3 Energy Stocks to Play the Marijuana Boom

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Unless you've been living under a rock for the past couple of years, you've probably been hearing about the marijuana industry almost nonstop -- and there's a good reason for that. It's not often that we see an industry blossom from a few billion dollars a year in global sales to perhaps up to $75 billion in annual sales over a 15-year period. This is the type of growth that comes around once in a generation, and investors don't want to miss out.

Naturally, most of the focus on the pot industry is with the direct players. In other words, marijuana growers, cannabis distributors, and vertically integrated dispensary operators have been garnering most of Wall Street's and investors' attention.

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Energy stocks could power your portfolio amid the cannabis boom

However, ancillary industries and sectors are primed to benefit from the marijuana boom, too. Examples would include banking, packaging solutions, and even real estate. But one sector that is frequently overlooked, but is liable to play a big role in the long-term outlook for the U.S. marijuana industry, is energy.

The U.S. cannabis industry is currently eating up more than 1% of all electricity each year. Keep in mind that it's not even legal at the federal level, so you can imagine how much electricity the industry would be using, and what demand would be placed on electric grids, if marijuana were legalized across the country. The needs to reduce greenhouse emissions created by the weed industry, as well as lower electric load and expenditures, makes the energy sector a clear beneficiary of a budding cannabis industry.

How can you take advantage, you ask? Here are three energy stocks that could be worth a look.

1. Bet on solar

As reported by online publication FastCompany.com, luxury cannabis company Canndescent out in Desert Hot Springs, California, recently had a 282.6-kilowatt solar system installed that could power up to half of its grow operations. Per Canndescent, this is the first on-site solar installation for a large-scale cannabis farm in the United States.

As outlined by FastCompany, getting approval for solar projects isn't necessarily a walk in the park for marijuana companies. That's because most banks won't offer basic financial services to the industry, albeit bills in Congress may soon change this. Additionally, pot companies aren't necessarily able to take advantage of renewable energy credits like most businesses, which makes installation of solar panels that much more expensive.

But the benefits are pretty obvious if marijuana growers are in it for the long haul. Aside from sizable up-front expenses, solar panels significantly reduce electricity costs in sunny growing regions of the country, and they're environmentally friendly, thereby reducing greenhouse gas emissions.

An energy stock I'd encourage investors to watch in this regard is NextEra Energy (NYSE: NEE), the largest utility stock in the country. NextEra currently generates more energy from wind and solar power than any other utility, and it's planning to invest $40 billion through 2020 in various renewable-energy projects.

In particular, NextEra Energy's subsidiary, Florida Power & Light (FPL), is already operating 18 solar power plants in the Sunshine State that are capable of producing 1,250 megawatts of combined solar capacity. In 2019, FPL is adding four new solar sites, which builds on FPL's plan to install 30 million more solar panels in the state by 2030 (also known as the 30-by-30 initiative). These solar panels will be critical to low-cost production for cannabis growers that have been flocking to the Florida marketplace in the early going.

2. Electricity storage could be the answer

Aside from simply generating lower-cost electricity from solar, growers are likely to look at ways to purchase and store electricity in order to save costs. That's where Tesla (NASDAQ: TSLA) comes into play.

Tesla is, of course, best known for its line of electric vehicles, ranging from its low-end Model 3 sedan to its luxury Model S. But it's also an energy company, with gigafactories cranking out lithium-ion batteries, supercharger networks scattered throughout the United States, its acquisition of Solar City providing a commercial and residential solar panel-leasing platform, and its Powerwall and Powerpack providing residential and commercial customers the opportunity to store electricity.

Right now, cannabis growers are more or less at the mercy of the pricing structure of their utility provider. Since growers tend to be such a strain on electrical grids, pot companies can pay a lot of money to keep their cannabis plants growing. This is where Tesla's Powerapack would come in handy. With Powerpack, growers would be able to purchase electricity in bulk during non-peak hours, when electricity rates are marginally lower, then store it. When electricity rates near their peak, growers would use their stored electricity to hedge their costs.

How much would this really save marijuana growers? Although it's tough to say since no large-scale cannabis grower has attempted it before, the expectation is that it would result in only a few cents of savings per kilowatt-hour. However, for large grow farms, a few cents in savings per kilowatt-hour would be significant over time.

As with solar projects, financing a commercial storage unit like Tesla's Powerpack would be difficult for most cannabis growers at the moment, but that may soon change. That makes Tesla an intriguing energy stock to watch as the marijuana industry grows.

3. It could be as simple as light bulbs

Finally, investors would be smart to keep their eyes on the little things in the growing process, such as light bulbs.

For a long time now, high-pressure sodium (HPS) bulbs have been a staple for the cannabis industry. HPS bulbs are relatively inexpensive to purchase and they yield highly predictable results, which is a reason growers have stuck with them for so long. But these are also bulbs that eat up a ton of electricity, and they tend to generate a lot of heat. That's a problem for indoor grow sites, which almost always means installing a cooling system that (you got it) also eats up a lot of electricity.

The answer might be LED light bulbs and lighting systems from Cree (NASDAQ: CREE). LED lights use far less electricity than traditional HPS bulbs, they generate much less heat, which can help reduce cooling system expenses, and they also last much longer than HPS bulbs.

So, why haven't Cree's LED lights become the industry standard? The first reason is that LED bulbs cost substantially more than HPS bulbs upfront, although the long-term costs would seem to favor LEDs due to their lower operating cost and longer life expectancy. And second, yields from LED lights aren't as well known within the industry, so it's tough to get growers to shift from what they're comfortable with.

However, if Cree continues to improve the life of its products while, at the same time, reducing production costs in China, there's the very real possibility that the marijuana industry could regularly use LEDs to lower their long-term production costs.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of Tesla. The Motley Fool has a disclosure policy.