Renewable energy companies could be some of the best stocks to buy this year. With a new Labour government pushing for increased renewable production, the political landscape for green energy’s in far better shape than a year ago.
What’s more, many of these companies are trading at a discount on the back of higher interest rates. However, with the Bank of England starting to ease monetary policy, I could be looking at a fantastic opportunity to invest in the future of Britain’s energy grid.
A leader in wind
Wind power current boasts one of the highest levels of efficiency when it comes to renewable energy technology. And with the UK being an Island, it’s not short of ideal wind farm locations both on- and off-shore.
There are a lot of companies operating in this space. However, one of the largest is Greencoat UK Wind (LSE:UKW), controlling approximately 7% of the market.
The business model’s simple. It owns wind farms across the country, generates clean electricity, and then sells it to suppliers that eventually deliver it to households and corporations alike. Since electricity demand’s only rising, cash flows have followed, resulting in nine years of consecutive dividend hikes.
A leader in solar
Just like Greencoat, Foresight Solar Fund (LSE:FSFL) owns a portfolio of renewable energy assets that produces and sells electricity to suppliers. However, the key difference is the source of the electricity. As its name suggests, Foresight specialises in solar farms instead of wind. And having both companies provides a bit of diversification against the weather.
Should the wind stop blowing, the sun might still be shining, and vice versa. Foresight also provides a bit of international exposure as it has operations across Spain and Australia as well.
A leader in storage
A big problem with renewables is that electricity generation may not be active when it’s needed most. That’s where battery storage systems enter the picture. Foresight has a few storage assets in its portfolio. But the capacity pales in comparison to Gore Street Energy Storage Fund (LSE:GSF).
Gore Street’s been systematically expanding its capacity, boosting it by another 45% to 421.1 MegaWatts in the 12 months leading up to March. With more electricity stemming from renewables, demand for storage solutions is on the rise as the stability of electrical flow becomes increasingly critical.
Nothing is risk-free
These three businesses operate in the same industry. However, each tackles a different corner of the market, providing welcome diversification and potentially making them among the best stocks to buy within this space. Yet that doesn’t make them risk-free.
Even with some jaw-dropping yields and free cash flow generation, renewable companies still have challenges to overcome. I’ve already highlighted a few, such as the weather. But the lack of pricing power can also be problematic.
When energy prices tumble, so do these firms’ profit margins. And while fixed electrical price agreements can mitigate the impact of price drops in the short term, prolonged periods of low prices could compromise cash flows.
Nevertheless, with valuations looking dirt-cheap and dividend yields juicy, these stocks look like they could be fine additions to my income portfolio once I have more capital at hand.
This post was originally published on Motley Fool
