A lot of investors see big opportunities in renewable energy. Just as some oil and gas companies produced huge profits over the past century, they hope buying renewable energy shares today might be as profitable for them in future.
I have been looking for renewable energy shares to add to my portfolio. One in particular has caught my eye.
FTSE 100 member
That share is SSE (LSE: SSE). I see it as being different to many renewable energy shares for a few reasons.
First, it has a long pedigree. Formerly known as Scottish and Southern Electricity, it has been in the business of electricity generation and energy sales for many decades. I think that deep experience gives it a competitive advantage when it comes to deciding what projects have the best long-term commercial potential.
Another thing I like about these renewable energy shares is that they benefit from an existing business. But some companies in the renewable energy space are just starting out. They have not built facilities or acquired a large customer base yet. That could mean that there are expensive capital requirements down the road for them, with uncertain commercial results to follow.
By contrast, SSE already has a fully operational business. Last year, it had revenues of £6.8bn and post-tax profits of £2.3bn.
Renewable energy credentials
The renewable energy part of this story relates to SSE’s ambitious move into wind farms. At the moment, it is one of the developers behind the world’s biggest offshore wind farm at Dogger Bank in the North Sea.
At face value, this gives the company good renewable energy credentials. But I have some concerns. One is the reliability of wind power. What the company called “exceptionally unfavourable weather conditions” last year meant the company had to “buy back hedges in volatile markets”.
In other words, if a power company commits to supply electricity but the wind does not blow enough at its wind farms, it may have to meet its obligations through power markets where the pricing can be notoriously unpredictable.
That can hurt profits, as it did in SSE’s renewables division last year. With energy security a hot topic these days, I think the potentially costly financial model of wind power could lose out to more predictable sources of supply.
On top of that, wind power is renewable but is it environmentally friendly? Building and dismantling turbines is environmentally costly. Many people feel they blight the landscape rather than help protect it. That could also mean wind power is overtaken by other renewable energy sources in future. But SSE has its primary renewable focus on wind.
Should I buy these renewable energy shares?
To top it off, so far renewable energy has been bad for SSE’s finances in my view. The company cut its dividend 18% a couple of years ago. Its renewables programme is capital intensive and profitability has been unstable.
I do still find the 4.4% dividend yield attractive. But I am concerned about the long-term economics of the business and do not like the fact that the company slashed its dividend. So I will not be adding SSE shares to my portfolio.
