The demand for alternative energy is growing rapidly as nations around the world have taken on the challenge to combat global warming issues. This is exemplified by the U.S. and China deciding to jointly act on climate change plans after prolonged talks. Notably, renewable energy growth in Asia’s third-largest economy -- India -- is expected to accelerate in the coming years following big-ticket announcements involving American loans for renewable energy projects in the country.
The recent drop in oil prices has been a drag on stocks in this space, which will likely be an issue for quite some time. Bu the long-term outlook for alt-Energy stocks remains favorable.
Solar
A major growth area in the renewable space is solar energy. A U.S. Energy Information Administration (“EIA”) report indicates continued growth in utility-scale solar power generation, which is projected to average almost 80 gigawatt hours per day in 2016. Although solar uptake is rising steadily, it will still be just 0.7% of total U.S. utility-scale generation in 2016.
Solar growth has historically been concentrated in customer-sited distributed generation installations. Yet, EIA expects utility-scale solar capacity to expand over 60% between the end of 2014 and the end of 2016, with about half of this new capacity being built in California.
In addition, the current U.S. administration’s efforts to restrict carbon emissions are a net positive for renewable energy stocks. The proposed climate-change plan is a very bold attempt to address the global warming issue. A proposed new Clean Power Plan of Environmental Protection Agency would reduce carbon emission from power plants by 30% by 2030, compared to the levels in 2005.
The administration’s earlier environmental plan, unveiled in Jun 2013, had put additional limits on existing coal-fired plants. The administration issued directives asking environmental regulators to set up carbon pollution standards for active plants. Coal generates about 40% of U.S. electricity and coal plants are the largest source of carbon emissions in the country.
Per the latest report released by the Solar Energy Industries Association (“SEIA”), the U.S. trade association of approximately 1,000 companies in the solar energy industry, the U.S. solar energy industry grew 41% year over year to reach 1,354 megawatt (MW) in the third quarter of 2014. This marked the second-largest quarter of solar installations in the history of the market, buoyed by the utility solar photovoltaic (“PV”) market, which installed 825 MW in the quarter, up 52.8% year over year. As of Sep 2014, more than 36% of all new electricity generation came from solar energy.
Solar in China: China, the world’s prime manufacturer of solar panels, is emerging as the leading market for solar PV to meet the growing need for clean energy. The Chinese government announced new policies to encourage local governments to promote more solar installations on home and business rooftops, and ground mounted plants of up to 20 megawatt (“MW”). China installed a record 12 GW of solar panels in 2013, which made it the world's largest solar market, for that year, overtaking longtime leader Germany.
China’s National Energy Administration has called on local governments of all regions to focus on distributed generation. A fourth-quarter surge is indeed likely on the back of these efforts.
China has also pledged to attain peak carbon emissions by 2030, or earlier if possible. The country has set a daunting goal of boosting the share of non-fossil fuels to 20% of the country’s energy mix by 2030.
The following leading Chinese solar stocks are sure to make the most of the favorable government stimulus: Yingli Green Energy Holding Co. Ltd. (NYSE:YGE), JinkoSolar Holding Co., Ltd. (NYSE:JKS) and JA Solar Holdings. Inc. (NASDAQ:JASO.
Ontario, Canada-based solar product manufacturer Canadian Solar Inc. (NASDAQ:CSIQ) is also well positioned with its diversified manufacturing base and project portfolio in Canada, China, Japan and the U.S.
Wind
The American Wind Energy Association (“AWEA”) reported that the wind industry grew radically during the first three quarters of 2014. The U.S. industry installed 1,254 MW over this time frame, up significantly from what the industry installed during the first three quarters of 2013. This brought the total installed capacity to 62,300 MW. The majority of wind construction activity continues to be focused in Texas.
As per EIA, wind capacity grew by 10% between 2012 and 2014 and it is expected to increase by 23% between 2014 and 2016. The EIA expects wind capacity to expand twofold as compared to solar as the former is starting from a much larger base than the latter: 15 gigawatts (“GW”) of wind versus 6 GW of utility-scale solar.
Hydro
Hydropower is considered the leading renewable energy source in the U.S. With the emergence of new technologies, like marine and hydrokinetics, this industry is likely to continue to generate vast amounts of sustainable energy throughout the country.
Hydropower is also the cheapest source of electricity as it has the lowest cost per kilowatt hour compared to all other sources. More importantly, hydropower is independent of the volatile movement in fuel costs. EIA projects that conventional hydropower generation will increase by 2.1%, while non-hydropower renewables used for electricity and heat generation will grow by approximately 3.9% in 2015.
For 2016, growth in renewables consumption for electric power and heat generation is projected to continue at a rate of 4.8%, as a 1.1% increase in hydropower is combined with a 6.6% increase in non-hydropower renewables.
Zacks Industry Rank – Neutral Outlook
We rank all the 258-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.
The way to look at the complete list of 258+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is neutral while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative.
Within the Zacks Industry classification, the Zacks Industry Rank for Solar is #109 out of 258. This corresponds to the middle one-third of the list, implying a neutral outlook.
The Zacks Industry Rank for the Other Alternative industry is #38 out of 258. This puts the industry in the top one-third of all industries.
The stocks that are making the most of the favorable market dynamics include STR Holdings, Inc. (NYSE:STRI), NextEra Energy Partners, LP (NYSE:NEE), JA Solar Holdings, JinkoSolar Holding, and Real Goods Solar, Inc. (NASDAQ:RGSE). STR Holdings and NextEra Energy Partners carries a Zacks Rank #1 (Strong Buy), while the others hold a Zacks Rank #2 (Buy).
We remain apprehensive of the Zacks Ranked #4 (Sell) company Trina Solar Ltd. (NYSE:TSL). In addition, these Zacks Ranked #5 (Strong Sell) stocks – ReneSola Ltd. (NYSE:SOL) and SunPower Corp. (NASDAQ:SPWR) – are best avoided at the moment.
Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months).
EARNINGS TRENDS
As far as the overall results of the alternative energy industry were concerned, the third quarter of 2014 was mixed. A number of solar power stocks came up with higher earnings last season, while some others plunged considerably from the year-ago level.
In spite of sluggish numbers from First Solar Inc (NASDAQ:FSLR)), SunEdison Inc. (NYSE:SUNE) and SunPower Corp., earnings from Canadian Solar Inc. along with a narrower-than-expected loss at SolarCity Corp. (NASDAQ:SCTY) were particularly encouraging, spreading optimism in the broad sector. Yet, some solar companies revised their outlook downward.
For 2014, we expect the solar companies to witness an impressive year with most returning to profit, building on last year's strength.