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3 shares at the centre of the clean energy revolution

With the clean energy revolution well underway, we take a closer look at 3 shares that could stand to benefit.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The ongoing crisis in Ukraine has put a spotlight on the development of clean energy. The combination of both government support and a willing public should offer a strong tailwind for companies within the sector.

Here’s a closer look at three shares at the centre of the clean energy revolution.

Investing in individual companies isn’t right for everyone – it’s higher risk than investing in funds as your investment is dependent on the fate of that company. If the company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

This article isn’t personal advice, if you’re not sure if an investment’s right for you, seek advice. All investments and any income they produce can fall as well as rise in value, so you could make a loss.

Tesla – driving the shift to electric vehicles

Cleaning up our act will require major changes to the way we live. Nearly a third of the UK’s emissions come from transport.

Tesla’s become synonymous with this shift toward cleaner vehicles. The group’s bread and butter is making and selling fully electric vehicles (EV).

At the start, this was somewhat of a noble goal. As one of the few EV providers out there, Tesla was given regulatory credits from the government. It turned around and sold those credits at a profit to other automakers looking to offset their emissions.

Chart showing Tesla automotive revenue ($ millions)

Scroll across or rotate device to see the full chart.

Source: Tesla first quarter 2022 results.

But over the past year, Tesla’s weaned itself off relying on this additional source of profit, making over $2.5bn off its own back. This is thanks in large part to economies of scale.

The group’s spent heavily on massive ‘gigafactories’ around the world. The more cars that rattle through the production lines, the less they cost to make per unit. Despite supply chain issues, the number of cars Tesla delivered in the first quarter was up 4%. That meant margins were 19%, unheard of for a car manufacturer.

Tesla’s car making business is sleek. But the appeal doesn’t end with the cars themselves. The software they run on, which boasts the beginnings of autonomous driving, is the next big opportunity for Tesla.

The group’s vehicles get wireless system upgrades as the company rolls out new technology. This opens the door for Tesla to create subscription services for its network of cars, ultimately squeezing more profits from vehicles already sold.

Add to that the group’s foray into car insurance, which, although still in the early stages, represents yet another potential profit driver.

Looking at Tesla’s operations, there’s not much to critique. But that doesn’t mean the stock is a no-brainer. The biggest risk for Tesla investors is the stock’s nosebleed valuation. Shares change hands for 57 times expected profits, and that’s after a significant decline over the past month. That means expectations are high.

There’s also some governance risk to consider. Outspoken CEO, Elon Musk, doesn’t shy away from conflict, and his penchant for a controversial tweetstorm has impacted the share price more than once.

Musk’s proven to be both a blessing and a curse to investors – his celebrity is a big part of the reason the group doesn’t have to spend on traditional marketing. Love him or hate him, his eccentric personality means the share price often moves based on his remarks, so volatility should be expected.

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National Grid – infrastructure for green energy

It’s not often that utility stocks are seen as growth options. They’re often thought of as the steady-eddies of the investment world. But the massive shift toward renewable energy has created a unique opportunity for utility companies to grow their businesses – it’s one National Grid’s well positioned to pounce on.

The group’s been repositioning its business to lean heavily toward electric. It acquired Western Power Distribution (WPD) and plans to offload its gas businesses, leaving behind a portfolio weighted 70% toward electric.

Chart showing consumer energy demand forecasts

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Source: National Grid ESO Future Energy Scenarios.

There’s some execution risk as the group moves forward with the sale of its gas business.

National Grid acquired WPD at a hefty cost, one that it planned to finance through the sale of its gas assets. But the timing of the purchase and sale are different. That means National Grid’s had to use expensive bridge loans, worth upwards of £8bn, to plug the gap while it waits for the asset sales to complete. So far things are progressing as planned, but until it’s signed, sealed and delivered, the interest payments remain a concern.

National Grid and its competitors are also regulated by Ofgem, which allows the group to earn a reasonable profit in exchange for maintaining and upgrading its infrastructure. This translates into predictable profits and low borrowing costs. But it also means the company’s constantly under a microscope.

This is especially true as the government facilitates the transition to clean energy. National Grid’s position as a key provider led Ofgem to recommend the group separate itself completely from managing the grid that it owns. The government’s backed this suggestion, and that could drag somewhat on National Grid’s ability to capitalise on the electric revolution.

The market’s upbeat about the future at National Grid – shares now change hands for nearly 18 times expected profits, well beyond the long-term average.

Growth has become a big part of the investment case for National Grid, with the dividend yield no longer outpacing inflation. This is unusual for a utility and offers investors an attractive combination. However while there’s certainly potential in the pipeline, regulatory challenges as the electric revolution unfolds could create some volatility.

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Ceres Power – fuelling the transition

Fuel cells could change the transport sector dramatically. They leverage a chemical reaction between hydrogen and oxygen to create electricity.

Unlike traditional combustion engines, which emit harmful gasses, the output from fuel cells is water and heat. Their potential uses are far reaching – from powering homes and hospitals to keeping the massive data centres supporting cloud computing.

This immense addressable market makes investing in fuel cell technology look appealing, and it’s a big part of the investment case for Ceres Power.

The group stands out from its peers in the industry for a few key reasons. Chief among them is the fact that Ceres is selling intellectual property rather than making fuel cells themselves. The group comes up with clever designs and then effectively sells the instructions for manufacturing them. It takes a lot of the raw material cost pressure off the table and allows Ceres to focus on improving the technology itself.

So far, this has led to some important breakthroughs for Ceres. Not only does the group claim its technology can send electricity further than some of its peers, but the group’s also developed fuel cells that can run on more than just hydrogen.

While it seems hydrogen is the future, the infrastructure isn’t in place yet to make a sudden shift. Ceres fuel cells also run on existing natural gas supplies, so companies can start to use them now to bridge the transition gap.

It all sounds ideal on paper, but Ceres comes with a hefty dose of risk as well. Most notably is the fact that Ceres doesn’t turn a profit, and isn’t expected to at any point over the next three years. This means cashflow is also in the red and ultimately the group has to continuously take out loans or ask shareholders for more money in order to continue operating.

This isn’t unusual for an up-and-coming new technology. Ceres’ model as a licenser rather than a manufacturer means it will also benefit from economies of scale as the technology is adopted. Once its enormous research and development costs have been covered, a larger proportion of each new client will drop through to profits.

The big question is whether those clients will materialise. The group’s so far made strides, with partnerships with German appliance maker Bosch and Chinese engine manufacturer Weichai.

Chart showing number of Ceres licensing partners

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Source: Ceres 2021 annual report.

However, the sharp rise in inflation means some of Ceres’ potential partners will be looking for ways to cut costs. Taking on a new manufacturing process is a gamble that many might want to put off until things loosen up.

This could delay Ceres’ ability to stand on its own two feet, meaning it might have to ask shareholders to open their wallets several times over before they see any rewards.

VIEW THE LATEST CERES POWER SHARE PRICE AND HOW TO DEAL

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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