The global economy has an addiction to fossil fuels, burning through an ever-increasing amount of oil, coal, and natural gas. While it is projected that the earth has enough oil in reserve to last the economy through at least 2050, there's still only a finite amount of these energy resources available. Worse yet, scientists have shown that our continued burning of these greenhouse gas-emitting fossil fuels is quickening the pace of climate change.
Given the severe issues facing fossil fuels, many organizations have been working on developing cleaner, alternative sources of energy to combat these and other problems. While the renewable energy industry is still developing, sector leaders are beginning to emerge. Given their size and expertise, these companies will likely be key players as the industry continues growing in the coming decades.
Investors who are learning how to invest in renewable energy stocks should get to know these industry leaders. That way, you'll have a better understanding of what made these companies successful, which should help you identify the characteristics needed to win in the renewable energy sector.
Image source: Getty Images.
The biggest alternative energy companies
The renewable energy industry is broad. It includes:
- Entities that generate electricity from the wind, sun, and water
- Companies that make systems and components to produce renewable energy
- Businesses that manufacture battery systems to store renewable energy
- Companies focused on building electric cars and recharging infrastructure
- Entities that make renewable fuel replacements such as wood pellets, ethanol, renewable natural gas, and biodiesel
The 10 largest companies that generate a majority of their revenue from one of those activities -- and also trade on the major U.S. stock exchanges -- are on the following chart:
The 10 Largest Renewable Energy Stocks
NextEra Energy (NYSE: NEE)
A utility focused on wind and solar power
Tesla (NASDAQ: TSLA)
Electric vehicles, solar panels, and battery storage
First Solar (NASDAQ: FSLR)
Solar panel manufacturer
Brookfield Renewable Partners (NYSE: BEP)
SolarEdge Technologies (NASDAQ: SEDG)
Solar optimizers and inverters
Enphase Energy (NASDAQ: ENPH)
Ormat Technologies (NYSE: ORA)
TerraForm Power (NASDAQ: TERP)
Wind and solar power generation
NextEra Energy Partners (NYSE: NEP)
Renewable power generation and natural gas pipelines
Atlantica Yield (NASDAQ: AY)
Clean power generation, electricity infrastructure, water assets
Data source: YCharts. NOTE: Market capitalization as of Aug. 11, 2019.
We'll take some time to look at each one of these renewable energy stocks and to focus on why they've grown to be so important to the development and advancement of clean energy.
1. NextEra Energy: The world's largest producer of wind and solar energy
NextEra Energy is an energy-focused holding company. It operates two Florida-based utilities (Florida Power & Light and Gulf Power) and an energy resources segment that mainly invests in clean energy assets. Together, the company's business units lead the world in producing renewable energy from the wind and sun. In addition to that, NextEra is a world leader in battery storage.
In 2019, NextEra's energy resources segment owned or operated 15.1 GW of wind and 2.5 GW of solar power generating capacity. That's enough to power 12.8 million average American homes -- although due to intermittency and other issues, the actual electricity generated would at best only cover half that number. Meanwhile, the company had another 11 GW of renewable energy projects in its backlog as of the middle of 2019. That gives it plenty of power to grow its lead in the coming years.
NextEra Energy grew into the world's largest renewable power producer by building projects and selling the electricity generated to end users under long-term, fixed-rate power purchase agreements (PPAs). That business model made it a trusted partner for companies that wanted to go green. Meanwhile, its focus on securing contracts that lock in pricing provides it with predictable cash flow to reinvest into new developments so that it can continue growing.
Image source: Getty Images.
2. Tesla: More than just an electric-car company
Tesla is an auto manufacturer focused on developing plug-in electric vehicles (EVs). In 2018, it ranked as the largest EV maker, selling nearly 250,000 units, which was 12% of the market. In addition to making cars, the company also manufactures rooftop solar panels and battery storage units.
The company took a unique approach to achieve its goal of eventually building affordable EVs. It started by making a premium sports car targeted toward early adopters. It rolled its learnings from that venture into other vehicles that targeted broader markets, first luxury and then the mid-sized sedan segment.
Tesla has also taken a different operating path than most automakers. Instead of relying on third parties to build the components it needs, Tesla has developed many in-house. Among its most significant investments has been that in building out a large-scale battery manufacturing facility called a Gigafactory to drive down costs. The company's Gigafactory 1 is the world's largest battery factory and has the lowest cost per kilowatt-hour. It produces almost half of the battery capacity needed to power the global electric vehicle industry.
Tesla has helped shrink the cost of manufacturing EVs, which has made them more affordable. That's helping accelerate their adoption so that they've become more mainstream. However, by growing the EV market, Tesla has also increased its competition, because both big automakers and new entrants have poured money into building their own EVs.
In addition to its vertical integration, Tesla has also sought out horizontal opportunities to expand its renewable energy ecosystem. The company, for example, acquired a solar panel manufacturing and installation company, Solar City, in 2016. Thanks to that, it can offer customers a complete system to generate and store electricity at their homes, which they can use to recharge their EVs.
