Development and use of renewable energy is on the rise as countries race to meet the 2030 Climate Target Plan.
A decade or two ago, most investors might have viewed environmental causes as little more than a niche special interest and an obstacle to maximum profits.
However, as governments and the public increasingly prioritize the environment, companies have leveraged resources and policies devoted to maximizing sustainability in order to grow their own business, making strides in fields such as renewable energy.
One investment in particular can mutually benefit the planet and your portfolio as it supports the ever-expanding virtuous cycle working towards said sustainability: solar power. Over a fifth of US electricity will be generated from renewable energy sources this year, more than double the country’s renewable output a decade ago. According to the Paris-based International Electricity Agency (IEA), solar electricity has grown at a compound annual rate of nearly 50 per cent for the past decade, and could account for 27 per cent of the world’s energy mix by 2050.
In October, the IEA crowned solar power the “new king” of global electricity markets, and said that solar photo-voltaic is now the cheapest source of electricity in history, having achieved an incredible 99 per cent reduction in module costs since 1980.
3 solar energy stock buys
Companies like SunPower Corp. (NASDAQ—SPWR), JinkoSolar Holding Co. Ltd. (NYSE—JKS) and Canadian Solar Inc. (NASDAQ—CSIQ) are some of the top ‘buy’ recommendations in this sector. However, SunPower’s products are far more expensive than those of its peers while JinkoSolar’s current operations do not cover its debt well.
According to Matthew Johnston, a professor of macroeconomics at St. Stephen’s University in New Brunswick and writer for Investopedia, Canadian Solar was the “best value solar stock” entering this year’s fourth quarter because of its price-to-earnings ratio.
It is important to note that the share price has nearly tripled since spring, from US$14 on April 1 to about US$42 as of early December, reflecting growing attention from the market.
On Sept. 16, the company announced the offering of US$230 million in convertible senior debt notes paying 2.5 per cent interest due in 2025, including an option for note holders to buy an additional US$30 million. The conversion rate translated to an initial price of US$36.67 per common share and represented a conversion premium of about 32.5 per cent above the Sept. 10 share price of US$27.68, though CSIQ has already handily exceeded that price.
In August, Canadian Solar highlighted the importance of adding energy storage to projects and the “significant growth opportunities in the solar-plus-storage market”.
Chairman and CEO Shawn Qu stated that the vertically-integrated company “exceeded expectations both on revenue and profits,” despite COVID-challenged market conditions. Canadian Solar made gross margins of 21.2 per cent and net revenue of $696 million in this year’s second quarter, which exceeded its guidance range of $630 million to $680 million.
It also reported an energy storage project backlog of 4,683 megawatt hours, which the company said was almost double the figures reported at the end of the previous quarter. “The company believes it is uniquely positioned to deliver solar-plus-storage solutions to its customers given its integrated business model as a top-tier module technology manufacturer and global project developer, and is committed to expanding its presence in this space,” an August press release stated. “There are significant growth opportunities in the solar-plus-storage market, given declining battery storage costs, higher capacity needs and accelerating retirements of fossil fuel power plants.”
Lithium-ion batteries most common
The most common batteries in solar storage are lithium-ion, based on their affordability, size, and long battery life. Most lithium-ion solar batteries have a minimum warranted lifespan of around 10 years, or a cycle life of 10,000 cycles (whichever comes first).
In addition, they do not produce the toxic gases that lead-acid batteries do, require little maintenance, and as a result of Tesla Inc.’s (NASDAQ—TSLA) increasing popularity, are a lot easier to come by in large capacities.
In 2018, the global solar energy market was valued at US$52.5 billion; it is projected to reach US$223.3 billion by 2026. If the IEA’s forecast is accurate, solar electricity will become the leading source of electricity worldwide.
Canada is the only major industrial country without a national renewable energy strategy, while at the same time heavily supporting the slowing fossil fuel industry.
Nevertheless, Rystad Energy analyst Felix Tan says Alberta’s commitment to stop burning coal by 2030 “opens the door” for renewable energy, like solar power. Given the province’s struggling oil industry, the construction of several massive solar farms in southern Alberta now underway could provide jobs and meet energy demand.
According to the Canadian Solar Industries Association, solar power operations produce about one per cent of electricity in Canada, employ about 10,000 people per year, and displace 1.5 million tonnes of greenhouse gas emissions per year, the equivalent of removing 250,000 vehicles from the road per annum.
Wind and solar will exceed nuclear
“We expect in 2021 that wind and solar will generate more electricity than all of the world’s nuclear power plants,” says Dave Jones, a senior electricity analyst at the organization EMBER. EMBER is an independent climate think-tank focused on accelerating the global electricity transition.
“Nuclear power generated 10.5 per cent of global electricity in the first half of this year, compared to 9.8 per cent for wind and solar, and we think there are enough new wind and solar installations being built that they will overtake nuclear for the first time ever,” he says. At the same time, coal’s share fell from 38 per cent to 33 per cent, which Mr. Jones calls “an unprecedented fall, by historical standards”.
When looking at the renewable energy market’s growth, wind and solar energy are often combined. That being said, solar panels have a lot of versatility (they can power homes, motor-homes, etc.) and the conversion of solar energy to electricity via solar panels is far simpler than wind via wind turbines.
The IEA says that since August 2019, wind and solar generation doubled from five per cent to 10 per cent of electricity on average across the world, and this was reflected in many key countries: Japan, China and Brazil grew from four per cent to 10 per cent, the US grew from six per cent to 12 per cent, and Turkey from five per cent to 13 per cent. Germany produced a record-setting 195 billion kilowatt hours of energy, enough to cover the electricity needs of all private households in Germany twice.
Solar energy also briefly met 100 per cent of electricity demand in South Australia on Oct. 11, making the state the world’s first to be entirely sun-powered.
Across a variety of income levels and diverse political climates, solar demand is rising globally.
Canadian Solar develops photo-voltaic power plants and then sells them to others to operate as they reach commercial operation. In some cases, the company retains a minority ownership stake in the plants of about 15 per cent.
An example of this is the Canadian Solar Infrastructure Fund (CSIF), a publicly traded investment fund akin to a real estate investment trust. It holds operating solar assets in Japan. CSIF has been listed on the Tokyo Stock Exchange since 2017 and remains 15 per cent owned by the company.
Canadian Solar said that it intends to replicate this strategy widely and that revenue generated from various streams (power sales, operations, and maintenance) could include opportunities to perform energy storage systems integration and optimization services.
The company has been consistently profitable over the past seven years with successful operations on six continents, and is one of the industry’s most profitable companies. In 2019 the company delivered a gross margin of 22.4 per cent and operating cash flow of US$600 million.
Potential catalysts for further growth include an accelerated “Green New Deal” in Europe, takeover opportunities from small developers unable to weather pandemic-related delays, manufacturers seeking market share, low interest rates facilitating capital partnerships and an extension of the US investment tax credit.
Isabella Lopes is a Toronto-based digital creator and writer for Investor’s Digest of Canada.
This is an edited version of an article that was originally published for subscribers in the December 18, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •2/25/21 •