The renewable energy industry has been one of the up-and-coming industries for most of this century. Solar and wind grew rapidly to start the century as subsidies grew around the world, but that didn't lead to a lot of financial success for investors.
In 2021 the industry is starting to stand on its own. Manufacturers have built competitive advantages, companies are differentiating themselves with technology, and financing has matured as well. Given all of the changes in energy over the last 20 years, here are the four biggest reasons I'm bullish on renewable energy stocks.
This is where energy's growth is
The energy industry isn't known for being high-growth in general, but renewable energy has been booming for more than a decade. The chart below shows the change in production of wind, solar, and all renewable energy over the past decade. You can see that solar energy is growing fastest, albeit from a small base -- but the entire renewable energy sector is growing quickly.
In fact, the U.S. now produces more electricity from renewable energy than coal, which was once the leading source of electricity nationwide.
If you're looking for growth in the energy industry, renewable energy is the first place to look.
The major energy advances coming from technology should disproportionately help renewable energy. Solar energy has been a clear example of that, with the cost of solar panels down over 99% since 1977. The costs of wind, solar, fuel cells, batteries, and other technologies continue to come down at the same time efficiency goes up, which will provide another tailwind for renewable energy adoption.
Fuel cell technology is improving rapidly, which could enable hydrogen fuel that's both 100% clean (produced from water and renewable electricity) and less expensive than fossil fuels. Bloom Energy (BE -1.65%) is one of the leaders in green hydrogen, and as its costs come down management expects clean hydrogen fuel will beat gasoline on a cost basis.
No matter where you look, renewable energy technology is improving and making it more competitive with fossil fuels. Long-term, that will be a big advantage for the industry.
For much of the last decade, renewable energy companies struggled to make money consistently. That's changing as the industry matures. You can see below that First Solar (FSLR 0.28%), SunPower (SPWR -2.84%), Enphase Energy (ENPH -0.14%), and SolarEdge Technologies (SEDG -3.71%) are all profitable. Of these five companies, only Sunrun (RUN -1.73%) is not profitable, and that's largely because of how it finances solar projects.
Financing companies are also on much stronger footings than they were a few years ago. Brookfield Renewable Partners (BEP -1.37%) and NextEra Energy Partners (NEP 0.72%) are two of the companies that have been able to grow through organic renewable energy project and acquisitions, all while consistently paying larger dividends.
Renewable energy stocks are on more solid financial footing than at any time in their history, and that's a great reason to buy into the industry.
Investors are increasingly looking at environmental, social, and governance factors (ESG) when making investment decisions, and that should be a tailwind for renewable energy stocks. As pension funds and other large investors sell off fossil fuel investments, wind, solar, and energy storage should benefit.
BlackRock's head of iShares Americas Armando Senra said earlier this year that ESG investments will be a $1 trillion category by 2030. As this category grows, it will feed money into finance companies like Brookfield Renewable Partners and NextEra Energy Partners, which acquire renewable energy assets and hold them for decades. This demand then flows to manufacturers and other renewable energy suppliers.
If you're following the money in the market, ESG and renewable energy are big areas of growth for investor funds, and that should help shares long-term.
Renewable energy stocks have a lot going for them
Renewable energy is clearly growing and disrupting fossil fuels, the financials of companies are improving, and technology continues to get better. As more money flows into the industry, this could be one of the hottest areas of the market over the next decade.