3. First Solar: Focused on thin-film solar
First Solar specializes in manufacturing thin-film solar modules that use cadmium telluride as a semiconductor instead of crystalline silicon, which is common in most other panels. First Solar's modules have a larger size overall and are more expensive. However, they can produce more energy per panel, which makes them cheaper on a cost-per-watt basis. That has made these panels ideal for utility-scale solar projects because they generate lots of lower-cost renewable energy.
The company has invested heavily to stay one step ahead of its rivals. It has done that by spending money on research and development as well as on building out its manufacturing capacity. The company began rolling out its latest breakthrough product, the Series 6 module, in 2018. It invested more than $1 billion in the product, which included constructing manufacturing facilities in the U.S. and Asia.
Another driving force behind First Solar's rise in the solar sector is that it has one of the best balance sheets in the industry. The company expects to end 2019 with $1.8 billion of net cash on its balance sheet. Add that to the free cash flow the company should generate as it transitions fully to the Series 6 module, and it has tremendous financial flexibility. That gives it the funds to continue investing in groundbreaking products that make solar energy more affordable and efficient.
4. Brookfield Renewable Partners: A leader in hydropower
Brookfield Renewable Partners is a publicly traded partnership created by leading asset manager Brookfield Asset Management to own and operate renewable energy assets around the globe. The company initially focused on owning hydroelectric power generating plants. However, it has diversified over the years to also operate wind, solar, and energy storage facilities. In 2019, hydropower remains the largest contributor at 75% of its portfolio.
The company makes money by selling most of the power it generates under long-term, fixed-rate PPAs with end users. Those agreements help insulate the company's cash flow from electricity rates, which can be quite volatile, especially in some of the countries in which Brookfield operates.
Because Brookfield Renewable Partners generates such predictable cash flow, it's able to return the bulk of it to investors via a high-yielding dividend. The company aims to distribute 80% of its cash flow, retaining the rest to invest in expansion projects. Those expansions, when combined with contractual rate increases, have the company on track to grow its cash flow at a 6% to 11% annual rate through 2022. That will give it the power to increase its dividend at a 5% to 9% yearly pace over that time frame.
While organic growth projects are an important driver of Brookfield Renewable, the company has grown into one of the largest renewable energy companies mainly through acquisition. It has targeted financially weaker companies, which enables it to buy attractive renewable energy assets at value prices. It then leverages its operational expertise to improve the profitability of those assets, which makes them more valuable.
5. SolarEdge Technologies: Optimizing renewable energy
SolarEdge developed an optimized inverter solution that improved the way solar panels converted the DC power they produced into AC used by the electricity grid. The company's intelligent inverter solution enables solar panels to maximize power generation while reducing the cost of producing energy from a solar panel. This solar component maker has gone on to develop several other products that help improve the way solar panels turn the sun's rays into electricity.
The company has also made several acquisitions to expand its opportunity set beyond the solar market. In 2018 and 2019, for example, SolarEdge made a couple of deals to bolster its capabilities in the energy storage market. It's a natural extension for the company given that energy storage is becoming a crucial enabler of the renewable energy sector. Meanwhile, the company has also made deals targeting the EV market by acquiring companies focused on recharging products.
In a way, SolarEdge is taking a page out of Tesla's strategy playbook by pursuing vertical integration. In this case, it's expanding its capabilities to cross-sell components to related renewable energy markets.
Image source: Getty Images.
6. Enphase Energy: A leader in microinverters
Enphase Energy focuses on manufacturing inverters that convert DC power from solar panels into AC. It was the first company that successfully commercialized microinverters, and it remains the market leader. Enphase's approach differs from that of SolarEdge: Enphase's inverters directly convert solar power from DC to AC, while SolarEdge's optimizers require an additional component, known as a string inverter, to finish the task. While SolarEdge's approach is slightly cheaper overall, Enphase Energy's microinverters are a bit more efficient.
The solar component maker has grown into one of the largest renewable energy companies by investing in developing new products that keep it one step ahead of competitors. The company focuses on making more-efficient and lower-cost inverters. For example, Enphase Energy built its latest-generation IQ 7 microinverter on the same platform that powers the Internet of Things and data centers. Meanwhile, it's developing the IQ 8 inverter, which will be even smaller and more powerful than the IQ 7. This could make it a key component in energy storage products.
As both the solar and storage industries grow, Enphase Energy should be able to keep expanding as long as it maintains its technology lead.
7. Ormat Technologies: A leader in geothermal power
Ormat Technologies is the largest company focused on harnessing the power of geothermal energy. It operates a portfolio of geothermal and recovered energy generation plants in the U.S., Central America, Asia, and Africa. It also designs, manufactures, and sells power generating equipment and other products to third-party geothermal operators. Ormat typically makes 67% of its revenue from its electricity segment and the rest from its product segment.
Like many power generation companies, Ormat sells most of the power it produces under long-term PPAs. Those contracts provide it with predictable cash flow. While the company uses some of those funds to pay a small dividend, it reinvests the bulk of its cash flow to expand its operations. These investments have included a combination of organic growth projects and acquisitions.
