It’s widely recognised that our reliance on fossil fuels cannot last forever. It’s also a fact that many nations are now working towards a net-zero carbon world. So what does the future look like for renewable energy stocks? Let’s take a look.
What are renewable energy stocks?
Renewable energy stocks refer to investments that have an interest in wind, solar, hydro, nuclear or fusion energy.
Unlike traditional energy stocks, such as oil and gas, renewable energy stocks are considered ethical investments. For this reason alone, they may attract investors who are conscious of putting their wealth towards environmentally-friendly projects.
Which green energy source has the most potential?
According to Peter Garnry, head of equity strategies at Saxo Markets, there are a lot of different energy sources that could win the race to become the dominant way of producing green energy. All have positives as well as drawbacks.
For example, some believe that windmill sizes have peaked, whereas others believe this is a long way off. Regardless of which is true, Peter Garnry accepts that “at some point, wind will reach its limits”. When this happens, it’s probable that the growth of wind energy will slow.
Garnry also acknowledges that hydropower will eventually reach its limit, adding that “most of the best places in the world are already being utilised.”
However, he is more positive about soar energy. He suggests there are “huge opportunities to develop and paths to create more efficient solar panels.”
Garnry also says that he believes nuclear is “gaining more traction”, adding that “the EU is starting to open up for using it as a green energy source because it doesn’t emit CO2”.
Interestingly, Garnry considers fusion power as a big potential energy source. “If we break that [fusion power], then we get an energy source with a lot of potential.”
How have renewable energy stocks performed in 2021?
Despite the growing interest in renewable energy stocks, oil and gas stocks have generally outperformed green energy during 2021.
For example, Vanguard’s Energy ETF consists mostly of oil and gas investments. Its value has almost doubled in the past 52 weeks, from $36.62 (around £26) to over $68 (around £50). In contrast, iShares Global Clean Energy ETF, which covers green energy projects, has grown by a more modest 37% over the same period.
According to Peter Garnry, the reason for this slower performance is because he considers renewable energy stocks as part of a ‘transformation sector’.
“Last year was a major breakthrough for the green energy sector, which translated into higher valuations, whereas the Covid-19 crisis had a severe negative impact on especially the oil industry.”
Garnry highlights that fortunes have reversed in 2021. This is due to the demand for traditional fossil fuels picking up while green energy stocks have been hit by growing commodity prices.
What does the future look like for green energy?
Garnry does not believe the trend of old energy outperforming green energy will continue. Instead, he refers to the performances of these respective stocks in 2021 as a “short-term transitionary period more than as a trend”.
Garnry goes on to explain that “there isn’t anything that suggests that the path to become greener is becoming less prevalent for the world around us, so this is a short-term thing.”
While Garny is optimistic about renewable energy stocks going forward, he knows traditional energy still has gas in the tank. He explains: “It isn’t realistic to think that oil and gas will become obsolete in the near future. We’ll need them as part of our everyday lives for years to come.”
How can I invest in renewable energy stocks?
Aside from investing directly in green energy projects, there are two main ways to invest in renewable energy stocks:
1. Invest in green energy exchange-traded funds. An exchange-traded fund (ETF) is a basket of stocks that tracks an index. In the case of a green energy ETF, this will consist of investments in a range of renewable energy stocks.
2. Buy renewable energy stocks directly. If you’d rather invest in a single green energy company, then you can buy its shares instead. If you wish to go down this route, see the list of our top-rated share dealing accounts.
New to investing? Understand the risks
Whether you choose to invest in renewable energy stocks or another sector, be mindful that the value of your investments can fall as well as rise. If you’re new to investing, it’s a good idea to read our guide on the basics of investing.
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