Just in case you’ve been avoiding all news flow recently, there’s probably no hotter investing space right now than renewable energy. Fortunately, there’s already a plethora of options available to investors looking to tap into the megatrend, including exchange-traded funds (ETFs). Here are two I already own and which I’d feel comfortable adding more of in the years ahead. 

2 ETFs to buy

As it sounds, iShares Global Clean Energy ETF (LSE: INRG) invests in companies that have a finger or two in the clean energy production pie. Alternatively, some holdings may supply the equipment or technology that enables this energy to be generated. 

All told, this ETF has 76 holdings. That’s not exactly concentrated but nor does it present as being overly diversified. This is an important consideration for me. After all, the greater the number of stocks held, the less impact each individual stock can have on returns. As such, I think INRG strikes a nice balance between risk and reward.

Another positive to this fund is the geographical spread. Companies held come from both developed and emerging markets (although 43% are based in the US). UK-listed SSE features in the portfolio, as do firms like and solar power company Enphase Energy.

A second passive fund I’m holding as part of my renewable energy strategy is WisdomTree Battery Solutions ETF (LSE: CHRG). As it sounds, this fund is more focused on energy storage. According to WisdomTree, battery technology has the potential to “significantly transform industries, services, labour and consumption“. Unsurprisingly, the electric vehicle revolution will form a major part of this.

Again, the geographical spread of this ETF is reassuring. By contrast to INRG however, almost 30% of holdings are based in China. Another 20% and 12% are based in the US and Japan respectively.

Some positives

As you might expect, there are advantages and disadvantages to playing the renewable energy theme via passive ETFs. For me, one clear benefit of using trackers is their relatively low cost. The less I give back in management fees, the better my eventual returns will be thanks to compounding.

The iShares and WisdomTree funds have total expense ratios of 0.65% and 0.40% respectively. Neither strikes me as unreasonable considering these are thematic funds. Moreover, the CHRG share price is up 50% over the last 12 months. 

It’s not just about the cost. I don’t claim to have specialist knowledge of the renewable energy space. This lack of investing ‘edge’ suggests buying a diversified fund that tracks indices created by experts in the field would be the more rational move.

Then again…

On the flip side, both funds could still prove volatile. Growth companies in hot areas usually trade on high valuations. And, regardless of renewable energy’s solid prospects, that could prove problematic in the event of a global economic wobble.

In direct conflict with what I’ve stated earlier, the ‘opportunity cost’ of holding these funds over specific shares is potentially very high if I can pick a winner. As the recent performance of Tesla has shown, buying an eventual market leader has the potential to generate life-changing returns. TSLA shares are up almost 2,800% since 2016.

The low/negligible yields from both ETFs also need to be borne in mind if I was looking to generate passive income. If that’s key, dividend-focused funds like these in this area might be more appropriate.

The post Renewable energy: 2 ETFs to buy appeared first on The Twelfth Magpie.

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Paul Summers owns shares of iShares Global Clean Energy ETF and WisdomTree Battery Solutions ETF. 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.

You probably don’t need me to tell you that renewable energy is a hot space right now. In fact, decarbonisation and climate change should make this a key investment theme of the next decade and beyond.

With this in mind, here’s how I’d invest in renewable energy stocks today if I had a sizeable sum like £10,000.

Renewable energy stocks to buy

Perhaps the first thing to understand when screening for potential renewable energy stocks to buy is just how broad this sector is. With a few mouse clicks, I can buy shares in companies specialising in fuel cells (Ceres Power Holdings), integrated hydrogen energy solutions (ITM Power) and waste-to-energy technology (Powerhouse Energy). All are potentially very exciting. Unfortunately, they aren’t making profits just yet.

If the thought of buying an unprofitable company didn’t appeal to me, a FTSE 100 chugger like SSE might be worth a look. In fact, I might be inclined to prioritise this utility stock if securing a dividend yield were also a priority.

As things stand, analysts have the company returning 83.2p per share to investors in the current year. That’s a chunky yield of 5.7% at today’s share price. Naturally, huge share price growth is unlikely. Even so, the company ticks the renewables box. It plans to triple green energy production within this decade.  

Safety in numbers?

Unfortunately, the issue with selecting individual renewable energy stocks right now is we don’t know exactly how things will pan out. As the tech sector’s shown, many of the big players a couple of decades ago are no longer around. That’s potentially problematic for long-term investors like me. 

As holders of the aforementioned Powerhouse Energy will no doubt attest, there’s also the potential for some company share prices to ‘pop and drop’. In just a couple of weeks last December, PHE shares enjoyed a spectacular gain of around 250%! Since then however, the valuation has tumbled by two-thirds.

