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Cashing In On a Cleaner Future

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The clean energy movement has been slowly building for decades, and the U.S. appears to finally be on the cusp of a paradigm shift. A mixture of public and private investment is ramping up to accelerate the transition away from fossil fuels. Various bills floating around Washington plan to dedicate billions of dollars to the cause.

Greener energy is, of course, far from black and white. Beltway partisanship could certainly slow or curb any serious government spending on clean energy initiatives.

Luckily, decades of microscopic progress, coupled with a more recent global push to go greener, means clean energy doesn’t need a trillion-dollar package to thrive. In fact, the U.S. is already much further along the green road than many might assume.

The Biden administration set an ambitious goal to “generate clean, American-made electricity to achieve a carbon pollution-free power sector by 2035.” Many analysts and experts understand the goal is somewhat symbolic and is likely an attempt to spur faster adoption of cleaner energy.

But the fact that a U.S. president can even float this lofty clean energy goal highlights the major progress already made. It also gives us a peek into the vast amounts of money that could soon flow into the clean, green, and renewable economic ecosystem.

And despite the progress, investors still have a chance to get in near the ground floor of green.

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Rather Green Already

Renewable energy is far from modern, with various forms of hydropower dating back thousands of years. The first U.S. alternating current hydropower plant began delivering power in Redlands, California in 1893.

Wind then began to pop up in the early 1990s, though it remained largely insignificant until the mid-2000s. Solar is the latest bloomer in the current crop of clean energy sources and it did not really arrive until the mid-2010s.

Overall, renewables accounted for 20% of the total U.S. electricity generation mix last year, to put it right on par with nuclear energy and just inching ahead of coal. This figure alone might be rather shocking to many. Meanwhile, natural gas led the charge at 40%.

Renewables account for one-fifth of total U.S. electricity generation and the EIA projects renewable’s share of the electricity generation mix will double by 2050, from 20% last year to 42%. The report predicts renewables will surpass natural gas over this stretch.

More broadly, the International Energy Agency expects renewables will provide 80% of the growth in global electricity demand through 2030. The IEA projected global coal demand won’t ever return to its 2014 peak, as wealthy nations turn to cleaner alternatives.

The Solar Story

Clean and green energy is poised to grow its share of power generation in the U.S. and beyond in both the near term and for decades to come. That said, many stocks within the broader green space already experienced rather hyperbolic runs. Many of these stocks and broad-industry tracking ETFs soared off the coronavirus lows and then skyrocketed after the November election, only to tumble somewhat quickly back to earth.

The logic followed that the new Biden administration would quickly pass trillion-dollar green-focused legislation and kick clean energy into high gear. Clearly this didn’t happen, and the $1 trillion bipartisan infrastructure bill the Senate passed in August faces, as of this writing, some substantial hurdles.

More importantly, not all companies are good investments. Many of the vogue ESG (Environmental, Social and Governance) funds’ top holdings are mega-cap tech stocks. There are, of course, some names who boast strong businesses within key aspects of the nascent market.

The simple numbers point to growth potential in wind and solar, with solar remaining the least utilized green energy source. In 2020, solar accounted for only 2.3% of total U.S. electricity generation, while hydropower made up 7.3% and wind grabbed 8.4%. Solar’s runway offers the most potential, but the right technology is needed in order to harness and store the power, especially in places where it’s not always sunny.

Solar energy’s total share of the electricity market was less than 1% above biomass in 2020 and Wall Street isn’t trying to discover ways to pour money into the oldest form of energy. Solar technology remains largely in its infancy, which is why it’s an attractive space.

Last year, solar photovoltaic (PV) capacity additions in the U.S. jumped 25% overall, with utility-scale up nearly 29% and small-scale up 19%. About 90% of solar panel shipments were imported, mostly from countries in Asia.

The EIA projects solar will pick up the slack and account for 80% of the increase in generation through 2050.

Where’s the Money...

Projections are rarely precise, especially when looking decades out, yet it seems rather safe to say the future of energy consumption will be a lot greener. Wall Street is currently honing in on the best ways to profit from the new era of energy.

The most basic investment pockets for clean energy at the moment are solar, wind, and ancillary segments. Even though solar panels themselves are the catch-all phrase and growing in popularity with businesses, governments, and homeowners, they are highly competitive and rather low-margin.

Instead, Wall Street has gravitated to a slightly higher-tech and higher-margin segment of solar that converts the DC power solar photovoltaic panels produced into the AC power used in our homes and businesses. Some of the inverter stocks have skyrocketed over the last five years and have held up in 2021 even as many other companies faded following the epic rise to start the year.

Inverters are essential to the solar energy ecosystem and a few of the standout names hold numerous patents on their various technologies. These firms have ample runway as solar energy grows in popularity, with many envisioning a smart-home future where solar panels power homes, electric cars (EV), and even allow consumers to sell electricity back to the grid.

Companies are also currently working to expand power storage, EV charging, batteries, grid services solutions, and more. Firms able to successfully master the energy storage capabilities and capacity needed to support a much greener future will be stars.

A Possible Sleeping Giant 

Next-generation nuclear power could be a hidden investment gem in the coming decades.

The U.S. is currently the world’s largest producer of nuclear power and it surpassed coal in annual electricity generation in the U.S. for the first time ever last year. In fact, nuclear energy provided 52% of America’s carbon-free electricity in 2020, making it the largest domestic source of clean energy, according to the U.S. Department of Energy.

Yet, nuclear’s share of U.S. electrical generation has remained remarkably stagnant during the last several decades, having supplied around 20% of the nation’s electricity every year since 1990.

The U.S. could be ready to invest in next-generation reactors, as consistent forms of non-fossil fuel power are needed to go along with wind, solar, and hydro. The recent craziness with uranium prices might be an early comeback signal.

Profiting from the Clean Energy Revolution

The push to make our nation greener is set to pump tremendous amounts of capital into renewable energy projects.

If the bipartisan infrastructure bill is approved, it will be a powerful tailwind pushing the space forward. As it currently stands, the deal includes the largest investment in clean energy transmission in American history.

But this is just one industry preparing for a big shift. The country needs upgraded infrastructure virtually across the board. The infrastructure bill has highlighted the need, and private investment is beginning to ramp up in response.

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Good Investing,

Ben Rains
Stock Strategist

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.