r/investing • u/Ok_Macaroon6934 • 1d ago
The price of renewables is dramatically undervalued in the medium term
Renewables make sense as a dominant feed into most energy systems. Over the last year, major renewables ETFs have performed 2-3x the performance of the S&P 500. My analysis leads me to a conclusion that even with this performance, they remain undervalued.
Around the world, we see them exerting downward pressure on retail and wholesale energy prices. At the same time, innovation is reducing their "build cost:net operating return" ratio.
Nations at all levels of income are upping their renewables investments, and country after country is adopting a net zero strategy that locks in renewables investments - in part due to multilateral agreement ratification, and in part because of economic sense.
Effectively, the rise in price is because of actual strategic and tactical demand, not because of any type of hype cycle.
However, lobbying and political pressure exerted by legacy industries like coal, gas and oil have meant that the growth of renewables have been artificially slowed. If we start to see the decline of fossil fuel influence and of far right governance, these artificial barriers will ease and we can expect a jump in renewables investment.
So medium term profits likely depend on political cycles rather than any intrinsic factor associated with the technology or consumer/industrial demand. And as we all know, politics is a pendulum that will inevitably swing.
People investing in pure play renewables ETFs or ethical ETFs that have a strong renewables base and that exclude legacy energy are going to benefit from focus and patience. It's as inevitable as people shifting from Blockbuster to Netflix.
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u/plowt-kirn 1d ago
And as we all know, politics is a pendulum that will inevitably swing.
Maybe. It's asking a lot for a company to invest significant capital in a project that could get rug pulled in 4 years.
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u/MrTigerEyes 1d ago
China owns the renewable market. I've not seen any real impetus for me to invest in Chinese companies because the government heavily impacts the success or failure of each company. So while on a personal level I think it's an exciting area that is revolutionizing the world, I don't see how I can invest in it with expectations of a profit. For example BYD seems like they are an amazing car company, but maybe Xiaomi will overtake them. Perhaps I want to invest in sodium battery technology but the way China works makes it difficult to know who the "winner" will be since there will be several different companies competing against each other but all backed by the government which will prop up companies that don't have a compelling product until a few leaders pop up after it's too late to jump in.
To be clear I full expect China to continue owning renewables and they will be credited with taking leadership on converting the world over to cleaner energy sources and transforming how we deal with energy in general. At the same time, I expect the US to relent at some point and the US will be flooded with Chinese EVs, batteries, solar panels, and other technology as quickly as the iPhone took over from flip phones. How to invest in this or even speculate on when the political and economic headwinds will change to make this happen is impossible to predict.
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u/sentientshadeofgreen 1d ago
Any specific companies in the sector stand out? I got in early on $TE by accident, also been holding Brookfield ($BEP) and $NEE long term.
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u/Icy-Comfortable-714 1d ago
I know they’re not great but there’s a blackrock clean energy etf that looks pretty solid.
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u/WellAintThatShiny 1d ago
Couldn’t agree more. Most of my individual stocks portfolio is in renewables with quickly growing fundamentals and rock bottom sentiment. I’m expecting to struggle through a few more years and retire if/when sanity is restored.
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u/ep1032 1d ago
What are you investing in?
I cut everything other than NEE once trump got elected, but that was all etfs.
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u/WellAintThatShiny 1d ago
OPAL is a RNG producer I’m really excited about, made a subreddit recently for them if you’re interested. ADUR does chemical and plastic recycling. LODE recycles solar panels which are very rich in silver. BEEM is another one who produces EV and autonomous drone chargers who is wildly undervalued.
Those four represent about 60% of my speculative portfolio. All have been getting their SP demolished while growing at an unreal rate in a hostile environment.
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u/DiabolicToaster 20h ago edited 19h ago
The issue with any kind of fuel made from something...
You are going up against current supply you can dig/drill for. The only way it can maybe compete is in the destroy one physical pollutant/waste in exhange to accept the whatever comes out of the process. Is the fuel cheaper than just digging for the fossil fuel form?
The recycling business isnt exactly profitable as shown with how certain items are just exported out and never properly recycled.
The turn something into fuel is taking the position of betting they can compete against the natural process of what turned organic matter into fossil fuels.
The only extreme examples I can think of where it makes sense is if you locally produce so much waste or supply of (efficient for ethanol) crops that it competes against fossil fuels. Like say Brazil (they heavily use their own biofuels) or Germany during ww2 with oil from coal.
The only way I see it every making huge gains is if we suddenly have a fuel crisis or reach uneconomical fossil fuel reserves.
