The increasing demand for green energy could be a boon for companies in that field. But probably there will be winners and losers. Often, as an industry develops, some businesses pull away from the pack while others end up failing. Here are three green energy shares I have been considering for my portfolio.
The former Scottish and Southern Energy has been in the power generation game for generations. Now known as SSE (LSE: SSE), the company is a FTSE 100 member and has been expanding its renewable energy footprint in recent years.
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From an investing perspective, I do not see that shift as wholly positive. The company cut its dividend by 18% in 2020. I took that as recognition that it was moving from areas with proven strong profitability into ones where the economic returns are less compelling, such as windfarms.
There are also extensive capital expenditure costs in setting up energy infrastructure and those can eat into profits. Indeed, at the interim stage, SSE’s investment and capex costs for the current year soared 140% to top £1bn. Still, with an established, profitable business and a 5% yield, I see SSE as a lower risk pick among green energy shares I could hold in my portfolio compared to some newer companies without a proven customer base or profitability model.
To many people, the name Biffa (LSE: BIF) may be more associated with the sides of rubbish carts than energy. But in fact, some of the rubbish the waste management company collects is then used to generate gas. This is no small-scale operation: Biffa operates 34 landfill gas locations and generates 530 million kWh of energy per year.
Green energy shares
Can Biffa’s gas operations be considered green energy? After all, many critics do not see landfill waste sites as green. I think that reflects one of the challenges of being an ESG investor. It can often be hard to land on a clear definition and find an investable company that meets that definition in all of its business. For me, Biffa’s recycling and landfill gas generation mean that I would consider it for my portfolio from a green energy and indeed ESG perspective.
Financially, though, I am not compelled. After an 18% share price increase in the past year, the company trades on a price-to-earnings ratio of 42. That looks very costly to me. The net debt pile of £579m – equivalent to 59% of the company’s market capitalisation – also puts me off as servicing that debt could eat into profits. So I will not be adding these green energy shares to my portfolio for now.
A different angle in green energy shares is offered by ITM Power (LSE: ITM). The company is a specialist in hydrogen energy.
ITM has promising technology and has built a large factory in Sheffield, with another factory in the works. That should help increase its ability to generate revenue, which last year grew to £4.3m. But for now, I do not think the company is an attractive fit for my portfolio. Its revenue is small and the company remains heavily loss-making. Post-tax losses last year were £28m. Meanwhile, its market capitalisation of £1.9bn seems very big given the amount of work ITM still has to do to prove the long-term commercial viability and profitability of its operation.