One way around this would be to invest the majority of my £10,000 (say 70%, or so) in actively managed funds. Doing this may impact my eventual returns (ongoing fees will need to be paid) but capital risk would be reduced too.

Gresham House Energy Storage Fund is one option I like. Since supply and demand for energy can vary from day to day, this fund invests in battery storage systems. Like SSE, this looks a decent option for me if generating income were important.  

FTSE 250 member Renewables Infrastructure Trust is another example. It has holdings in onshore and offshore wind power projects and solar farms across the UK, Ireland, France, Germany, and Sweden. This makes it a nicely diversified pick, in my opinion. 

No guarantees

Investing in renewable energy stocks using a balanced approach like those described above feels appropriate for me. However, there’s still no guarantee this entire sector won’t be volatile going forward. A stumbling economic recovery, for example, could push investors to move into more defensive sectors. This means I could be stuck with paper losses for a while.

So, while I remain very bullish on renewable energy stocks, I think it would be important for me to have a healthy amount of money in other, unrelated companies and potentially lucrative themes elsewhere in my portfolio.

The post How I’d invest £10,000 in renewable energy stocks today appeared first on The Twelfth Magpie.

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Paul Summers 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.

The wobbly SSE share price

Demand for residential gas and electricity increased significantly last year. After all, lockdown restrictions forced most individuals to stay at home. But they also forced non-essential businesses to close their doors. And consequently, the level of unemployment rose sharply.

For individuals unable to continue working from home, their level of household income declined, making keeping up with utility bills quite challenging. Ofcom, the UK energy regulator, imposed new price caps on energy tariffs to mitigate this impact.

Unfortunately, these price limitations put a considerable amount of pressure on profit margins. The SSE share price suffered for it. Overall, the total financial impact from Covid-19 on the business is expected to be between £150m and £200m, according to the management team.

Despite this, based on its half-year report, the company is actually performing relatively well. At least, I think so. The operating profit of the business increased, even after ignoring the additional £327m gained from the disposal of some non-core assets. And the firm continues to progress with its £7.5bn transition into renewable energy sources.

Combining all that with no expected cuts to demand or shareholder dividends does make SSE seem like a promising income stock to own. But I have some concerns.

Risks to consider

Based on the latest financial results, the company currently has around £10bn of debt on its balance sheet. As a result, around 65% of the firm’s capital structure currently consists of debt. This isn’t unmanageable. But it is quite a significant chunk of leverage that is eating up around a third of operating profits from interest payments alone. And while it is set to raise £2bn through its disposal programme, it could take several years to bring down this level of leverage.

This is particularly concerning as the firm is in the middle of the aforementioned expensive transition into renewable energy. Should creditors deem the business overburdened with loans, it could put the brakes on SSE’s future growth and its share price as well.

Bottom Line

With the UK economy slowly reopening and people returning to work, the affordability of household utilities is back on the rise. And so, Ofcom has already begun lifting the price caps on energy tariffs.

I have some reservations over SSE’s level of debt. However, based on current performance, I think the company can return to its pre-pandemic levels of profitability as well as maintain its 5.4% dividend yield. And so, SSE is a company I would consider adding to my income portfolio even after the recent increase in its share price.

The post The SSE share price is rising. Should I buy now? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in SSE. 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.

However, over the last few months, the stock has been climbing – increasing from 205p in November to around 300p today. Is this an early sign of the firm’s recovery? And should I be adding BP to my portfolio?

Why is the BP share price rising?

Like other oil companies, BP has little pricing power over its products. This proved to be problematic in the early days of the pandemic. However, the firm can mitigate its losses in several ways. In 2020, it cut its dividend, sold some sites and facilities, and focused on paying down debt to reduce interest expenses.

The latter of these, I believe, is a primary contributor to BP’s rising share price. By the end of Q1 2020, net debt stood at around $51.4bn and was dangerously close to the business’s total market capitalisation. But based on the latest updates, these long-term obligations have been cut by nearly 25%. As it stands, net debt is now around $38.9bn, with the management team expecting it to fall below its target of $35bn by the end of Q1 2021.

This is excellent news for two reasons. The first and most important, in my opinion, is it strengthens the balance sheet and increases BP’s financial health. The second is a reduced debt level increases the availability of excess cash flow to pay dividends and perform share buybacks. In fact, BP has already said that once the $35bn debt target is met, a minimum of 60% of surplus cash flow will be used to buy back shares.

