Solar energy stocks shone brightly in 2020. The average solar inventory in the Invesco Solar ETF rose by 233.6% last year. It wouldn't be surprising if the sector cooled down in 2021.
However, solar energy has an incredibly sunny future. It's well on its way to becoming the most cost-effective form of mass flow in the next few years, and that with the added cost of battery storage. Industry experts expect the sector to grow more than 15% annually through the end of the decade. While many companies should benefit from this benefit, Brookfield renewable (NYSE: BEP)(NYSE: BEPC) is as well positioned as anyone. That upside is why I still love this solar energy stock, despite its shares rising more than 85% over the past year.
From non-existent to meaningful in less than five years
Brookfield Renewable didn't operate solar systems five years ago. However, thanks to rapidly falling costs, solar energy investments generate high returns on investment. This led Brookfield to begin building its solar energy platform through a series of acquisitions, beginning with investments in TerraForm Power and TerraForm Global in 2017. The following year, the company partnered with a leading logistics and industrial facility owner in China a solar projects on the roof of commercial buildings in that country. In 2019, a joint venture was formed with the private equity giant KKR (NYSE: KKR) Solar energy project developer to buy X-Elio. In the past few quarters, the company has acquired a handful of solar energy development projects in Brazil, including one of the largest solar energy development projects in the world Exelons (NYSE: EXC) Solar energy business.
Brookfield now has approximately 3.5 gigawatts (GW) of solar operating capacity. Solar now contributes around 9% to annual cash flow. While that makes it a relatively small part of their overall business, it's not bad considering that Brookfield didn't own solar panels a few years ago.
A solar powered future
What really sets Brookfield's solar business apart is its growth potential. The company has focused on acquiring development pipelines in recent years. For example, the main attraction of X-Elio was not the 273 megawatts (MW) of operating assets, but the solar projects under construction with 1.413 GW and a wider pipeline with 4.8 GW projects. Similarly, one of the reasons behind the purchase of Exelon's solar business was the more than 700 MW development pipeline that came with the 360 MW operating portfolio.
With a focus on buying solar companies with development potential, Brookfield now has more than 10 GW of solar energy projects in the pipeline. That is more than half of its total of 18.3 GW renewable energy Residue. Solar energy will be one of the most important growth drivers in the coming years.
Brookfield wrote in its second quarter letter to shareholders, “It is possible that in 10 years the majority of Brookfield's manufacturing capacity will be renewable solar.” That's not because it doesn't believe in wind or water, but rather because of the strong returns it can get from solar investments that allow it to grow this business much faster.
For example, Brookfield's large Brazilian solar project is likely to generate a return on investment in excess of 20%. This is partly due to Brookfield's growing scale, which allows it to reduce equipment, installation, and operation costs to get even more value from its solar energy investments. With such returns on such a large project, it's no wonder Brookfield sees such a bright future in solar energy.
Still a good long-term buy this year
While Brookfield could cool off this year after last year's scorching run, the company should continue to generate strong returns for years to come. That view is supported by Brookfield's high-yield solar energy pipeline and its dividend yield of 2.4%, which should grow at a high single-digit annual rate. This long-term upside potential makes it a great solar energy stock to hold for the long term.