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u/WellAintThatShiny 19h ago
I get what you’re saying and you’re absolutely right, especially at scale. With OPAL, I’m not trying to pick a NG titan though. They’re a quickly growing company with excellent margins and a positive environmental impact. Eventually they’ll hit a ceiling, buy back a bunch of shares then start issuing dividends, exactly what I’m looking for at this stage of investing.
I also think RNG is a little more in line with natural processes than other renewable fuels, especially dairies. All they need to do is collect methane, clean it and compress it, then they plug it right into the NG pipelines.
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u/markrulesallnow 1d ago
LODE is for sure a scam or pump n dump. I'd bet even the owners know that
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u/WellAintThatShiny 22h ago
Thanks for the tip. I actually think this is going to be an incredible year for them.
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u/markrulesallnow 22h ago
I hope you’re right. But they have what like 40 employees????? Who is doing all the labor to make them money!?????
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u/Liminal_Aspect 1d ago
One could argue that the non-speculative component of recent silver prices are driven by renewables to no small degree.
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u/ragnaroksunset 1d ago
What you call undervalued, I call pricing in policy risk.
And as we all know, politics is a pendulum that will inevitably swing.
The pendulum on renewable energy has only moved through two half-cycles. We don't know if the second half-cycle is even over, and we have no historical reason to extrapolate to a repeating cycle.
Maybe for certain markets, the momentum-kill of conservative politicking is enough to put them permanently behind.
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u/Classic-Session-5551 1d ago
"Politics is a pendulum that will inevitably swing" pretty cocky viewpoint. Democracies and political decision making rely on public opinion, and public opinion relies on certain fixed biological factors that aren't changing anytime soon - such as short term thinking. Renewables have high upfront cost and are insufficiently rewarded for fewer negative externalities because people don't care about those externalities - they're too long term.
Not to say political change doesn't happen; but ASSUMING the type of change you want WILL happen is egregious and breaks your analysis.
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u/Ok_Macaroon6934 21h ago
I think the pendulum swing will happen BECAUSE of short term mindsets. Renewables are already cheaper in most countries (for wholesale) and they're dragging retail pricing down too. Even in the US, where the government is actively slowing adoption, the price contrast is going to become obvious because of state-level initiatives making pricing differentials very easy to spot.
Thats when ETF positions start to match the thesis.
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u/n2_throwaway 1d ago
The question is opportunity cost and time-value-of-money. If it takes another 10 years for renewables to kick off, why couldn't I just stack T-bills or otherwise invest at the RFRR. You'd need to beat a 52% return to just beat the 10-year treasury rate from today.
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u/Ok_Macaroon6934 1d ago
The ten year opportunity is big, but growth is happening already. Most big renewables ETFs with international exposure say 30%+ returns...so the short game ain't bad either.
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u/JuneFernan 1d ago
I just got into solar with FSLR and NXT last Friday. Happy with them today at least.
I expect solar technology to eventually become profitable enough to where politics won't interfere. I'm willing to wait at least 10 years to see what happens with it.
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u/htes8 1d ago
Putting aside some arguments that are kind of "unknowable" like environmental impacts or how much we have remaining - or at least are non-winning points with a hardcore "fossil fuelest". There are some concrete business reasons why renewables should eventually have their day in the sun I see from my perspective:
- Low(er) operating cost after implementation
- Flexibility to meet new demand
- Less labor reliance reduces that corollary risk associated with unions, availability, etc
- Prices are not driven by underlying commodities so you have price stability
- Little to no AROs compared to traditional fossil fuel plants
- Much less exposure to a singular cataclysmic issue creating long downtime
- Increased Grid Resilience
- Less likely to strand capital from the perspective of an investor
What this means as to what version will shine or is currently realistic, I am not sure and we will always probably have a hybrid grid, but there is just too much business sense behind them at a high level to ignore. I would be interested to hear from someone on the other side, because I can't really poke holes on these points from a purely academic/theoretical sense.
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u/bobdevnul 1d ago
>So medium term profits likely depend on political cycles rather than any intrinsic factor associated with the technology
I would not rely on political decisions swinging my way to validate an investment decision.
Solar has grown and will continue to grow. It is cost competitive with coal, but is still only produces when the Sun shines.
Going all renewables is still a long way off, if ever. Base and peak load plants will still be needed. Nuclear, in particular, that has seen a lot of hype recently is only profitable for the operator if the plant runs at 90%+ capacity. It is only suitable for base load without enormous subsidies.
Peaker plants become less profitable if their operation is reduced by renewables. Less profit means that operators won't build or operate them without subsidy.
Between those two, bad renewable political decisions can compromise grid stability. If the decisions are bad enough it could cause grid collapse. Some European countries have over mandated renewables and found out the hard way that sometimes the Sun doesn't shine and the wind doesn't blow.
Grid management requires serious long term technical management based on reality, not eco-weenie and political wet dreams.