Uncertainty ahead

BP is constantly under scrutiny for its impact on the environment and global warming. So I find it encouraging to see it has initiated a zero-emissions long-term strategy. Under this new direction, the firm has begun its transition to sustainable and clean energy generation.

But BP is one of the largest oil companies in the world. A complete transition like this will be a multi-year process, during which many complications could arise.

For example, producing and selling oil will be key to fund its shift into renewables. However, as electric vehicles become cheaper and more widely available, oil demand will likely suffer, as will its price, restricting BP’s access to internal capital, as well as affecting its share price.

Another risk that I’ve previously highlighted is renewable technology itself. Green energy generation methods may not be as profitable as oil is today. And consequently, the surplus cash flow used to reward shareholders may be significantly impacted.

The bottom line

There are still many unknowns regarding the company’s transition into renewable energy. But now that oil prices have returned to around $60/barrel, and the net debt level is close to being back under control, I believe that the BP share price can recover in 2021. Or at least it could be close to doing so. Therefore, I would consider adding it to my income portfolio.

The post Will the BP share price recover in 2021? appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in BP. 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.

Tesla CEO Elon Musk has made his views on the hydrogen fuel cell technology quite clear. He once called it a “staggeringly dumb” idea when compared to storing power in an efficient battery. But given he runs an electric car company, it’s fair to say he is biased.

Hydrogen technology is gaining significant popularity in several European nations – including France, Germany, Spain, Portugal, Holland, and soon the UK. Prime Minister Boris Johnson recently announced plans for a Green Industrial Revolution and one of its critical points is the use of hydrogen to power industries, transport, and homes.

The UK, along with other European nations, is slowly transitioning to a net-zero emissions economy. I’ve previously discussed what this means for the energy sector. But another crucial evolving industry is the automobile sector.

Today the two most viable solutions to eliminating vehicle emissions are to change the power source to either electric or hydrogen.

An opportunity to beat Tesla?

NASA have been using hydrogen to power its rockets since the 1950s. It is the most abundant element in the galaxy. However, a significant problem with hydrogen technology has been sourcing the fuel.

Originally, hydrogen was extracted from hydrocarbons — commonly referred to as fossil fuels. This is not exactly an environmentally friendly way of acquiring the material.

Luckily ITM Power (LSE:ITM) found a much better solution. Using patented technology, it uses a process called electrolysis to convert water into hydrogen and oxygen. The process produces zero greenhouse gas emissions.

Three projects – three hydrogen opportunities

Today ITM Power has three major projects underway.

The REFHYNE project is the leader in the effort to supply clean refinery hydrogen across Europe. Partnering with Royal Dutch Shell, and the European Commission’s Fuel Cells and Hydrogen Joint Undertaking (FCH JU), ITM will install and operate the world’s largest hydrogen electrolyser in Wesseling, Germany.

Its second project, HyDeploy, is experimenting with the viability of blending up to 20% hydrogen into the normal gas supply. The research is being funded by Ofgem, with the University of Keele testing the new solution. If successful, households could see a dramatic drop in energy bills with no changes to their consumption or domestic appliances.

The third project is by far the largest. H2Mobility is an effort to install and operate hydrogen refuelling stations across Europe. Supported by the British and European governments, 21 companies – including Honda, Hyundai, and Nissan – are collaborating to complete the project with ITM providing the fuel.

The bottom line

Combined, these projects, along with new supportive legislation, are making a hydrogen-based energy solution increasingly viable, not just for vehicles but households as well.

Like Tesla in the electric vehicle market, ITM Power has the technology and expertise to lead in the hydrogen market. However, the stock valuation today is borderline insane.

The market has priced the company at £1.6bn. While it may be worth that in the future, today it remains unprofitable and has little more than £3m in revenue.

I am keeping a close eye on the company, but for now, I’m not buying shares.

The post Forget Tesla! I’m looking at this hydrogen stock appeared first on The Twelfth Magpie.

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Zaven Boyrazian does not own shares in ITM Power. 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.

Many investors have become rich buying up cheap shares of successful growth companies. This is a strategy that I think could work for the rest of us too.

FTSE 250 firms can grow faster

It’s at times like these, when a recession is imminent, that the agility of smaller-cap firms is key. FTSE 250 constituents that are smaller than their FTSE 100 peers are likely to see faster growth. 

Consequently, some fund managers think that there’s good reason for active funds to increase their holdings of non-FTSE 100 companies.

