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4 UK alternative energy shares I considered buying

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With the climate attracting more attention, many investors been running the slide rule over UK alternative energy shares. Here are four UK alternative energy shares I’ve recently considered, although given the risk-to-reward ratio in each case, I have decided not to add any of them to my portfolio right now.

UK lithium shares

Lithium excites a lot of investors for its role in storing energy, for example, in electric vehicle batteries. Bacanora Lithium is listed in the UK, although its key assets are overseas – most notably a stake in a massive lithium mining development in Sonora state, Mexico.

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The company received a takeover approach from shareholder Ganfeng in May. That values the company at 67.5p per share, around 14% higher than today’s share price. The deal is not guaranteed to close, however.

Established player

While many alternative energy shares are companies in their early stages, that is not true of SSE. The erstwhile Scottish and Southern Energy has decades of experience generating and distributing electricity in the UK and elsewhere. But these days it attracts more attention for its ambitions in alternative energy sources such as wind power.

I like the fact that SSE has well-established revenue streams, an existing customer base, a proven business model, and pays dividends. But there are risks of a lower profit margin as it spends capital to grow its alternative energy infrastructure. That is partly why the company’s dividend is lower now than it was a couple of years ago.

Growth prospects

Ceres Power is a UK company that has spent some years developing fuel cell stack technology. This seems to have got traction with some sizeable customers. Companies such as Bosch have developed deepening relationships with Ceres.

Ceres already has meaningful revenue streams. Last year, for example, it generated £21.9m of revenue. That’s not a huge amount, but equally it is not a token sum. Ceres is gearing up its commercial operation.

Profits have been harder to come by as the company has continued to invest in growth. While a gross margin of 67% sounds attractive, in 2020 the company’s operating loss was £20.8m. It’s been a rewarding investment for many shareholders, though. In the past year the Ceres Power share price has surged 72%. I see valuation as a risk here: the market cap of £1.8bn is a lot for a loss-making company with fairly small revenues.

Alternative energy shares: ITM Power

In another alternative energy area, ITM Power, manufactures equipment that helps generate and store hydrogen power.

The company has started manufacturing operations at its large factory in Sheffield. Like Ceres, it has been inking contracts that offer promise. Last month it reported a contracted backlog of £35.4m at the end of April.

Expected total revenues for last year, however, were forecast to come in at the much lower number of £4.0m. The new factory might help clear some of this backlog faster and there does seem to be growing commercial interest in ITM’s technology. But the market cap of these alternative energy shares is even greater than Ceres, standing at £2.2bn. I see a risk that the stock market will value the company lower in future if growth does not meet the very high expectations the share price implies.

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Christopher Ruane 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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