The renewable energy market has been incredibly volatile over the last decade, despite growing at an incredibly rapid rate. You can see below that both wind and solar energy production in the U.S. have grown over the last decade, and that has been mirrored worldwide.
As the U.S. implements the Inflation Reduction Act and associated subsidies to U.S. manufacturing and production of renewable energy, there are a number of companies that should benefit. Here's how investors should be viewing this industry right now.
US Wind Energy Production data by YCharts
Companies behind wind and solar energy
There are three main types of companies in the renewable energy industry.
- Product manufacturers -- These are the companies that make hardware that produce renewable energy. Solar panels, inverters, wind turbines, and other components are included.
- Installers and service companies -- Businesses that install renewable energy power plants and provide ongoing services. This ranges from solar installations on homes to massive installations of offshore wind farms.
- Financiers -- Companies that finance renewable energy projects and hold them for decades. This includes major banks, pension funds, utilities, and publicly traded institutions like Brookfield Renewable(NYSE: BEP)(NYSE: BEPC), NextEra Energy(NYSE: NEP), and Hannon Armstrong(NYSE: HASI).
There is sometimes a crossover between these segments of the industry, but over the last decade the industry has become much more modular, with companies focusing on a specific segment of the market.
Tailwinds behind wind, solar, and other energy solutions
Multiple factors are driving renewable energy adoption, but the biggest is cost. An analysis done by investment bank Lazard shows that wind and solar energy are the lowest-cost forms of new electricity generation in most markets, so this is no longer just about subsidies.
But subsidies do help, and the Inflation Reduction Act did give some certainty to the incentive environment in the U.S. The investment tax credit for wind and solar projects was expanded and extended, which makes these forms of energy more cost-effective and give more certainty to developers.
An emerging segment is energy storage. This is a relatively new solution for utilities, businesses, and homeowners, but is increasingly valuable as intermittent energy sources -- like wind and solar -- proliferate.
Where to invest now
Renewable energy has been a difficult place to invest over the last decade, but there are some great options for investors. First Solar(NASDAQ: FSLR) is a leading solar panel manufacturer, and is more than doubling panel production over the next two years. Add in a rock-solid balance sheet, and this is a great stock to own long-term.
SunPower(NASDAQ: SPWR) is a residential solar installer and technology company that has emerged as an industry leader. The company installs some rooftop systems itself and works with dealers to do others, but its advantage is in putting together the system components and financing in bids that can take just minutes. And unlike most of its competitors, SunPower doesn't keep the solar assets on its balance sheet for long, reducing financing risk.
Finance companies are another great option for investors. Brookfield RenewablePartners(NYSE: BEP)(NYSE: BEPC) and NextEra Energy Partners(NYSE: NEP) own wind, solar, and energy storage assets and sell electricity and energy services to utilities. They pay 4.2% and 4.5% dividend yields respectively, and those payouts should grow steadily over time as they reinvest in acquiring more assets that generate cash flow.
There are tailwinds behind the renewable energy industry, and I think it has a place in almost any portfolio. But buying a basket of stocks is probably the right approach given the industry's volatility, and a long-term buy-and-hold strategy has proven most successful. We never know which companies are going to be the biggest winners, but the multi-trillion dollar opportunity should lead to solid long-term gains.
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Travis Hoium has positions in First Solar, NextEra Energy Partners, and SunPower. The Motley Fool has positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners and First Solar. The Motley Fool has a disclosure policy.
