The renewable energy industry is exploding. Estimates suggest that trillions of dollars will flow into renewable energy investments over the next few decades as the world tries to move away from hydrocarbons.
There are many ways to invest in this theme. New companies are popping up all the time. However, I think trying to pick the winners in this boom will be incredibly challenging.
I plan to focus on companies that provide the components and resources for the renewable energy sector. I think these businesses offer an exciting way to gain exposure to the green energy boom without gambling on which technologies will succeed and which will fail.
Renewable energy stocks
There are three main buckets of stocks I’d concentrate on buying. Firstly, resource companies. Most green assets need copper to function, and the second-largest producer in the world is the mining giant BHP (LSE: BHP).
With 1.72m tonnes of copper produced last year, BHP is second only to Chilean state-owned mining company Codelco, in terms of total copper output.
Management has plans to grow production in the years ahead, so I wouldn’t rule out the mining giant becoming the world’s largest producer at some point.
Estimates vary, but one forecast projects copper demand could rise by 0.7m tonnes a year by 2040 as the world races to build renewable energy capacity. To meet this extra demand, miners will either have to increase output, or prices will rise. In either scenario, BHP could benefit.
That said, as it’s a mining giant, this firm may not be suitable for all investors for other environmental reasons. Still, I’m comfortable adding the company to my portfolio of green energy stocks.
XP Power (LSE: XPP) is a leading manufacturer of AC-DC power supplies, DC-DC converters. These components will become vital in the future as most appliances run on AC power, but green energy assets, such as solar power, produce DC. Batteries, another component of the green grid, also store energy in DC.
Therefore, it looks as if the demand for these converters will increase substantially as green energy becomes standard. That’s why I’d buy the stock for my portfolio. XP isn’t the only producer in the world, but it’s one of the largest. That gives the company an edge.
Nonetheless, despite its size, the company is facing fierce competition. It needs to keep investing, or it could be left behind. This competition is probably the most considerable risk and challenge the group’s management faces right now.
The final company I’d buy for my portfolio of renewable energy stocks is Vestas Wind Systems. The Danish manufacturer, seller and installer of wind turbines is one of the largest wind energy companies in the world, with a presence in 84 countries. Meanwhile, the size of the wind energy market is projected to hit $123bn by 2025.
The company’s unique technology and its global footprint should help it capitalise on the trend. That’s why I’d buy the stock for my portfolio.
As a Danish-listed business, some investors may not be able to own this stock. Currency fluctuations and different regulations are all challenges investors may face when buying the shares.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. 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.