Should I consider renewable energy stocks for my portfolio?

Jabran Khan looks deeper into renewable energy stocks and their rise as well as detailing whether he should add shares to his portfolio.

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Windmills for electric power production.

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Renewable energy has become more popular in recent times, so could renewable energy stocks be a good addition to my portfolio? Let’s take a look.

Renewable energy is the future

By 2050, approximately half of the global energy production is expected to come from renewable sources.

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I believe a vast amount of investment will be needed to make this happen. In the UK there is already evidence that the biggest energy firms are pouring money into this. For example, Shell has spent approximately £1.4bn since 2016 investing in renewable energy.

Types of renewable energy

There are several types of renewable energy and I have noted the most common types below. 

Solar energy: Energy derived from the sun can be harvested using various technologies such as solar panels. This can be done at an individual home, building, or on a solar farm. Currently, solar energy accounts for approximately 4% of the UK’s electricity.

Wind energy: Wind turbines which can be located onshore and offshore contribute to around 25% of the UK’s electricity needs. The UK is the world leader in offshore wind farms and possesses more capacity than any other country.

Water energy: This is energy produced by flowing water and is sometimes referred to as hydro power. This contributes approximately 2.2% of the UK’s electricity needs.

Factors to consider

I must consider external factors that could affect my appetite for renewable energy stocks. For example, when the global economy is strong, demand for power soars and its price grows. This means that the value of firms producing power begins to rise.

Next, regulation and policies affect firms too. Governments may mandate a certain amount of energy to be renewable or penalise firms who use fossil fuels and so this can benefit renewable energy businesses and stocks in turn.

I believe the financial strength and position is important in any type of investment. Despite the fact renewable energy stocks and green energy is a growing sector, a firm with a weak balance sheet will still struggle.

One stock I like

FTSE 250 incumbent Greencoat UK Wind (LSE:UKW) is an investor in onshore and offshore wind farms and a stock I have identified that I could see myself investing in.

Greencoat is not afraid to splash the cash in investment and acquisitions, and I believe it could play a critical part in the UK government’s green energy plan. From an investment perspective, it boasts a 5.4% forward dividend yield and is priced low in my opinion at just 135p per share. This is 8% less than this time last year. I believe the risk associated with Greencoat is tight regulation in the green energy space threatens to hinder progress and profit if regulations tighten or change.

Overall, I am seriously considering renewable energy stocks for my portfolio. I am not an ethical investor but this is a bonus in this case. In addition to this, green energy requires the latest technology and I am a fan of tech and tech stocks. Finally, world wide governments are backing renewable energy and I believe this means demand will rise, in turn benefiting businesses and their stocks.

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Jabran Khan has no position in any shares mentioned. 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.

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