Renewable energy electricity production has exploded over the last two decades as the cost of wind, solar, and energy storage has come down, but that hasn't translated to many big wins for investors. Manufacturers have gone bankrupt, finance companies have struggled, and installers have been boom or bust. 

In 2021, the renewable energy industry is reaching a more mature point in its development. Technology and cost leaders are emerging, and finance and installation companies have established themselves with markets and customers. Does that make renewable energy stocks a buy? In some parts of the industry, the answer is yes. 

Wind turbines on a grassy hill at sunset.

Image source: Getty Images.

Renewable energy is booming

The fundamentals for renewable energy have never been better. According to investment bank Lazard, the unsubsidized levelized cost of energy for utility-scale solar energy ranges from 2.9 cents per kW-hr to 4.2 cents per kW-hr, and wind power ranges from 2.6 cents per kW-hr to 5.4 cents per kW-hr. Community and rooftop solar is much more expensive at 6.3 cents per kW-hr to 22.7 cents per kW-hr. 

These costs compare to 4.4-7.3 cents per kW-hr for natural gas, 6.5-15.9 cents per kW-hr for coal, and 12.9-19.8 cents per kW-hr for nuclear energy. All of these costs are for new power plants, not plants that have already been built, but if renewable energy is winning new generation based on cost, it'll replace fossil fuels and even nuclear long-term as older facilities are retired.

The chart below shows the growth in these main power sources over the last decade. You can see that renewable energy has grown by leaps and bounds.

US Wind Energy Production Chart

US Wind Energy Production data by YCharts

This is the backdrop under which we need to look at renewable energy stocks. 

Renewable energy is maturing

One of the challenges as investors is deciding what phase of the life cycle an industry is in. Buying into an industry too early can be risky because companies aren't established, and waiting too long can leave companies in decline. Industry life cycles are typically categorized as something like this:

  • Emerging industry: High growth, low rivalry among companies, and focus on innovation and trying to get the business model right. This is also the highest risk of failure for businesses. 
  • Growth industry: No dominant player has emerged, but companies grow quickly and regulations start to emerge. Rivalry increases as companies fight for the growing market. 
  • Mature industry: Growth slows and power consolidates to a few mature players. Companies focus on lowering costs and increasing barriers to entry for new competitors. 
  • Declining industry: The industry is contracting and being disrupted by new players. Companies may look to sell themselves or compete on price to maintain business. 

The renewable energy is in different phases of these cycles depending on where you look. Wind and solar manufacturing, I would argue, is a mature industry with very few dominant players in each market. These would be companies like Canadian Solar, First Solar, and JinkoSolar in the solar industry and Siemens, GE, and Vestas in wind. 

Renewable energy finance is also fairly mature with Brookfield Renewable Partners (BEP 2.85%), NextEra Energy Partners (NEP 4.77%), and Hannon Armstrong (HASI 0.91%). They are buying billions of dollars in assets with decades of contracts to sell electricity to utilities. 

A little less mature is the residential solar industry, which is well established but is now adding small-scale energy storage and energy management to the mix. Sunrun, SunPower (SPWR -8.41%), and Tesla (TSLA 1.85%) are all well established in this market, but it's still changing rapidly so it's not quite a mature market yet. 

Somewhere between the emerging and growth phase is energy storage, which includes battery storage and hydrogen. Tesla is a leader in battery energy storage and hydrogen is is led by companies like Plug Power and Bloom Energy (BE 5.47%)

Depending on your risk tolerance and belief in the future growth of the industry, these could all be great plays in renewable energy. 

Solar farm in the desert with a mountainous background.

Image source: Getty Images.

Is it time to invest in renewable energy? 

If you're interested in renewable energy stocks, there are three areas where I would look. First is the finance companies behind the industry. Brookfield Renewable Partners, NextEra Energy, and Hannon Armstrong are all great options for financing renewable energy projects, and they come with dividend yields of 3.2%, 3.4%, and 2.5%, respectively. 

The other area I'm excited about is energy storage, which is more of an emerging industry. Bloom Energy is a leader in hydrogen, which I think could be a huge industry long-term. SunPower has built an asset-light solar and energy storage business with a lot of growth potential as well. The company is including energy storage with about 30% of new commercial installations, and the residential energy storage market is growing. As SunPower moves to be more of an energy services company it could grow as solar and energy storage costs come down. 

I think renewable energy stocks have a lot of potential long-term, but given cost pressure and potential disruption from competitors, not every company will be a great investment, so investors should tread carefully.