growth in the use of renewable energy. First, the costs of renewable power generation have fallen significantly over the years. What's more, the costs continue to fall even now. For example, between 2010 and 2020, the global weighted average levelized cost of electricity of new utility-scale solar projects -- a metric used to compare the economic competitiveness of power generation by source -- fell by 85%, from $0.381 per kilowatt-hour (kWh) to $0.057/kWh. Compared to 2019, this cost fell by 7% in 2020. Similarly, the average cost of onshore wind generation fell 56% in the last decade.
The second factor contributing to the growth of renewable energy is increased reliability due to batteries. Generation from solar or wind energy is uneven, happening only when the sun shines or the wind blows. Batteries provide a solution to this key problem, allowing storage of generated power for later use, adding immense value to renewable energy and making it a viable alternative to fossil fuel-based generation.
Top solar companies, including SolarEdge and Enphase Energy (NASDAQ:ENPH), have launched their battery storage products to cater to this need. Enphase Energy shipped 42 megawatt-hours of storage systems in the first quarter, up 30% sequentially. It plans to launch battery storage products for the European markets in the second half of this year.
The third contributor to the growth of renewable energy is not as intuitive as the above two but could potentially be a big force -- energy companies. Oil and gas giants, such as BP and TotalEnergies, are increasingly focused on renewable energy as a key growth avenue. With their expertise and financial strength, they could accelerate a transition to renewables.
2. Institutional investor support
Renewable energy is gaining increased support from large funds worldwide. As much as half of the assets managed in Europe and roughly a third of those in the U.S. consider environmental, social, and governance parameters while making investment decisions. Globally, the Socially Responsible Investing (SRI) market is worth around $23 trillion. Notably, SRI-based funds don't exclude oil and gas stocks. But they may exclude certain oil and gas companies which are, say, not committed to climate change. And this trend may rise further in the future.
An example of this is ExxonMobil (NYSE:XOM). British fund Legal & General divested some of its Exxon holdings due to the company's slack approach on climate change. Similarly, hedge fund Engine No. 1 has received backing from prominent pension funds including the California Public Employees' Retirement System and the New York State Common Retirement Fund in its efforts to push ExxonMobil to take bigger and more concrete steps toward climate change. BlackRock, ExxonMobil's second-largest shareholder, also backed Engine No. 1 in its efforts.
3. Governmental support
Renewable energy is receiving increased governmental support worldwide. In the U.S., several parts of President Biden's $2.3 trillion infrastructure plan focus on climate change. The plan includes a 10-year extension of investment tax credits for solar projects. It also includes $174 billion in funding for electric vehicles and electric vehicle infrastructure.
Contrast this with dozens of lawsuits filed by U.S. states and local governments against major oil and gas companies over the last few years. Relying solely on governmental support isn't a great idea for any company, but positive governmental support can surely spur growth of a sector, which has the potential to affect all of mankind.
4. Dividend income
Dividend income isn't the first thing that comes to mind when talking about renewable energy stocks. However, several renewable energy utilities offer stable dividend income too. For example, Algonquin Power & Utilities (NYSE:AQN), which derives a third of its income from renewable energy sources, has an impressive track record of dividend growth. The stock currently trades at a yield of 4.2%. Another renewable energy utility that offers an attractive dividend is Atlantica Sustainable Infrastructure (NASDAQ:AY). It currently trades at a yield of 4.5%.
Brookfield Renewable and NextEra Energy Partners are other top renewable energy stocks offering yields higher than 3%.
5. Portfolio diversification
Investments in renewable energy stocks offer crucial portfolio diversification. In the short term, this is beneficial because oil prices and stocks tend to be volatile. If oil stocks fall out of favor, as happened in the last year, renewable energy stocks may provide some protection for your portfolio. In the long run, investing in renewable energy stocks offers exposure to this high-growth energy segment. Investing in renewables is also crucial should a transition away from fossil fuels happen faster than anticipated.