Investing in ASX renewable energy shares

Renewable energy companies provide an alternative to fossil fuels and help reduce the negative impacts of climate change. So are they worth considering for your share portfolio?

light bulb surrounded by green hydrogen and renewable energy icons

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What are ASX renewable energy shares?

Renewable energy (often also called 'green energy') comes from sources that are not depleted as they are consumed. They provide an alternative to traditional fossil fuels like coal, crude oil, and natural gas. Renewables include energy sources such as solar, wind, and geothermal.

Fossil fuels are formed from the fossilised remains of plants and animals (hence the name 'fossil fuels') in a geological process that takes hundreds of millions of years. This effectively makes them a finite resource for humanity. Once we've dug the last ounce of coal up out of the ground, that's it – none of us will be around long enough to see its stores replenished.

Because of their high carbon content, fossil fuels release large amounts of carbon dioxide into the atmosphere when they are burned for energy. Carbon dioxide is a greenhouse gas, and the more present in our atmosphere, the more damaging the potential impacts of climate change.

For these two important reasons, many energy companies have started transitioning to renewable energy sources. And at the same time, a whole range of junior energy companies have emerged, hoping they can offer a viable alternative to the legacy fossil fuel industry.

This class of ASX shares is referred to broadly as renewable energy shares. It is an umbrella term encompassing a broad range of companies, from Origin Energy Ltd, which still sources the majority of its energy from fossil fuels but is expanding into wind and solar, to Mercury NZ Ltd, a New Zealand-based company that already generates 100% of its energy from renewables.

Some might even argue that the term should encompass all companies on the green energy supply chain, even miners like Pilbara Minerals Ltd (ASX: PLS) that produce the lithium needed for the batteries in electric-powered vehicles. However, we'll focus explicitly on energy providers in this article.

Why invest in ASX renewable energy stocks?

Environment, social, and (corporate) governance (ESG) investing has become a new super-trend in finance. ESG is an investing style that prioritises a company's environmental and social impacts alongside its profits. ESG investors seek out companies that act ethically and have adopted environmentally-sustainable business practices.

In fact, demand for these types of shares has run so hot that many investment funds have been set up that invest exclusively in companies with a solid ESG framework. And there are now even ASX exchange-traded funds (ETFs) that everyday investors can easily buy – like the BetaShares Global Sustainability Leaders ETF (ASX: ETHI) – that screen out stocks that do not meet specific ESG-related criteria.

These social trends have fuelled (pardon the pun!) massive interest in green energy shares. Renewables may even develop into one of the significant investing themes of the next decade (or more)!

So, if the warm fuzzy feeling you get from saving the environment isn't reason enough for you to buy renewable energy shares, how about the fact that doing so may help boost your portfolio's long-term returns?

Top renewable energy stocks on the ASX 

Most renewable energy stocks are grouped into the utilities sector. They are providers like Meridian Energy or Mercury NZ that source their energy from wind, hydropower and solar.  

Origin Energy Ltd (ASX: ORG)Major Australian energy producer increasing its renewables capacity
Meridian Energy Ltd (ASX: MEZ)New Zealand's largest energy producer, using 100% renewable sources
Mercury NZ Ltd (ASX: MCY)Another New Zealand-based green energy stock that also uses 100% renewables

Origin Energy 

It might seem odd to see Origin on this list, considering it operates Australia's largest coal-fired power plant at Lake Macquarie, New South Wales. However, it also has a growing portfolio of green energy assets. 

Once the remaining projects it has under development come online, 25% of its energy capacity will be from renewables. It even recently proposed accelerating its exit from coal-fired generation by giving an early retirement to one of its NSW plants, Eraring (it will still be operational until August 2025, though).

Origin has more than a decade's experience in solar energy and is one of Australia's leading installers of home solar panels. It has purchase agreements with several major solar farms, including an exclusive deal to buy all the energy produced by the 110 MW Darling Downs Solar Farm until 2030.

Origin also purchases power from many wind farms across the southeast of Australia, including the Stockyard Hill Wind Farm west of Ballarat, Victoria.

Meridian Energy

Meridian is New Zealand's biggest power generator, with 100% of its energy coming from renewable sources. This makes it more of a 'pure play' on the green energy trend than a company like Origin.

Meridian owns five wind farms, seven hydropower stations, and many commercial solar arrays. These are solar panels erected on the roofs of commercial sites – many of which Meridian itself maintains, selling the power back to the businesses occupying those sites. 

It also owns the largest hydropower station in New Zealand, the 122 MW Manapouri hydro station located underground in the picturesque Fiordland National Park, a UNESCO World Heritage site in New Zealand's South Island.

Mercury NZ

Another New Zealand entrant on the list, Mercury sources 100% of its energy from renewables. The company owns nine hydro stations along the Waikato River in New Zealand's North Island, which supply 10% of the country's electricity annually.

In addition to its existing four wind farms, Mercury is building what will soon be New Zealand's largest such facility, the Turitea Wind Farm, located near Palmerston North.

On top of its hydro and wind assets, Mercury also has five geothermal plants in New Zealand's North Island. These plants work by piping hot water and steam trapped in underground reservoirs up to the surface, where the hot air drives turbine generators, creating electricity.  

What does the future hold for ASX renewable energy stocks?

The future looks bright for renewable energy stocks. More and more countries – including Australia – are looking to transition to green energy and reduce their reliance on the fossil fuel industry. 

One of the consequences of the ongoing Russia-Ukraine conflict is that many nations — particularly in Europe — are also looking for alternatives to Russian oil and gas. And one way countries can gain energy independence is to invest in new renewable energy projects.

However, in many ways, the renewable energy industry is still in its infancy. The global transition to renewables won't happen overnight — and not all currently emerging green energy companies will survive. This makes it an industry with significant potential but also carries high risk.

Benefits of investing in renewable energy shares

  • Renewables could be one of the major investing thematics of the next decade (or longer). Many governments have imposed renewable energy targets and mandates, meaning there will likely be a strong pipeline of new green energy projects.
  • The private sector is also driving green energy adoption. Many banks and lenders are moving away from the fossil fuel industry and setting targets for sustainable lending. This creates a favourable environment for green energy stocks, as they potentially have easier access to financing.
  • Retail investors are becoming more environmentally conscious. Regular, everyday investors also support the green energy sector by investing in ethical ETFs and other financial products. This gives ASX companies greater incentive to embrace green energy to have easier access to shareholder capital.

And the cons…

  • It is still an emerging industry with a lot of risk. Many companies with different technologies are competing to lead the renewable energy field. Not all of these companies will survive, which could leave investors out of pocket.
  • The industry can be opaque. There are many different types of green energy — from solar to wind to hydropower, among others — and understanding the pros and cons of each can be difficult for the everyday investor. Making informed investment decisions requires significant research and detailed industry knowledge.

Are ASX renewable energy shares right for you?

Green energy stocks can make you feel good about where you're putting your money. These companies are actively helping to mitigate the impact of climate change by reducing society's reliance on fossil fuels as a source of energy. That's a pretty good cause to put your money behind!

And with investors only becoming more and more concerned about how their investments impact society and the environment, demand for ethical shares (like renewable energy shares) is increasing. That means an investment in green energy shares could also improve the overall long-term performance of your portfolio!

However, the usual caveats apply: Always do your research and understand the risks involved in any investment. And make sure that an investment in renewable energy shares complements the rest of your portfolio and aligns with your investing goals.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

Motley Fool contributor Rhys Brock has positions in Pilbara Minerals. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.