ESG criteria gain popularity 

One such growth opportunity for funds is the appetite for firms meeting more stringent environmental, social, and governance (ESG) criteria. ESG criteria are a set of standards that socially conscious investors use to screen potential investments. More and more investors are putting their money where their values are.

Although it’s true that there are many FTSE 100 companies that incorporate these criteria, the large-cap index is where the miners, oil majors, and pharmaceutical companies reside. And ESG investing is not usually associated with these industries. The FTSE 250 offers more choice for those seeking growth with environmentally and socially conscious investments.

Contour Global, a FTSE 250 powerhouse 

One such investment is FTSE 250 constituent Contour Global (LSE: GLO). Contour is a UK-based wholesale power generation business. Its Europe-wide operations are focused on thermal and renewable energy. Altogether, the firm owns 103 power plants in 21 countries.

Contour’s business is relatively unaffected by the coronavirus-induced demand shock to the global economy. Moreover, it isn’t expecting any significant disruption for the rest of 2020. Its solid end-of-year results reinforced this view.

In addition, turnover and operating profit have grown for the last five years. Income from operations swelled 11.5% to £241m in its latest year, thanks to its renewables division. Contour is also aiming to increase its ordinary dividend per share by 10% each year going forward. 

However, some fund managers are bullish about Contour Global for another reason. The firm has cancelled a coal power plant project in Kosovo due to political opposition. Consequently, the company is not pursuing any other projects with the fossil fuel, making it highly attractive to ESG-themed funds containing FTSE 250 firms.

High gearing makes for a risky investment

The downside of this cancellation is $12m in impairment and $22m in recoverable costs. These costs were in addition to a 2019 Spanish solar power acquisition, swelling the firm’s gross gearing ratio by over 48%. I calculated a debt-to-equity ratio of around 0.9, mostly comprised of long-term debt. This indicates Contour Global could be a highly risky investment. 

Contour’s shares are currently trading around 160p, with some analysts giving the firm a fair value of 205p. While it has a P/E of 49, that fair value price indicates that there may be earnings growth to be had. Much is expected.

The firm will be hoping its acquisitions will add to its future profitability. Early indications are that they may well do so and risk-tolerant investors might find the prospect attractive.

However, due to the weak balance sheet, I’ll be seeking to make my fortune elsewhere for the moment. I will be watching Contour’s developments closely though.

The post Will buying this FTSE 250 share help you to get rich sustainably? appeared first on The Twelfth Magpie.

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Wind in spades 

Greencoat owns a portfolio of domestic wind farms that stretch from Caithness in the north to Kent all the way down south. As of this morning’s full-year results announcement, the group has been public and operating for five years, delivering a total shareholder return of 58.3% in that timescale. While this return is less than that of the FTSE 250 index its a member of, conservative shareholders after a hearty dividend and less volatility are unlikely to be complaining. 

Looking forward, the trust does trade at a 10% premium to its net asset value (NAV), which is already falling and may shrink further in the short term as bond yields rise and income investors flock to these safer assets. However, it’s likely that the group will continue to trade at some sort of premium as the fund’s manager has proven very willing to not only deliver hefty dividends but also grow the portfolio through acquisitions. 

Last year, the group raised £340m in a right issue and used this cash, plus £165m drawn down on its debt facilities, to buy £507m worth of wind farms. That added 273.3 net megawatts (MW) of energy generation, bringing the group’s year-end total to 694MW. During the year these assets generated net cash of £80m that more than covered £52.3m paid out in dividends. And as the costs of wind power continue to fall while nearing a time when they no longer require government subsidies, the outlook for Greencoat UK Wind looks quite bright to me. 

Basking shareholders

Although the idea of solar power in the UK is an easy target for cheap jokes, NextEnergy Solar Fund is showing that it’s farms receive more than enough sun to power big dividends for shareholders. At the end of December the group had 63 plants with an installed capacity of 569MW, including eight recently-purchased farms in Italy. 

And just as is happening with UK wind power prices, solar farms are becoming cheaper and cheaper over time, bringing down the acquisition costs for NESF, which only purchases operational farms. And the group’s manager is proving adept at wringing efficiencies out of its plants as they produced 2% more energy than budgeted in the half-year to September. 

This helped generate enough cash to cover the company’s generous dividend 1.14 times over. The fund continues to grow through acquisition, so with cash flow rising over time dividend payouts should quite safely continue to grow in line with inflation. Furthermore, with its shares trading at only a 6.5% premium to their NAV, NESF isn’t ridiculously overpriced for a high-income option in a low-income world. 

