2 UK renewable energy stocks to watch in 2021

Green energy is the future, but which technology will become the leader? Zaven Boyrazian shares two renewable energy stocks he’s looking at.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As we move closer to 2050, the push towards net zero emissions has created the perfect environment for UK renewable energy stocks. At least that’s what I’ve seen.

Coal power plants are to shut down by 2025. And wind power infrastructure is being established to power every home within the next 10 years. Such radical change within the UK energy sector breeds opportunity, and there are two renewable energy stocks that I’m looking at for my own portfolio.

A renewable energy stock that profits from wind

Today approximately one-third of the UK’s electricity is generated by wind turbines. Greencoat UK Wind (LSE:UKW) offers me the opportunity to invest directly within the UK’s wind power infrastructure.

The renewable energy stock sells clean energy directly to the national grid. And since turbines require little maintenance once they’re up, Greencoat’s profit margin is an impressive 80%. On top of that, it’s a REIT. Which means 90% of net income is returned to shareholders via a 5.2% dividend yield.

But, while I like a high payout ratio, it introduces some problems. As its ability to retain earnings becomes significantly limited, the business has to rely on debt financing to expand.

Another risk I spotted is the lack of pricing power since the consumer energy sector is highly regulated. To ensure that electricity is affordable, the prices that energy companies can charge is capped. Ultimately these limitations are passed onto Greencoat and dictate how much it can charge per generated kWh, potentially reducing profitability if the price limits are lowered. 

Having said that, the demand for electricity continues to rise. And while margins might get squeezed, I believe they’re large enough to withstand a fair amount of regulatory pressure. So Greencoat does look like the kind of dividend stock I’d want to add to my portfolio.

UK renewable energy stock

Batteries to the rescue

Wind power has proven itself to be a viable source of clean energy, but it does have a big drawback. If the wind isn’t blowing, the turbines are essentially useless. 

So the second renewable energy stock I’m looking at is Gore Street Energy Storage Fund (LSE:GSF). Like Greencoat, the company allows investors to put their capital into the UK’s energy infrastructure. Whenever excess electricity is generated, it’s directed to one of Gore Street’s eight energy storage facilities. That way, when the wind stops blowing, the power can keep on flowing.

However, the company operates in a relatively new market space that has yet to mature. As such, there could be many complications and threats that have yet to reveal themselves.

Another alarming risk is 97% of batteries in the firm’s portfolio are manufactured and maintained by NEC Limited. Gore Street has begun diversifying its storage technology with Tesla. But, as it stands, it’s almost entirely dependent on one-third party. Suppose NEC is unable to fulfil its duties or the relationship sours. That could be a problem.

I think it’s fair to say that battery technology is becoming more critical as we transition to renewable energy sources. However, the undeveloped energy storage market combined with Gore Street’s over-reliance on a single supplier makes me slightly cautious for now. I think the potential is huge for this firm, but I won’t be adding the stock to my portfolio for now. I’m definitely going to keep an eye on it throughout 2021 though.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian does not own shares in Greencoat UK Wind or Gore Street Energy Storage Fund. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

I’d buy 1,784 shares of this FTSE 100 stock to target £350 of monthly passive income

Muhammad Cheema takes a look at how British American Tobacco shares, with a dividend yield of 10.1%, can generate a…

Read more »

White female supervisor working at an oil rig
Investing Articles

1 ex-FTSE 100 stock that I think will get promoted soon

Jon Smith flags up an energy stock that used to be in the FTSE 100 and currently has strong momentum…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »