As a rule, energy transitions don't happen quickly. It took some 200 years for coal to supplant wood as the world's leading source of energy. The rise of oil wasn't that much faster. After the first oil rush, in Pennsylvania in 1859, more than a century passed before crude topped coal. The age of renewable energy, by comparison, is coming on with lightning speed.
Sources of energy like solar panels that seemed like anachronistic tree-hugger technology less than a decade ago have become key parts of baseload electricity generation. Wind turbines now produce more power in the U.S. than the entire country used in 1950. Electric vehicles account for 5% of new-car sales, a tipping point that in other countries has led to 25% adoption within four years. Renewables are now the largest source of power generation in Europe, and they expanded their share of global power generation to 29% in 2020 from 20% in 2010.
The next stage should be even more impressive. A patchwork system of tax credits and environmental rules is now giving way to much more robust governmental support, not just in the U.S. but also around the world.
Russia's invasion of Ukraine gave new urgency to Europe's already-ambitious clean-energy goals. Using grants and other incentives worth over $200 billion, the REPowerEU plan aims to double the region's solar capacity in just the next three years, with capacity to power more than 100 million homes. Wind and clean hydrogen will get enormous subsidies, too.
The climate bill in the U.S., expected to clear the House on Friday, unlocks $370 billion for clean-energy incentives and consumer benefits. Research firm Wood Mackenzie projects that the incentives will trigger some $1.2 trillion in private investments by 2035.
"By far, this is the most significant piece of legislation we've ever seen globally," says Jos Shaver, chief investment officer of Electron Capital Partners, which has been investing in renewables through multiple boom/bust cycles over the past 17 years. He thinks those short-term gyrations are a thing of the past. "Now we have visibility for a decade, which is going to be amazing."
By 2030, renewables could account for 60% of power generation in Western Europe, up from 35% today, and 38% in the U.S. and China, up from 23% and 30%, respectively, according to S&P Global Commodity Insights. From there, investments should ramp up even more. Annual clean-energy investment worldwide will need to hit $4 trillion by 2030 to meet the widely held commitment of net-zero carbon emissions by 2050, according to the International Energy Agency.
Despite the enormity of the transition, investors will need to be picky. Big, obvious winners are few and far between. Green-energy indexes and funds like the Invesco Solar exchange-traded fund (ticker: TAN) have historically traded based on short-term expectations for government policy or raw materials costs, instead of the longer-term opportunity. And some of the companies involved haven't shown they can persevere through good times and bad.
"Because some of these technologies are nascent, you just don't have an abundance of publicly traded companies with long-term track records," says Ben Cook, portfolio manager of the Hennessy Energy Transition fund.
All the same, Barron's has identified six promising companies and stocks in the field: a developer of solar roof projects, two innovators in hydrogen technology, a battery maker, a supplier of green power to utility companies, and a miner of a mineral key to renewables.
To understand the opportunities in renewable energy, it helps to look at the math. The U.S. and Europe are each adding about 30 gigawatts a year of new solar and wind capacity, enough to power about 10 million homes. In the U.S., solar and wind have helped meet rising demand for electricity over the past decade, but they haven't cut much into the shares of other power sources. The U.S. added 30 gigawatts of total new electricity generation last year, meaning that renewables accounted for nearly all of the increase but didn't really challenge existing sources. In the next stage, that will change.
By 2030, both the U.S. and Europe will be adding 80 gigawatts of solar and wind per year, according to Wood Mackenzie, meaning they'll be displacing older forms of energy. That rate of growth adds up fast. The U.S. had about 1.2 terawatts (a terawatt is 1,000 gigawatts) of electricity-generating capacity as of the end of last year. Europe similarly plans to more than triple its wind and solar capacity by 2030.
The Inflation Reduction Act, as the climate and tax bill is called, extends and boosts lucrative tax credits for wind and solar, allowing homeowners and project developers to claim up to 30% of the value of a project as a credit in the case of solar and a per-watt credit for wind. That could take $6,000 off the cost of a standard-size $20,000 system.
In Europe, solar power already is advancing in leaps and bounds. One striking example: Romande Energie's floating solar park in the Swiss Alps. It's more than a mile above sea level, all the better for collecting sunlight.
But investing in solar and wind has long been a tricky proposition. The companies that make the hardware operate on thin margins, and ones that finance it sometimes take on considerable risk for cash flows that can take years to materialize. While they seem like tech products, solar and wind projects feed into utility markets that grow gradually, with slim payoffs for invested capital. Inflation has lately hurt their margins.
Leading wind-equipment maker Vestas Wind Systems (VWDRY) has lost money and seen its stock fall this year, despite booming demand for its products. Solar panels, largely made in China, have their own problems. Sanctions and tariffs against China have made it hard for American installers to get steady supplies of materials, and the stocks of producers have often struggled.
Solar and wind aren't the only beneficiaries of the bill. It also makes it easier to claim a tax credit for battery storage, a major boost to people who want to disconnect from the electric grid entirely or have a backup system in case the grid goes down. It vastly expands credits available to people who buy electric vehicles and heat pumps, too.
Other, more-nascent technologies benefit, too. The bill boosts tax benefits for carbon-capture projects that remove carbon emissions from the air and store them underground. Chevron (CVX) and Exxon Mobil (XOM) are both working on carbon-capture projects.
