As we move closer to 2050, the push towards net zero emissions has created the perfect environment for UK renewable energy stocks. At least that’s what I’ve seen.
Coal power plants are to shut down by 2025. And wind power infrastructure is being established to power every home within the next 10 years. Such radical change within the UK energy sector breeds opportunity, and there are two renewable energy stocks that I’m looking at for my own portfolio.
A renewable energy stock that profits from wind
Today approximately one-third of the UK’s electricity is generated by wind turbines. Greencoat UK Wind (LSE:UKW) offers me the opportunity to invest directly within the UK’s wind power infrastructure.
The renewable energy stock sells clean energy directly to the national grid. And since turbines require little maintenance once they’re up, Greencoat’s profit margin is an impressive 80%. On top of that, it’s a REIT. Which means 90% of net income is returned to shareholders via a 5.2% dividend yield.
But, while I like a high payout ratio, it introduces some problems. As its ability to retain earnings becomes significantly limited, the business has to rely on debt financing to expand.
Another risk I spotted is the lack of pricing power since the consumer energy sector is highly regulated. To ensure that electricity is affordable, the prices that energy companies can charge is capped. Ultimately these limitations are passed onto Greencoat and dictate how much it can charge per generated kWh, potentially reducing profitability if the price limits are lowered.
Having said that, the demand for electricity continues to rise. And while margins might get squeezed, I believe they’re large enough to withstand a fair amount of regulatory pressure. So Greencoat does look like the kind of dividend stock I’d want to add to my portfolio.
Batteries to the rescue
Wind power has proven itself to be a viable source of clean energy, but it does have a big drawback. If the wind isn’t blowing, the turbines are essentially useless.
So the second renewable energy stock I’m looking at is Gore Street Energy Storage Fund (LSE:GSF). Like Greencoat, the company allows investors to put their capital into the UK’s energy infrastructure. Whenever excess electricity is generated, it’s directed to one of Gore Street’s eight energy storage facilities. That way, when the wind stops blowing, the power can keep on flowing.
However, the company operates in a relatively new market space that has yet to mature. As such, there could be many complications and threats that have yet to reveal themselves.
Another alarming risk is 97% of batteries in the firm’s portfolio are manufactured and maintained by NEC Limited. Gore Street has begun diversifying its storage technology with Tesla. But, as it stands, it’s almost entirely dependent on one-third party. Suppose NEC is unable to fulfil its duties or the relationship sours. That could be a problem.
I think it’s fair to say that battery technology is becoming more critical as we transition to renewable energy sources. However, the undeveloped energy storage market combined with Gore Street’s over-reliance on a single supplier makes me slightly cautious for now. I think the potential is huge for this firm, but I won’t be adding the stock to my portfolio for now. I’m definitely going to keep an eye on it throughout 2021 though.
Zaven Boyrazian does not own shares in Greencoat UK Wind or Gore Street Energy Storage Fund. 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.