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If any domestic firm is to become a global player in clean energy the smart money would be on industrial giant Johnson Matthey (LSE: JMAT). The company may not be a household name but with over £3bn in annual sales and a market-leading position in emissions control devices for diesel engines it has the know-how and balance sheet to profit from our changing energy needs.

The company’s most intriguing bet is on the future dominance of high capacity batteries made to power electric vehicles or efficiently store solar energy for households. To see the potential importance of batteries for renewable energy you need look no further than Tesla’s $5bn investment in its own battery production facility in the US.

Johnson Matthey won’t be dominating the market any time soon as its new business division, which includes batteries, only brought in £157m in sales last year. However, this was a 73% increase on the previous year and with substantial investments being made in this high opportunity venture alongside traditional emissions control, the company is one to watch in the coming years.

Wind power

Greencoat UK Wind (LSE: UKW) is the more classic example of a renewable energy company through its ownership of 19 wind farms across the UK. Thanks to government regulations that stipulate utilities must source a certain amount of their energy from renewable sources, Greencoat has a relatively reliable source of income, which allows it to return a hefty chunk of its earnings to shareholders.

These dividend payouts currently yield a whopping 5.5% and with relatively low debt and a growing portfolio of farms under ownership look quite safe. That said, the company isn’t aiming for global dominance and is focused solely on the UK, which naturally constrains its growth prospects. However, for more risk-averse investors who want more direct ownership of tangible assets and steady income potential, there are worse options than Greencoat.

Utility Good Energy (LSE: GOOD) is trying to profit from consumers’ increasing awareness of climate change by sourcing its energy from renewable sources and then feeding it back into the national grid. So far the plan is working well and customer numbers bumped up 36% year-on-year over the past six months.

More meters led to a 40% rise in revenue and full 72% jump in EBITDA over the same period. Unlike more staid traditional utilities, those increased earnings aren’t being passed on to shareholders just yet. Interim dividends stayed level and are expected to yield a miserly 1.5% this year.

Rather, Good Energy is investing large sums in expanding its own power generation capabilities. Power generated from the company’s assets increased 19% year-on-year through June and numerous large solar and wind projects are currently in development. Good Energy is by no means an ordinary utility with higher debt and growth prospects than larger rivals, but for socially conscious investors the company’s business plan may prove an interesting one.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

In addition, Greenko has announced a non-binding heads of terms for the sale of its stake in Greenko Mauritius for just under £163m to an affiliate of the Government of Singapore Investment Corporation. The sale of the stake would mean that Greenko disposing of its trading activities and assets which are made up of the ownership and operation of clean energy products in India. While talks are at an advanced stage, there is no guarantee that the sale will be agreed but, it if is, then Greenko expects to distribute the proceeds to its investors.

Clearly, the performance of Greenko’s shares in 2015 has been hugely disappointing, with them being down by 46% since the turn of the year. As a result, it now trades on a much lower price to earnings (P/E) ratio of 9, which indicates that its shares are very cheap. Certainly, today’s profit warning means that the 16% growth in earnings that had been expected for the current year is unlikely to be met but, even if the current year does disappoint, the strong outlook for clean energy in India remains relatively upbeat and, with such a low rating, Greenko could be an enticing purchase for less risk averse investors.

Of course, there are other options within the electricity sector. Notably, SSE (LSE: SSE) offers relative stability and, unlike Greenko, pays a great dividend. In fact, SSE currently yields a whopping 5.8% and, with dividends forecast to rise by 2.8% next year, it is likely that their growth will beat inflation over the medium term.

Furthermore, SSE is expected to increase its earnings by 6% next year which, for a utility company, is very impressive and is roughly in-line with the growth rate of the wider index. Despite this, SSE trades on a relatively appealing P/E ratio of 13.9 and this indicates that its shares are well-worth buying and, alongside their stable outlook, are more appealing than smaller peer, Greenko.

Meanwhile, Drax (LSE: DRX) continues to endure a very challenging outlook as it transitions from being a coal-fired power station to one fuelled by biomass. The change, though, is rather painful, with the company’s earnings falling in each of the last four years and being expected to do the same in the current year and next year, too. As such, it seems likely that investor sentiment may decline and put the company’s share price under further pressure, with it having fallen by 31% since the turn of the year.

Clearly, Drax has significant potential to be a key part of the UK’s energy mix via biomass. However, with its shares trading on a forward P/E ratio of 48, there seems to be little value in its shares at the current price. As a result, it seems to be one to watch, rather than buy, at the present time.

The post Greenko Group PLC Slumps 9%: Is It A Better Buy Than SSE PLC And Drax Group Plc? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of SSE. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.