Ormat's investments in increasing new geothermal energy generating capacity have enabled it to consistently grow earnings. From 2014 through 2018, the company's adjusted EBITDA increased from $273 million to $368 million as new projects came online. The geothermal-focused company expects that growth to continue. It had between 120 MW and 135 MW of new projects underway in mid-2019, which would power growth through the end of 2021. While geothermal energy might not have the growth potential of other renewables, Ormat Technologies has made a name for itself by dominating this niche.
8. TerraForm Power: Focused on wind and solar in North America and Western Europe
TerraForm Power is another renewable energy company managed by Brookfield Asset Management. Brookfield Asset Management, along with Brookfield Renewable Partners, acquired a controlling stake in TerraForm following the bankruptcy of the wind and solar power generator's former parent. While Brookfield discussed combining TerraForm with its namesake renewables arm, its major investors wanted the company to remain independent. As a result, Brookfield has worked directly with TerraForm to improve its operations and refocus its efforts on operating wind farms and solar projects in North America and Western Europe.
Like its sibling, Brookfield Renewable, TerraForm Power also sells the bulk of the electricity it produces under long-term, fixed-rate PPAs. Those agreements provide the company with predictable cash flow. It aims to pay out about 80% of that money to shareholders via a high-yield dividend. That enables it to retain some cash flow to invest in expanding its portfolio. Among the opportunities it's pursuing is repowering some of its older wind farms by upgrading the existing turbines to newer, more powerful ones.
The company has also taken a page out of the Brookfield playbook by making acquisitions a major part of its growth strategy. In 2018, TerraForm bought a Western European solar and wind platform that grew its portfolio by 40%. Meanwhile, it followed that up with another large-scale deal in 2019, which further bolstered its solar portfolio. One of the driving forces of these deals is that TerraForm aims to increase the underlying profitability of the assets it acquires by improving operations. That's helping make renewables a more viable investment option.
9. NextEra Energy Partners: A strategy to generate high-powered dividend growth
NextEra Energy Partners is a master limited partnership (MLP) created by utility NextEra Energy to help drive its renewable energy growth strategy. It formed NextEra Energy Partners to appeal to income-seeking investors since it would pay a higher-yielding dividend and increase it at a faster pace. NextEra would power this dividend growth plan by dropping down clean energy assets (wind farms, solar projects, and natural gas pipelines) it owns to NextEra Energy Partners. Its MLP would use the growing cash flow from these acquisitions to power its dividend growth plan, while NextEra would reinvest the sales proceeds into new renewable energy projects.
The two companies typically complete at least one large-scale transaction each year. In March of 2019, for example, NextEra sold a portfolio of six wind and solar projects to the partnership for $1.02 billion. That deal provided NextEra Energy Partners with enough power to increase its high-yielding dividend by 15%. That kept the company on track with its goal of growing its payout at a 12% to 15% annual rate through at least 2024.
In addition to its acquisition-powered growth, NextEra Energy Partners has started investing money into expanding some of its existing assets. In 2018, for example, it locked up an opportunity to increase the capacity of its natural gas pipeline system. Meanwhile, it's also working on wind repowering projects to boost the output at some of its legacy facilities. With ample growth opportunities, NextEra Energy Partners has plenty of power to continue increasing its higher-yielding dividend at a fast pace in the coming years.
10. Atlantica Yield: A diversified clean energy portfolio
Atlantica Yield is a diversified infrastructure company. It owns and manages a portfolio of renewable and clean energy assets, as well as electricity transmission infrastructure and water assets. In 2018, the company generated about 68% of its revenue from renewable energy. Its portfolio consisted of wind farms and solar assets in the U.S., Spain, South Africa, and Uruguay as well as a small hydro facility in Peru. In addition to that, the company operated a natural gas-fired power plant in Mexico, electricity transmission lines in Peru and Chile, and water desalinization facilities in Algeria.
The company has secured long-term PPAs or other regulated-rate structures for all its expected capacity. That strategy enables Atlantica Yield to generate predictable cash flow, the bulk of which it returns to investors via a high-yield dividend. The company uses the cash it retains and its strong balance sheet to invest in expanding its portfolio.
Atlantica Yield has a bold strategy to grow its dividend at an 8% to 10% compound annual rate through 2022. Powering its plan is a strategic partnership with Algonquin Power & Utilities, which acquired a stake in Atlantica Yield in 2018. Algonquin has supplied Atlantica with both growth opportunities and capital, which have helped fuel its expansion strategy.
The largest renewable energy companies expect to get even bigger
The global economy needs to invest trillions of dollars in transitioning from fossil fuels and renewables. In light of that, the alternative energy sector should continue growing at a healthy pace for many years to come. This outlook suggests the biggest renewable energy companies will likely expand their lead in the future. That makes them an ideal starting point for investors who are interested in this fast-growing sector.
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Matthew DiLallo owns shares of Brookfield Asset Management, Brookfield Renewable Partners L.P., First Solar, NextEra Energy, TerraForm Power, and Tesla. The Motley Fool owns shares of and recommends Brookfield Asset Management and Tesla. The Motley Fool recommends First Solar and NextEra Energy. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com