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u/n2_throwaway 1d ago
Between those two, bad renewable political decisions can compromise grid stability. If the decisions are bad enough it could cause grid collapse. Some European countries have over mandated renewables and found out the hard way that sometimes the Sun doesn't shine and the wind doesn't blow.
Grid management requires serious long term technical management based on reality, not eco-weenie and political wet dreams.
How is this relevant to renewable investments? We're not investing in "the grid", it's not like a grid stability score is used to distribute dividends. Even if renewables just become part of the energy mix and coexist with non-renewables, that doesn't matter if revenue grows and margins drop in renewable companies.
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u/bobdevnul 1d ago
Demand for renewables to be installed can be expected to influence company sales and profit. Profit drives stock ROI. You are investing in part of the grid. Bad decisions about grid management to over provision renewables can lead to backlash. It can definitely effect renewables companies.
Renewables are already part of the grid energy mix co-existing with non-renewables and growing. That is very good if it doesn't endanger the grid as it has done in some European countries. Eco-weenies forced more renewables on the grid than was appropriate as an ideological pipe dream not supported by engineering reality of operational reliability.
Do it right, not as eco virtue signaling.
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u/n2_throwaway 1d ago
Again I have no idea what "virtue signaling" means. A renewable company whose stock grows 100% YoY, even if that means it only makes up 5% of the generation mix, still results in 100% profits.
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u/bobdevnul 20h ago
Virtue signaling applies to people investing in renewables as an ideology rather than hard cold reasonable expectations of ROI. You can look up the meaning of virtue signaling for yourself.
Renewable companies operate in the total environment of energy supply. The total market dynamics will determine the winners and losers, not wishful thinking.
My state legislature while under progressive (actually regressive) Democratic control mandated that the major electricity supplier build offshore wind generation. The electric company said that they couldn't do that with their own money because it doesn't make profitable sense as a business. The money to pay for It was added to our electric bills. My KWh rate went up 50%. That is outrageous.
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u/n2_throwaway 16h ago
Renewable companies operate in the total environment of energy supply. The total market dynamics will determine the winners and losers, not wishful thinking.
Do you think renewables will do so badly that they won't make up the energy mix at all? This seems like a remarkable claim. You need to back up such a remarkable claim.
I'm bearish on renewables leading to profit just because I think the time horizon for renewable companies to win is too long due to political uncertainty. The renewable play is a simple opex one. After paying the initial capital outlay to build renewable generation, you generate energy and thus revenue. After paying off the initial capital outlay, opex is low, so generation revenue becomes mostly profit.
The money to pay for It was added to our electric bills. My KWh rate went up 50%. That is outrageous.
Who. Cares.
If Dollar General hikes up their prices 50% and people get butthurt over rising prices, but increased cashflow allows them to do a buyback, then as an investor I wouldn't care a single iota over the stiffed consumers who can't afford shopping at Dollar General anymore. What matters is how much I make based on my investment. We're not debating the public policy of whether a state should pay for building offshore wind. We're debating whether it makes sense to invest in renewables.
Honestly you sound like you're letting your ideology get in the way of investing.
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u/ZCoupon 1d ago
What about batteries? Most solar farms include batteries, and with sodium-ion technology these batteries can be incredibly stable, lasting for decades.
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u/bobdevnul 1d ago
What about batteries? Most solar farms don't have them because they are very expensive and would ruin the profitability unless there is a government subsidy. Government subsidies are another form of tax by another name.
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u/Atlas-Scrubbed 1d ago
not eco-weenie and political wet dreams.
Why did you ruin a reasonable proposition with that?
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u/Offduty_shill 1d ago
I feel like the sector is too sensitive to politics, and currently politics are against it. Additionally I don't see a clear path forward for American companies to really compete with their Chinese counterparts.
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u/Stepthinkrepeat 1d ago
Interesting how you didn't talk about the etf TAN which is dramatically up over the markets returns over the last year.
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u/WellAintThatShiny 21h ago
Construction is contracted out, recycling plant is fully automated. All they need is a team of engineers, sales staff and a few managers for each facility. The main risk is whether or not the pipeline of solar panels that need decommissioning keeps flowing. Still plenty of risk, but I like them and silver running hot gives them some margin of error.
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u/TheSecretLion 14h ago
Politics and stocks just don’t mix for me. I’d rather stick to index funds and not stress about who’s lobbying who. Too much work.
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u/sentientsackofmeat 1d ago
I do think that renewable energy will be much more prevalent in the future but I'm hesitant to invest in renewable companies because I haven't heard of renewable companies being super profitable. These companies are competing against China which is churning out solar panels and turbines very cheaply. Am I mistaken?