Renewable energy stocks: 1 to watch in 2021

Innovations from renewable energy stocks continue to spark headlines as the UK moves towards carbon-neutral in 2050. But what about carbon-negative?

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.

Risk reward ratio / risk management concept

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

The UK government has set out plans to eliminate the country’s carbon footprint within the next 30 years. But in order for the energy sector to transform itself into a carbon-neutral powerhouse, some technological innovations from renewable energy stocks are needed. At least that’s what I think.

With that in mind, I’ve spotted one renewable energy stock that I think deserves a closer look as a potential addition to my portfolio.

A renewable energy stock using biomass

While most energy companies seek to become net-zero carbon by 2050, Drax Group (LSE:DRX) is being a bit more radical. The energy generation business is aiming to become carbon negative by 2030. This means that it intends to remove more carbon dioxide from the atmosphere than it produces in less than a decade.

Whether it will achieve that goal remains to be seen. But the renewable energy stock does appear to be on track. The business can be broken down into three segments.

The first is biomass production. The firm manufactures compressed wooden pellets from sustainable working forests. These pellets are subsequently used in the second business segment – electrical power generation.

The Drax power station was originally a coal-powered plant. Today it uses its own manufactured biomass as an alternative fuel source. This switch resulted in an 80% reduction in Drax’s carbon footprint, while also making it the UK’s largest renewable power station.

The company’s final segment is a business-to-business (B2B) energy supply solution where it’s Power Haven and Opus Energy teams negotiate with other firms to supply all their power needs.

Renewable energy does carry risks

Investing in a clean energy company that consistently increases its dividends sounds interesting to me. But there are some risks to be aware of.

First, this renewable energy stock does not currently produce 100% clean energy. Of the 17.3TWh of electricity generated in 2019, only 79% was sourced from its biomass or hydro-power plants. The remaining 21% came from burning coal. And since coal-powered plants will be made illegal in 2025, that gives Drax only a few short years to eliminate it from its portfolio.

Yes, that 21% may not seem like much. But the firm is dependent on government subsidies for its biomass power production (in 2019, it received £790m). These subsidies are expected to end in 2027, but they could be ended sooner. This adds a lot of pressure to not only become 100% renewable but to make biomass power production economically viable in a relatively short space of time.

Renewable energy stocks: 1 to watch in 2021

The Bottom line

As a business, Drax looks quite compelling in my eyes. But as an investment, not so much… at least not at the moment.

It has achieved a respectable 11% average annual revenue growth over the last five years. However, the problem I have is the operating profit margins. They’re incredibly tight and haven’t shown any real sign of improvement, which correlates with the firm’s dependence on government subsidies.

Until it can reduce the operating costs of generating electricity with biomass, I won’t be considering Drax for my portfolio. But I’m definitely keeping an eye on it.

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 Drax Group. The Motley Fool UK has no position in any of the shares mentioned. 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

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »