What are the best renewable energy stocks for 2021?

Hunting for the best renewable energy stocks for 2021 led me to the top holdings in a clean energy ETF and then to two UK stocks that I think fit the bill.

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Taking a look at the holdings of the most popular clean energy ETFs is a good place for me to start my hunt for the best renewable energy stocks for 2021.

The top holding in the iShares II plc Global Clean Energy ETF  is Vestas Wind Systems, a Denmark-based manufacturer of wind power plants and wind turbines. Second is Orsted, another Denmark-based wind farm developer, which also does bioenergy and thermal power. Also in the top 10 holdings are the likes of US-based Xcel Energy and Nextera Energy and Enel, an Italian company. These three are power companies. They do have natural gas operations but also have sizeable renewable businesses.

All these companies are profitable. All, except Enel and Orsted, have grown their revenues over five years. However, buying foreign stocks in a Stocks and Shares ISA means extra forms to fill in, restricted dealing hours and foreign exchange transactions on buying, selling, or receiving dividends. Buying something like the iShares Global Clean Energy ETF or the Invesco Global Clean Energy ETF cuts out the fuss and would get me exposure to 80 or so clean energy stocks.

UK renewable energy stocks

But, I prefer picking UK-based stocks for my Stocks and Shares ISA. There are two that I am looking at closely as potential best of British renewable energy stocks for 2021. The first is SSE (LSE:SSE), an electricity generator, and the second is Ceres Power (LSE:CWR), a fuel cell company.

Almost two-thirds of SSE’s operating profits come from its renewable division. It has plans to treble its renewable power generation by 2030. That would be essential if millions of electric vehicles are tapping into the grid. I think once investors start to notice SSE is moving towards being the UK’s “pre-eminent green energy company”, its share price could soar.

However, transitions like this can be tricky to pull off. The company thinks £7.5bn worth of investment will be needed over the next five years. Furthermore, Ofgem is slashing the returns it allows companies like SSE to make between 2021 and 2016. That would make generating funds for investment harder and potentially affect the company’s ability to maintain its dividend. Perhaps SSE would have to seek alternative funding sources if Ofgem gets tough, potentially diluting existing shareholder returns.

Hydrogen stock

Ceres Power makes solid oxide fuel cells that generate power from natural gas and sustainable fuels like hydrogen, ethanol, and biogas. The company is also investing in reversing the process to make electrolysis cells that can produce hydrogen by splitting water. Revenue has grown from £1.11m to £31.68m over the five years to 2020, but the company is still making losses.

Ceres licences its technology to others to manufacture in return for royalties and milestone payments. Thus, Ceres runs an asset-light business model, which could be scaled up quickly without making large capital expenditures.

Shipping seems like a good application for hydrogen fuel. Ceres has licensed its tech for this use. But German engineering giant Bosch has also licensed it for land base use and owns around 18% of Ceres. Ceres is a speculative stock, but if hydrogen can grab a decent share of the future energy mix and Ceres can continue to find new licensing partners, this renewable energy stock could power up my portfolio. There is also the potential for a Bosh buyout.

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.

James J. McCombie 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.

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