What is renewable energy?
Renewable energy is considered to be energy (electricity) which is generated from a naturally occurring source which in theory will never run out. On the face of it, this sounds like a tall order. But simply take a look around your natural environment, or just out the window, and at least one unending source of energy should be apparent – the sun. Certainly, solar energy is one of the most commonly targeted renewable energy resources, but wind, hydro, geothermal, and tidal each offer a potentially inexhaustible pool of energy that humans can draw upon well into the future.
Related articles: Investing ethically through your Superannuation
Why invest in renewable energy on the ASX?
What’s the alternative to renewable energy? Well, since before we were running away from woolly mammoths, the energy we’ve used to warm us, light our way, and cook our food has come from burning something. The ‘something’ has typically been wood, coal, petroleum products, and natural gas. Putting aside the nuclear option, these so-called ‘carbon-based’ energy sources have a long track record of accomplishing our intended goals. But, we are learning more and more that they also come with some particularly undesirable consequences.
There is an increasing body of scientific evidence indicating that the Earth’s climate is changing, and many believe it is not changing for the better. Regardless of where you stand on the climate change debate, everyone agrees that we don’t have an inexhaustible supply of carbon-based energy, and most agree that the use of these resources is negatively impacting the world’s climate. Either way, it would be sensible to find suitable renewable alternatives to supply our energy.
Save the planet and potentially grow your investment returns
Saving the planet is great and all, but I know you’re also thinking ‘How can renewable energy bolster my portfolio’s returns?’ Perhaps a more interesting question is ‘Can we achieve both goals?’ Well, I am here to tell you that the answer is a resounding ‘Yes!’ By investing in renewable energy we help business and industry devise and implement innovative and enduring solutions to the climate change problem. We also help answer the question of ‘What do we do when carbon-based energy sources run out?’ And as a bonus, in the process, we could also boost our investing returns. In this article, we’ll investigate five of the most prospective renewable energy companies listed on the ASX.
Investing in renewable energy with stocks
New Energy Solar Fund (ASX:NEW)
New Energy Solar owns 14 solar power plants across four states in the USA. Each plant generates emissions-free electricity which is then sold to wholesale energy companies and commercial consumers under long term contracts. The company has so far invested over $1.3 billion in building their power plants which displace over 1 million tonnes of CO2 annually. This is the same as removing around 277,000 cars from the road each year. The company has recently divested its Australian solar power plants to focus on the US market which they believe has a more friendly and supportive stance towards renewable energy.
New Energy Solar had a tough time of it in 2020 as the COVID-19 pandemic saw business activity and electricity usage in many parts of the USA grind to a halt. As a result, electricity prices fell sharply as did the value of the company’s assets. Looking forward, the economic recovery is well under way in the USA and we should see electricity prices, and therefore New Energy Solar’s earnings may bounce back strongly in 2021.
Mercury NZ Limited (ASX:MCY)
Mercury NZ is a vertically integrated 100% renewable energy generator with operations located in the North Island of New Zealand. The company owns and operates hydro, geothermal, and wind generating power plants, supplying clean energy to over 300,000 customers throughout New Zealand. Recently, Mercury has agreed to acquire all of Australian wind power operator Tilt Renewables’ New Zealand wind farms. The acquisition will add roughly 1,100GWh of electricity production to Mercury NZ’s portfolio, which represents about a 17% increase in productive capacity.
Mercury NZ also saw its earnings dip in 2020, although by only a relatively small amount compared to New Solar Energy. Encouragingly, management has forecast increased profits in 2021, and profits are expected to continue to grow over the next few years.
IGO Limited (ASX:IGO)
We’ll take a slightly different angle with our third option. It’s not exactly clean and green on first pass, in fact, imagine dirty great big holes full of dirty great big machinery! But, there is a green tinge to IGO which is one of Australia’s largest nickel producers. Nickel is a key component in energy storage batteries, but so too is copper, cobalt and lithium, which IGO also produces. Producing clean energy is certainly a noble cause for the likes of New Energy Solar and Mercury NZ, but what do you do when the sun isn’t shining or the wind isn’t blowing? Energy storage batteries aim to solve this problem by allowing us to store renewable energy so we can use it later at a time of our choosing.
The other major growth area for energy storage batteries is electric vehicles. According to the International Energy Agency, the electric vehicle market is expected to grow by around 30% each year until at least 2030. So, assuming you can get past how IGO obtains its products, it is potentially at the cusp of a major surge in demand for the minerals it produces. But, it is important to consider that the prices for mineral commodities like nickel, copper, and lithium can be extremely volatile and this could have a negative impact on IGO’s short term returns.
Investing in renewable energy with ETFs
Companies four and five on our list are not a company at all, instead they are exchange traded funds or ETFs for short.
Not sure what an ETF is or need a refresher, check out this article.
ETFS Battery Tech and Lithium ETF (ACDC)
The ETF Battery Tech and Lithium ETF was launched in 2018 to provide investors with instant exposure to the expected surge in energy storage production. The fund invests in companies within the Solactive Battery Value-Chain Index which contains over 30 companies involved in the supply chain and production of energy storage batteries, and mining companies that produce minerals that are crucial in the manufacturing process. The companies are listed on various stock exchanges across Australia, Asia, and the USA. Compare this to a single investment in say, NEW, MCY, or IGO, and you can see just how powerful the ETF concept is for investors.
The returns and volatility in the share prices of the companies owned by the fund will ultimately determine the returns of ACDC, but the fund has delivered strong performance since inception.
Related articles: 10 High-Performing Ethical ETFs
BetaShares Climate Change Innovation ETF (ERTH)
The BetaShares Climate Change Innovation ETF provides investors with exposure to over 100 leading companies from all over the world which derive at least 50% of their revenues from products and services aimed at addressing climate change and other environmental problems. Sectors include renewable energy, energy efficiency and storage, sustainable food production, water efficiency, and pollution control. So, there’s clearly some overlap between ERTH and the other four options we’ve discussed so far. ERTH encourages investors to make a ‘positive impact’ by directing their capital towards companies that are striving to create a more sustainable planet.
As with ACDC, the returns and volatility in the share prices of the companies owned by ERTH will ultimately determine its returns (for example, Tesla is one of the fund’s core holdings). With respect to the fund’s performance, it has only been trading since March 2021, therefore it’s too early to get an idea of what to expect.
Thinking of investing in renewable energy?
If you are thinking of investing in stocks, renewable or otherwise, it is important to remember that past performance is not an indicator of future performance. And, it is always important to do your research and if ever unsure seek the advice of a financial adviser.
Cover image source: Stepnext/Shutterstock.com