When Fortis Inc. updated its five-year plan for capital spending this week, the company highlighted renewable energy as one of its key areas of growth.
No doubt, public interest in solar and wind power is a driving factor for the St. John’s-based utility, which owns energy-producing and distributing assets in Canada and the United States. According to a Pew Research Center survey, 77 per cent of Americans believe it is important for the U.S. to develop alternative energy sources.
But Fortis is tapping into a compelling business case, too. The cost to produce renewable energy has fallen dramatically in recent years, to the point where it has become attractive next to fossil-fuel generating assets, particularly coal.
David Hutchens, the chief operating officer (and incoming chief executive officer) at Fortis, noted that wind and solar power in Arizona – where Fortis is phasing out its coal generating facilities at Tucson Electric Power – now costs less than 3 U.S. cents per kilowatt hour.
“That’s substantially cheaper than it was even five years ago. Obviously, federal incentives helped push those costs down. But even without the incentives, it’s going to be an affordable energy source,” Mr. Hutchens said in a telephone interview this week.
As the corporate world starts to embrace solutions to climate change, investments tied to renewable energy are producing the sort of growth that is hard to ignore, and supporting hefty dividends. The S&P Global Clean Energy Index of 30 stocks – which includes Canadian Solar Inc. and Toronto Stock Exchange-listed Boralex Inc. and Innergex Renewable Energy Inc. – has surged 46 per cent over the past 12 months.
For investors, green means opportunity – not only in the case of traditional utilities that are boosting their exposure to renewables, but also for companies that are defined by their focus on solar, wind and hydro.
Here are four reasons why investors should take a closer look at stocks in this promising sector.
Wind and solar are economical.
Years ago, renewable energy needed government support. Now, following technological advances that have driven efficiency and reliability (including breakthroughs in storage), along with the declining cost of wind and solar components, renewables are clearly here to stay.
According to Lazard, the asset management firm, the unsubsidized cost of wind energy has declined by 70 per cent over the past decade, while the cost of solar energy has declined by 89 per cent. What’s more, the costs associated with building new projects has also converged with traditional energy sources.
Growth in renewables is an unstoppable force.
U.S. President Donald Trump has supported coal and denigrated wind and solar power. Nonetheless, the growth of renewable power has accelerated.
According to the U.S. Energy Information Administration, U.S. electricity generation from coal fell 22 per cent from 2016 to 2019, while generation from renewables (excluding hydro and nuclear) increased 34 per cent over the same period. Renewables are on target to account for 22 per cent of U.S. energy generation by 2021, up from 17 per cent in 2019.
Big, savvy investors are embracing renewable energy.
At the Canada Pension Plan Investment Board, investments in renewable energy companies are valued at $6.6-billion and now account for 1.5 per cent of the fund, double the share since 2019. Its acquisition of Pattern Energy Group Inc., completed in March, added a portfolio of 28 renewable energy projects in Canada, the United States and Japan.
Bruce Hogg, who heads CPPIB’s Power and Renewables group, said in a phone interview that renewable energy has proved resilient relative to other areas of the economy, even as the pandemic weighs on global energy needs.
“The resilience in the demand for clean electricity has given investors confidence in the long-term fundamentals,” Mr. Hogg said, noting that the potential market for renewable energy is huge – likely measured in trillions of dollars – and the cost-competitiveness of wind and solar power can overcome reversals in government policy.
“The sector has long since moved from being policy- or climate change-driven, to an economic decision,” Mr. Hogg said.
Even big oil companies want some of the action.
Struggling with sluggish demand and low prices for fossil fuels, a number of global oil giants are turning to renewable energy.
BP PLC raised its exposure earlier this month with a US$1.1-billion investment in two offshore wind farms being developed near New York and Massachusetts. The projects, which are expected to generate a combined 4.4 gigawatts when completed, are part of BP’s long-term plan to increase its renewable energy generation capacity to 50 gigawatts by 2030.
France’s Total SA is investing US$3.7-billion in the Seagreen 1 offshore wind farm project in Scotland as part of its plan to generate 40 per cent of its sales from low-carbon electricity by 2050. And Spain’s Repsol SA announced in July that it is developing wind and solar projects in Chile as part of its plan to increase its renewable energy capacity to 7.5 gigawatts by 2025.
According to the consultancy Rystad Energy, 10 major oil companies are expected to invest a total of US$18-billion on renewable energy through 2025.
Yes, that’s about 10 per cent of what oil majors will likely spend on oil and gas projects over the same period. But it underscores that interest in renewable energy has a lot of momentum.
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