Renewable energy stocks have been getting a lot of attention in recent years, and for a good reason. With the world trying to eliminate carbon emissions, investments into green electrical infrastructure are on the rise.
In late 2020, the UK government unveiled its ‘Green Industrial Revolution’ that outlined its objectives over the next few decades. And this report has opened up some enormous opportunities within the sector.
With that in mind, I’ve spotted two stocks that might thrive under this plan, making them a potentially excellent source of passive income for my portfolio.
A renewable energy stock investing in wind
What could be the most ambitious part of the Green Industrial Revolution is the aim to power every home in the country using offshore wind turbines by 2030. To meet this target, total wind farm capacity needs to increase by around four times its current size. And that’s something which Greencoat UK Wind (LSE:UKW) is already taking advantage of.
This renewable energy stock is actually a real-estate investment trust that targets wind farms rather than property. These farms generate clean electricity sold to 11 different energy companies, including SSE, British Gas (Centrica), and EDF Energy. The profits are then returned to shareholders as a 5.2% dividend yield, creating a quarterly stream of passive income.
Greencoat has been ramping up its investments into offshore wind farms over recent years. In 2018, offshore energy production represented only 8% of the group’s total capacity. Today, it’s closer to 30%. And since turbines don’t require much maintenance, the underlying operating profit margins sit around 65%.
Of course, nothing’s risk-free. Greencoat is highly susceptible to fluctuating energy prices. Since these are regulated by Ofgem, the firm has no pricing power. If energy prices are pushed down to improve affordability, the firm’s margins will likely get squeezed. And, in turn, so will the dividends.
Passive income from electrical batteries
A problem I’ve highlighted in the past about wind energy is the simple fact that it’s entirely reliant on wind. The UK certainly has plenty of it. But the weather isn’t always so reliable. If the country plans on becoming dependent on this source of electricity, this challenge needs to be solved. That’s where Gore Street Energy Storage (LSE:GSF) steps in.
This company operates similarly to Greencoat. It uses its capital to invest in renewable energy infrastructure. The difference being Gore Street focuses on high-capacity batteries rather than wind farms. That way, any excess electricity generated on a windy day can be stored for later use.
Much like Greencoat, the firm is exposed to the same electrical price volatility risk. If prices fall, the current 7% dividend yield could be jeopardised. However, according to its latest September trading update, revenues doubled their initial forecasts, thanks to rising electricity prices. This boost is undoubtedly impressive. But since the catalyst is out of management’s control, I don’t think it’s sustainable.
Having said that, both of these renewable energy stocks look like a promising source of passive income for my portfolio.