The renewable energy industry is booming. And it does not look as if this is going to end any time soon. With that being the case, I have been looking for the best shares to buy in this growth sector, which will allow me to build exposure to the green revolution.
Renewable energy market
According to the IEA, despite the pandemic, last year was a record year for renewable energy. Annual renewable capacity additions increased 45% to almost 280GW. That was the most considerable year-on-year increase since 1999.
It looks as if the global energy industry is now well and truly invested in green energy. The IEA predicts that in 2021 and 2022, renewable projects will account for 90% of new power capacity globally.
The growth will vary from country to country and from renewable sector to renewable sector, but the overall trajectory is up. India is expected to set new records for renewables expansion over the next two years. However, China’s growth will slow after a couple of years of explosive growth powered by government subsidies.
The IEA estimates that renewable energy installations of solar power will break records in 2022, reaching 162GW. That is a 50% increase on 2019 levels.
Meanwhile, global wind capacity additions will be 50% above the 2017 to 2019 average in 2021 and 2022.
The best shares to buy now
There are many different options available for me to build exposure to the renewable energy sector.
Unfortunately, many of the most exciting companies are still in their early stages of development. This may make them unsuitable for some investors. After all, some of these technologies are highly experimental, and there is no guarantee they will ever be commercialised.
While I am happy to allocate a small portion of my portfolio to these experimental companies, I want to invest the bulk of my money in renewable energy stocks that are already generating profits for investors.
That is why I believe one of the best shares to buy now is SSE (LSE: SSE).
For a start, this company is already an established utility provider. It has been a major part of the UK power infrastructure for decades. And now it is looking to the next stage of its growth.
Management is looking to expand the group’s renewable energy capacity generation. To do this, the organisation is investing £7.5bn over the five years to 2025 in substantial projects including the Seagreen and Dogger Bank offshore wind farms.
These new projects will complement the group’s existing renewable energy assets, including hydroelectric projects and other wind farms.
Alongside the company’s power generation assets, it also distributes electricity. This distribution network provides a steady income stream, which helps support the group’s dividend.
This is another reason why I think SSE is one of the best shares to buy now.
Not only is the company an established, profitable utility provider with a strong balance sheet and £21bn of power assets, it is also an attractive income investment. At the time of writing, the stock offers a dividend yield of just under 5%.
Put simply, I think this stock offers a way to buy into the renewable energy revolution without taking on too much risk. That is why I would buy it.
Some challenges the enterprise may face as we advance include additional regulation. The utility industry is highly regulated. If regulators decide to reduce the amount of profit the enterprise can make, this may reduce its ability to return cash to investors. A sudden increase in interest rates may also increase the cost of the group’s debt. This would have a similar impact on profitability.
Renewable energy challenges
I think SSE would act as excellent foundation stock in my portfolio of renewable energy investments. By having this company in the portfolio, I would be happy to take on more risk with other holdings.
One relatively speculative investment I would own alongside SSE is Ceres Power (LSE: CWR).
I think this is one of the best shares to buy now because the global hydrogen generation market could nearly double in size over the next two years.
The market overall is expected to grow at a compound annual rate of around 6% over the next decade. This forecast could change dramatically if scientists crack the code for producing cheap, green hydrogen.
There are two types of hydrogen production. So-called blue hydrogen, which is generated using hydrocarbon power and green hydrogen. This is produced with green energy.
Currently, green hydrogen accounts for less than 1% of the total hydrogen produced, but the market is projected to grow at a compound annual rate of 57% over the next eight years.
Ceres’ SteelCell could play a significant part in the hydrogen revolution. The cell is a highly cost-effective solution, which is not limited by a lack of hydrogen infrastructure. It is modular, so it can be installed in homes and vehicles and can use existing electric grid facilities.
The technology is already being used in the real world, and management is looking to scale up production of the company’s SteelCells over the next few years. It is targeting a production capacity of 200MW volume 2024.
One group of City analysts believe that the organisation could generate annualised sales of £1bn by 2035 based on the company’s current projections. But this is just a rough guess right now. No one can tell what the future will look like, and 2035 is a long way away.
Best shares to buy now for my portfolio
In the best-case scenario, I think the company could help make this projection a reality. If the technology starts a hydrogen revolution, buyers may be fighting among themselves for access. This is why I believe the stock is one of the best shares for me to buy now for exposure to renewable energy.
Still, this is a risky investment. The group is losing money, and it may be years before the technology takes off. In the meantime, plenty could go wrong, and larger, deeper-pocketed competitors are also working on the same challenges. There is no guarantee Ceres’ technology will be the one that wins.
Nevertheless, when combined with SSE in a portfolio, I think the stock could provide exposure to this fast-growing sector. That is why I would buy the shares today.
Rupert Hargreaves 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.