Buy the dip: 2 fast-growing green energy stocks
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Co-created by Austin Rogers for High Yield Investor
As a severe heatwave sweeps across the United States and Europe, pushing temperatures from Salt Lake City, Utah to the United Kingdom to Italy and Norway to their highest ever recorded levels, concerns are growing that during the summer This could be the new normal of the world. Climate change.
Now, we are investors, not climate scientists. We do not want to dwell on the debate about how concerned we should be about climate change or what to do about it.
But it cannot be denied that the population of the developed world is becoming more and more concerned about climate change over time, and this concern leads them to believe that more wind and solar power generation is a factor. Attractive solution. A Pew Research poll from early 2022 shows that 72% of American adults (including 54% of self-identified Republicans) think the federal government should encourage wind and solar as sources of electricity.
pew research
Furthermore, data from the Pew Research survey shows that 69% of American adults support their country “taking steps to become carbon neutral by 2050.”
pew research
Again, we are not trying to make any political statement here. Instead, we are simply showing that the winds (pardon the pun) favor the continued rapid growth of electricity generation from renewable energy sources.
The demand for more green energy should continue to grow, regardless of whether governments enact more renewables legislation.
Therefore, we find that the US Energy Information Administration projects in its 2022 Annual Energy Outlook that US electricity generation from renewable energy should more than double from 2021 to 2050. In fact, the EIA projects that the vast majority of electricity generation is on to the next. Renewable energy will bring 30 years.
Energy Information Administration
As you can see, the EIA estimates that renewable sources of electricity generation should increase from 19% in 2021 to 41% in 2050. That second number is actually one percentage point lower than the 2021 Annual Energy Outlook, with 42% of electricity generated. Renewable energy in 2050.
But here’s an important point to note: The EIA has made its forecast for natural gas prices at around $4 per million British thermal units (“mmBtu”). Today, natural gas prices have nearly doubled, driven by the Western world’s separation from Russian gas supplies.
The 2022 Annual Energy Outlook assumes that natural gas will increase capacity by about 40% over the next three decades. But if the price of natural gas is meaningfully higher than the EIA’s assumption for several years, it could spur the shift toward renewable energy.
What’s more, about half of the new gas-fired power generation capacity expected over the next 30 years is for extreme purposes. In other words, it is expected that it will operate only during certain parts of the day with the highest demand/load. But battery storage technology continues to improve and could reduce the need for some of the gas-powered drinking plants in the future.
In short, if renewable energy technology continues to get cheaper and more efficient, the EIA’s most recent launch could prove too conservative.
The last decade has shown that it is more dangerous Underrate to. the rise of renewable energy in comparison to Excessive This.
With that, let’s take a look at two companies that are currently undervalued, and yet, own stable, long-contracted renewable energy assets like wind farms, solar arrays, and battery storage facilities.
NextEra Energy Partners (NEP)
NEP Presentation
NEP parent company, sponsor and external manager is the renewable energy yieldco of NextEra Energy Inc. (NEE), a utility company serving Florida as well as owns a large-scale renewable energy development business called NextEra Energy Resources.
NEE and NEP have a symbiotic relationship in which NEE sells or “drops down” completed and stable renewable energy projects to NEP, raising capital through various means to purchase them. With the expansion of NEP’s portfolio, it is able to pay out more distributions, which also benefits NEE by owning more than half of NEP’s operating company units.
NEP Presentation
Although in most cases investors have a right to worry about external management structures, the management arrangement between NEE and NEP is, in our opinion, one of the best for NEP unitholders for at least two reasons:
- Because NEP issues equity to purchase assets from NEE, it is in management’s best interest to make every effort to ensure the NEP’s stock price outperforms.
- NEE owns the majority of the NEP and receives more distributions as the NEP’s cash available for distribution (“CAFD”) increases.
Unlike many external management agreements, in which management is paid to increase assets under management, even if it benefits shareholders, the structure of the NEE specifically refers to the parent company as the common unitholders of the NEP (such as you and I). rewards for increasing distribution. It aligns the incentives between the management and the unitholders.
Evidence of this alignment of interests comes with the recent announcement that management has decided to limit Incentive Distribution Rights (“IDR”) fees to around their current levels. This will reduce the payout ratio of NEP to this otherwise each new portfolio will have to be carried forward with higher accretion for CAFD per unit.
NEP Presentation
Due to NEE’s efficient management and the smart structure of the two symbiotic companies, we are confident that NEE’s vast renewable energy development pipeline will translate into continued growth of both NEP’s portfolio and its distribution per unit.
nep june presentation
Since NEP’s IPO eight years ago, the company has grown its distribution overall at an annualized rate of ~290%, or about 15%. Management aims for growth to continue at 12-15% per year until at least 2025.
With a dividend yield of 4%, growth of 12-15% per year, and no K-1 forms to deal with, the NEP makes a great dividend growth game on the green energy transition.
Clearway Energy Inc. (CWEN, CWEN.A)
CWEN Presentation
CWEN is a publicly traded YieldCo whose sponsor, Clearway Energy Group (“CEG”), is a private company that develops renewable energy projects. CWEN’s 7.7-GW portfolio includes utility-scale wind, solar, battery storage, and natural gas-powered generation plant assets.
CWEN Presentation
Unlike NEP, CWEN is managed internally, meaning that its management team is employed by CWEN itself, rather than the parent company or sponsor.
For many years, CEG has been 100% owned by Global Infrastructure Partners, but most recently, GIP agreed to sell 50% of its ownership in CWEN to French energy giant TotalEnergies (TTE). This new partnership between GIP and TTE is a powerful partnership that, combined with CEG’s own expanded development pipeline, will ensure that CWEN has substantial growth opportunities for the foreseeable future.
CWEN Presentation
After selling off its thermal generation assets at an opportune time, CWEN’s management has stated that they have dry powder to fully fund their investment pipeline for the next few years.
In addition, these planned investments in long-term wind, solar and battery storage projects, as well as any new opportunities presented by the partnership with TTE, will allow CWEN to raise its dividend to the upper end of its target growth rate of 5-8%. should be allowed to increase. per year until at least 2026.
Currently, CWEN offers a dividend yield of over 4%, while CWEN.A offers a yield of over 4.5%. Even though Class A shares (CWEN.A) are the smaller share class, it is our preferred way of owning a company because the discount on Class C shares (CWEN) offers a higher yield with no noticeable difference in liquidity.
ground level
Regardless of one’s personal view of climate change or green energy, it is undeniable that the US and the developed world are increasing their investments in the electric energy sector to achieve carbon neutrality at some point in the future. This will be a multi-trillion dollar transition that investors can either ignore or take advantage of.
At High Yield Investor, we choose to take advantage of this massive growth trend and profit from it. Although we prefer both NEP and CWEN, our top choice in this area is the high yield with a growth profile similar to CWEN.
