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Stocks to Watch in Clean Energy

By Travis Hoium – Jun 20, 2015 at 2:07PM

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Clean energy sources like wind and solar are a booming business, and these are the companies you need to watch in the industry.

Source: Siemens.

Clean energy has become the hottest energy trend from the U.S. to China to South Africa. Falling costs for wind and solar energy over the past decade have made them competitive with traditional electricity that comes from fossil fuels.

With this progress have come incredible investing opportunities in a variety of forms. Here are the clean energy stocks you should be watching.

SunPower and First Solar
Leading the charge in solar energy are two companies that both manufacture their own panels and build their own projects: SunPower (SPWR -3.58%) and First Solar (FSLR -0.28%)

SunPower's C7 product design. Source: SunPower.

What these two have over developers who buy solar panels from other manufacturers is better technology and the ability to create products that integrate efficiently with other components in a solar power system. Take, for example, SunPower's C7 concentrator product that uses mirrors to bounce the sun's rays onto a high-efficiency solar cell. Since SunPower makes the cells and builds the systems, it can engineer the entire system to save on installation costs.

By the same token, First Solar is using its R&D prowess to increase efficiency to stay competitive in today's solar industry. Already one of the most efficient project builders in the world, First Solar will now be able to get more energy per acre than project builders who use commodity solar panels.

These two solar giants are also working together on a yieldco, known as 8point3 Energy, that will own solar projects and pay owners a dividend from the cash flows they generate. This form of solar investment is lower-risk than buying a module manufacturer, and it has become a popular way to invest in the industry.

Yieldcos are the latest clean energy investment
A lot of investors want to invest in renewable energy without taking the risk that a specific manufacturer or technology will be a winner. And with interest rates at historical lows, investors are searching for any investment that has consistent cash flows. That's why yieldcos have become extremely popular, with new offerings like NextEra Energy Partners (NEP -1.93%), Abengoa Yield (AY -1.71%), NRG Yield (CWEN -2.35%), and TerraForm Power (TERP)

Source: SunPower.

There are a few questions surrounding yieldcos, though, for investors, they're worth paying attention to. Can yieldcos grow assets fast enough to increase distributions without raising capital? Are they overpaying for assets based on internal rates of return on projects? What happens to assets when a 15-, 20-, or 25-year power purchase agreement expires? What happens to yieldcos when interest rates rise from their extremely low levels today?

It'll take years to answer these questions, so watching how yieldcos perform and how the market reacts to them will be key.

The "do it all" clean energy company
Arguably the most aggressive clean energy company today is SunEdison (SUNEQ), the sponsor for TerraForm Power. The company is building wind and solar assets around the world, and buying up development competitors at a rapid pace. In early 2015, it closed on the $2.4 billion acquisition of First Wind, and earlier this week, it announced deals to buy Central American developer Globeleq Mesoamerica Energy and Continuum Wind Energy. The companies build projects in Central America and Asia, respectively.  

If there's a market for renewable energy, SunEdison will find it, and that makes it a company worth watching.

Clean energy is the future of energy
The simple fact is that the cost of clean energy from wind or the sun is now competitive with that from fossil fuels. And unlike fossil fuel, the cost of building wind and solar farms is falling year after year.

For investors, that makes this an industry worth watching. Clean energy is, after all, the future of energy.

Travis Hoium owns shares of NRG YIELD INC and SunPower. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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