The most transformative subsidy, however, may be for an industry that has received very little attention so far: hydrogen. Hydrogen may be the most abundant element in the universe, but it's tough to harness for practical uses. For now, it's mostly used for industrial purposes like making fertilizer, and is produced almost entirely using fossil fuels. Newer methods to make hydrogen from clean-energy sources, however, are starting to take off, and the bill would provide tax credits that would quickly bring the industry closer to profitability—cutting costs by as much as half and bringing it in line with dirtier methods about a decade ahead of schedule. Hydrogen is a key part of the energy transition because it can be used to decarbonize industrial areas like steel manufacturing that account for a quarter of carbon emissions.
The cleanest form of hydrogen is known as green hydrogen, which is made by using renewable power sources like solar and wind to separate hydrogen and oxygen in water, using a piece of equipment known as an electrolyzer. The process produces water vapor instead of carbon dioxide.
The hydrogen subsidy "would essentially create a new industry in the U.S.," according to Morgan Stanley analyst Stephen Byrd. Major energy players like Shell (SHEL) and NextEra Energy (NEE) are investing heavily, and see wide applications. NextEra expects that the green-hydrogen market will grow from essentially nothing to at least $60 billion annually by 2050.
"The magnitude of demand for electrolyzers would get fairly immense quite quickly," Byrd says. "We don't have many companies that have that technology, and even fewer that have the technology at low cost."
The world's leading producer of electrolyzers is a little-known Norwegian company named Nel (NLLSF) that trades in Oslo and over the counter in the U.S. Just last month, the company announced a 200-megawatt order for electrolyzers from an undisclosed U.S. industrial company, 10 times as large as the largest existing green-hydrogen project. Nel has a factory in Connecticut and is ramping up fast, Nel CEO Håkon Volldal said in an interview. "The U.S. could become one of the cheapest places to produce hydrogen," says Volldal.
In the U.S., two companies focused on hydrogen should get a burst of new life from the bill.
Dimitry Dayen, a renewables analyst at ClearBridge Investments, likes Bloom Energy (BE), a California company that builds machines using fuel cells that can run on several kinds of gases, from natural gas to hydrogen to biogas pulled from landfills or dairy farms. Biogas, like hydrogen, gets large subsidies in the bill.
"There are eight to nine places [in the bill] where we feel like we got a big win for our customers," says Bloom Energy CFO Greg Cameron. Bloom is expected to pull in $1 billion in revenue this year, but the expected burst of demand means it has a "chance to get to $20 billion," Cameron says.
Dayen figures the subsidies will take Bloom from break-even economics to strong profitability. Analysts expect the company to go from a per-share loss this year to profits in 2023.
The bill would also "tremendously accelerate profitability" at Plug Power (PLUG), a vertically integrated hydrogen producer and equipment-maker based in New York, Dayen says. Plug Power already has hydrogen-supply contracts with companies including Walmart (WMT). CEO Andy Marsh worked in the wireless telecommunications industry in the 1980s and broadband in the 1990s, industries that drove enormous societal changes. "This industry is going to be bigger than those two," he says.
Other companies that can benefit from subsidies for U.S. manufacturing include LG Energy Solution (373220.Korea), a Korean battery maker that has struck a major deal with General Motors (GM) to jointly make batteries for its electric vehicles. LG is quickly opening new factories in the U.S., allowing it to qualify for domestic credits, and has strong relationships with U.S. manufacturers. "It will be cheaper to manufacture a battery in the U.S. than it is in Asia today," says Shaver, the investment manager at Electron Capital.
Solar power will be the workhorse of the energy transition, powering the electric grid as well as fueling hydrogen production and filling battery storage. Investing in the industry, however, has largely been a bust until now. The leading manufacturers are based in China, and carry political liabilities and spotty margins. Eventually, the climate bill will spur more domestic panel manufacturing, but it's too soon to pick winners. To get into the field now, investors can buy Sunrun (RUN), which sells and leases panels to homeowners, offering them discounts on their local utility rates.
Sunrun CEO Mary Powell tells us that she's seeing a "consumer tipping point," spurred by high traditional electricity prices and increased subsidies. Sunrun will be able to charge higher prices while still offering consumers a discount on their monthly utility bills.
Sunrun's business model makes its financials tricky and unappealing to some investors. The company pays to install the panels at homes and then leases the power to consumers, leaving it with an up-front loss using traditional accounting methods. Powell thinks she can help investors recognize the decades of reliable cash flows that are on their way. "What you'll see from us next year is ways of talking about and thinking about our business that are maybe more traditionally accepted so that we can kind of cross that divide," she says.
For those interested in other ways of buying into the growth of solar and wind without betting on the manufacturers, some utilities offer significant exposure. One of those is AES (AES), a Virginia power company that sells renewable power to utilities and other customers. It has also signed deals with corporations, including Microsoft (MSFT), and trades at just 13.6 times next year's expected earnings. "In our view, it's the cheapest renewables play on the market," Shaver says.
There are other ways to buy into the shift without purchasing renewable stocks directly. Cook, the Hennessy fund manager, likes copper miner Freeport-McMoRan (FCX). Copper is a key metal used in electric vehicles and other renewable-power applications. The stock has fallen with copper prices this year, but demand for the metal is set to rise quickly and should benefit the stock. "It's kind of a side door into the energy transition," Cook says.
Public support for renewable power sources is putting the energy transition on a fast track. Investors still have time to buy in—whether they fully embrace the trend, or would rather slip in through a side door.
Write to Avi Salzman at email@example.com
6 Stocks to Play the Push for Renewable Energy
Credit: By Avi Salzman