Where to find sustainable growth in renewable energy

The renewable energy sector has come a long way, but there is still plenty of momentum in funds and utility stocks.

When the coalition government set a target of 30% of the UK’s electricity supply to be met from renewable resources by 2020, it was ridiculed. In 2010, renewables had accounted for just 7% of supply. The target seemed absurdly ambitious and ruinously expensive given that renewable energy required heavy subsidies. Yet renewable generation reached 45% of supply this year and our carbon emissions have fallen by 29% in ten years. Such has been the fall in equipment and installation costs that a rising number of new onshore wind and solar farms are subsidy-free. 

Power at a premium

Investors have benefited from the creation of a 13-strong renewable-energy sector within investment funds. Share prices, however, trade at a 20% premium to net asset value. Though electricity prices are now rising as demand recovers from the lockdown lows, UK demand is in long-term decline, having fallen by 15% since 2005. The go-ahead for Sizewell C would at least maintain the long-term market share of nuclear at 20%, leaving renewable energy to compete with the most efficient and versatile gas-powered generation. Dividend yields ranging from 5%-6.7% are certainly attractive, but are they sustainable without higher long-term demand or prices? 

Several of the funds have assets in the EU too, but that renewable energy market is as developed as the UK. Only in the US, where renewables account for just 17% of electricity output, does there seem to be much room for growth. In addition, the growing enthusiasm from the governments of developed countries for “green new deals” should worry investors, implying large-scale expenditure without regard for investment return.

Jean-Hugues de Lamaze, investment manager of Ecofin Global Utilities & Infrastructure (EGL, of which I am a director) is more optimistic. “While electricity consumption in the US and Europe has been stagnant in the last decade,” he says, “there is likely to be demand growth from the displacement of fossil fuels in road transport, the heating of homes, industrial automation and in the production of hydrogen for fuel cells. Though about 200 gigawatts of new wind and solar-power generation capacity was added worldwide in 2019, [the annual pace] will need to more than double over the next three decades to reach the 2050 zero net-carbon emissions target.” He argues that the prices paid in private-equity transactions across the infrastructure spectrum have been far higher than in listed infrastructure funds. “For example, recent transactions have valued offshore wind assets at nearly double their invested capital. This suggests that listed infrastructure valuations still need to fully price in the global decline in interest rates.” 

The top tips 

However, the best opportunity lies in utilities transitioning to renewable energy. Since 2005, European utilities have retired 40% of their coal plants. RWE (Frankfurt: RWE), still Europe’s largest emitter of carbon dioxide in 2018, is now its third-largest renewable energy generator. The stock has trebled in five years. 

North America’s largest electricity generator, NextEra (NYSE: NEE), plans to raise renewables from 10% of generation to 30%-40% by 2030, according to its chief financial officer, Rebecca Kujawa, with “renewables now the lowest-cost means of power generation. This is the best environment for renewables development we have ever been in and it keeps getting better, offering 6%-8% annual growth for a long time”, she says. 

The upshot is that the specialist renewable-energy funds, especially those with international expertise, are still attractive, while what many regard as “boring old utilities” are becoming growth businesses

Recommended

DoorDash won't deliver for investors. Here's how to short it
Trading

DoorDash won't deliver for investors. Here's how to short it

American food-delivery app DoorDash can’t even make money in a pandemic. Matthew Partridge explains the best way to short it.
20 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021
Five online retail stocks to diversify your portfolio with
Share tips

Five online retail stocks to diversify your portfolio with

Professional investor Tancredi Cordero, founder and CEO of Kuros Associates, selects five of his favourite online retail stocks to buy now.
18 Jan 2021
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
15 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021