I think green energy is the future. But I’m also conscious it’ll be challenging to pick winners in the sector over the next few years.
Over the next decade, hundreds of billions of pounds are set to flow into the renewable energy sector. What’s more, a tidal wave of new companies seeking to capitalise on this trend has hit the market during the past year. However, most of these businesses are currently unprofitable. In addition, some are developing technology that’s, as yet, unproven.
These companies are incredibly speculative, which is why I plan to avoid most of them.
Instead, I want to focus my efforts on already-established companies that have plans in place to grow their green energy production over the next few years.
Green energy champion
One FTSE 100 company is planning to invest more than almost any other UK business over the next nine years in green energy. That’s utility group SSE (LSE: SSE).
The group is currently in the middle of a transition. It’s looking to invest £7.5bn by 2030 to triple its renewable energy output. The funding for these projects will come from the sale of non-core assets.
For example, SSE recently inked the sale of two energy-to-waste projects, which raised £995m in cash. It’s also progressing with a plan to sell its entire stake in Scotia Gas Networks, which distributes gas to homes and businesses.
On top of these disposals, SSE has sold a 25% stake in the Walney offshore wind farm and a one-third stake in meter asset provider MapleCo.
And while one team at the company has been selling assets, another has been redeploying the capital. SSE and its partner Coillte Renewable Energy recently began construction of their joint 30MW Lenalea wind project in central Donegal.
The company is also pushing ahead with the development of its Dogger Bank C Project, one of the most significant wind farm projects in the UK, jointly owned and operated by SSE and Equinor. SSE also owns 40% of the Dogger Bank A and B projects.
Finally, this month, SSE announce it plans to build Scotland’s first power station using carbon capture technology. All of these projects should help the company achieve its green energy ambitions.
Income and risks
One of the reasons why I like SSE over any other green energy stock is the fact the firm’s an already established business.
It has the capital to pursue renewable energy projects and is generating enough profit to pay shareholders for owning the stock. At the time of writing, shares in the company offer a dividend yield of 5.2%.
Unfortunately, I don’t think this dividend is here to stay. The company has said it’ll try to maintain the payout, but if SSE’s capital spending obligations continue to expand, it may cut the distribution.
Another challenge the group faces is debt. SSE’s debt-to-equity ratio is nearly 200%. That’s relatively high. Such an elevated level of borrowings could weigh on the company’s growth.
Still, despite these risks, I think this remains one of the best green energy stocks to buy. That’s why I’d invest £5,000 in the business today.
Rupert Hargreaves has no position in any of the shares mentioned. 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.