Once upon a time, if someone mentioned investing in energy you could be pretty sure that they were referring to fossil fuel stocks. After all, for decades they were some of the largest stocks on the market. Nowadays though, investors have varying kinds of energy stocks to choose from.
In This Guide:
What is the Energy Revolution?
We are in the midst of an energy revolution. Across the board, more and more initiatives are made to transition from fossil fuels to renewable sources of energy. The energy revolution is taking shape in numerous ways:
- We increasingly buy electric vehicles rather than gas vehicles
- Government policies restrict fracking.
- People invest more in alternative energy sources such as solar, wind, and nuclear
Traditional energy used to be one of the stalwarts of many indexes such as the Dow Jones Industrial Average (DJIA). A major turning point for fossil fuel dominance came when Exxon Mobil, the largest petro giant in America, was removed from the DJIA.
Energy still interests some investors as many of the companies have tightened their belts since the pandemic. And many of these companies poured capital into alternative energy sources, sensing the changing winds.
Here's a rough breakdown of the kinds of companies found in the traditional energy sector:
When you think about oil giants pumping oil from the ground, you generally picture what is called “upstream companies.” These businesses explore new oil fields and actually extract the oil. Exxon Mobil (XOM) is an example of an upstream oil company and is one of the largest in the world.
Companies in this segment transport and market the extracted oil. This uses pipelines, oil tankers, and trucks. Additionally, these companies handle the storage and general infrastructure that keeps the oil industry going. Some midstream companies include Targa Resources (TRGP) and Enable Midstream (ENBL).
Finally, we have downstream companies. These businesses refine the raw oil into a wide variety of products that can be created from crude oil. Most businesses in this segment are refineries. HollyFrontier (HFC) and Valero (VLO) are two publicly traded refinery companies.
Often found as a byproduct of oil, especially from fracking, natural gas gets fewer headlines than oil gets. But people still use it. People use natural gas most often for heating and cooking. Some electricity generation also uses natural gas. It has other uses as well such as being a key ingredient in plastics. Due to the carbon footprint emitted by the burning of natural gas, it faces the same level of divestment as oil. Cheniere Energy (LNG) is one of the biggest natural gas companies.
Perhaps the blackest (dirtiest) fossil fuel of them all, coal use has been declining in the West for decades. But the developing world still uses it due to how cheap it is relative to the amount of energy it can produce. It has long faced increasing regulation due to its emissions and its history of dangerous work environments stemming from coal mines. BHP (BBL) is a mining company that has been around since the late 1800s.
That brings us to the next big investment trend: Investing in renewables (ESG). Renewables aims to solve the two major headwinds that traditional energy faces: environmental damage and finite resources.
Knowledge and research in the areas of climate change increases. And many people realize that over the long term, traditional energy may be doing more harm than good. This has brought a huge resurgence of attention and investment in alternatives that avoid these issues.
A second issue plagues traditional energy: It's a finite commodity. That means prices are often subject to violent changes as we saw in the 1970s and just recently during the pandemic. And we know that there will come a time when all the oil reserves have been depleted. If a viable alternative hasn't been developed by then, we could all be in for a very rude awakening.
The areas and technologies behind renewable energy constantly change and expand. Following is a list of the most popular types of renewable energy.
When someone mentions renewable energy, most people think first of solar. Using solar panels for relatively simple jobs such as water heating has been popular in hotter-climate countries for decades now. But electricity generation remains much more complex.
The energy source is theoretically nearly infinite. But our present technology still limits our ability to capture that energy. Additionally, we are at the mercy of the weather to be able to harness solar.
Some of the companies harnessing solar include SunPower (SPWR) and FirstSolar (FSLR).
Wind is another common type of renewable energy source. Some countries, such as the Netherlands, have battalions of wind turbines.
While wind is another energy source with theoretically unlimited potential, the turbines used to harvest wind energy are also at the mercy of the weather. Additionally, wind farms require large expanses of land to be effective as well as high upfront costs to build the turbines. Dutch-based Vestas (VWDRY) is an example of a wind company.
One of the most controversial renewable energy sources has been nuclear, mainly due to the very high profile nuclear plant failures of Three Mile Island, Chernobyl and Fukushima. That being said, nuclear energy produces large amounts of power without being reliant on external factors. This makes it particularly attractive to countries that may face surges in electricity demand.
Fears of further nuclear accidents cause hesitation on the adoption of nuclear power. But China and more recently the US have both begun embracing it. Nuclear currently accounts for 52% of the US's clean energy production and so far, nuclear remains the only scalable clean energy source.
Perhaps the newest entrant to the clean energy space is hydrogen, or as it's called in the process to generate power from it, “hydrogen fuel.” Hydrogen is the most common element in the universe. And hydrogen fuel generates electricity with only water as a byproduct.
Hydrogen, like nuclear, produces large amounts of energy — an important factor in being able to replace traditional fossil fuels. The main issue with hydrogen today is the lack of infrastructure to scale it and the fact that the most common process of producing hydrogen fuel relies on natural gas, defeating the purpose of trying to go green.
What Are Renewable Energy Stocks?
Now that we've gotten excited over the different categories of renewable energy, how exactly can one make money off it?
Thankfully, there is a whole range of stocks to invest in. As mentioned, energy has always been one of the favorite sectors for investors. For most of its history that mainly meant oil-related equities.
But that's no longer the case as there are a number of stocks and ways to play the green energy revolution. In fact, the green energy space provides investors with far more variety in investment opportunities than investing in oil ever did.
There are a number of ways that investors play into the green energy trend, including:
- Electric vehicles
- Lithium batteries
- Solar/wind farm businesses
- Uranium mining
- Hydrogen technology
- Wind turbine installers/manufacturers
How to Invest in Clean Energy Stocks
You have options for investing in energy. You can invest in individual stocks and businesses. And exchange-traded funds (ETFs) provide investors with a one-stop-shop of dozens of energy companies. Many prefer this option for investors who may not know much or have time to fully research individual companies.
With an ETF you get exposure to the broader trend while also benefiting from diversification — protecting you from nasty surprises. First Trust NASDAQ Clean Edge Green Energy (QCLN) and Alps Clean Energy ETF (ACES) focus on clean energy, and there are others.
Or invest in real estate investment trusts (REITs) that focus specifically on renewable areas such as wind and solar farms. No REIT presently focuses only on these areas. But a few infrastructure REITs have solar and wind as a portion of their investments. Investors like REITs as they involve tangible assets (land and infrastructure) and have stable cash flows paid to the investor in the form of dividends.
Here are some brokers you can use:
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How Fast Is Renewable Energy Growing?
According to a study by McKinsey, nuclear and hydroelectric already make up an impressive portion of the energy mosaic. What is more interesting to note is that wind and solar are expected to keep growing as a portion of global power generation while traditional fossil fuels will see a continual decline.
All this culminates in an expected 73% of all power generation being produced by renewable means by 2050, compared to approximately 27% today.
In fact, over the past decade, renewable energy consumption has grown by an average 13% per year. This kind of growth on its own is incredible. But renewables are still far from becoming the dominant provider of energy.
One of the big drivers toward renewable energy is China. Since China's incredible urbanization began, it became a massive driver in demand for commodities. Before, commodities such as coal, steel, etc., were the traditional materials needed for rapid industrialization. Now China is entering its second stage: mass transition to renewable electrification and a decrease in its CO2 emissions. China isn't shy about this either, officially setting it as one of its goals in its 13th five-year plan.
We are already seeing the results, as China already has the largest number of wind turbines in the world. In fact, China is the largest contributor to renewable energy growth, ahead of the US and far outpacing Japan.
An additional tailwind to the renewable energy trend is the fact that many traditional energy giants such as Total SE (TOT) are actively pursuing a new strategy of transitioning to renewable energy from fossil fuel.
How to Find Good Renewable Energy Investments
The renewable energy sector has a huge variety of investment types. These range from stable renewable energy giants who manage large plots of solar panels to far more speculative stocks that are trying to create new technologies. So it's impossible to give a one size fits all approach to how to invest in them.
However, some guiding principles, which investors can use as a litmus test, apply to any emerging innovation. As these questions about the companies you're considering:
- Does this company already have a proof of concept (i.e., it isn't still “on the drawing board”)?
- Does it have a clear way to scale this concept to millions of customers?
- Is what it's offering more efficient or cheaper than traditional energy?
Are Energy Stocks a Good Buy Now?
Now could be a good time to buy energy stocks but just not the energy stocks you're used to thinking about. And in general, we always recommend investing for the long term. And make sure you have a diversified portfolio.
The facts are that fossil fuels are all in a decline. And governments around the world are pushing for more and more renewable mandates. Sure, in the short term there will likely be many scares along the way — but why fight this massive long-term trend?