Overview
Alternative energy is making strong headway in the power generation fuel mix in many developed and developing nations. Although some better established sources of alternative energy, like hydro, wind, biomass and waste, not mentioning solar photovoltaics (PV) are supported extensively, niche renewable energy sources such as geothermal and concentrated solar power (CSP) are also on the rise, natural conditions permitting.
Specifically, the third quarter of 2013 was an excellent one for the U.S. solar market. It is likely that for the first time in more than 15 years the
U.S. installed more solar capacity than the world leader Germany.
Other upcoming sources include the prospect of harnessing sea power. Numerous new ocean power technologies are on the verge of commercial development. Although this form of renewable energy is one of the most notable, it involves technologies with high research and development and startup costs. This has inhibited its all-out adoption so far.
Solar
A major growth area in the renewable space is solar energy. With the increasing need to develop renewable energy in response to stringent environmental regulations, countries worldwide are relying on solar energy for generating electricity.
The solar industry rallied in 2013 following a tough period since 2011. The U.S. Energy Information Administration (EIA) estimates that U.S solar demand increased more than 32% in 2013. For 2014, the EIA projects that U.S. solar energy consumption will boom by roughly 35%. The expected increase in demand is likely to fuel top-line growth at the solar manufacturers.
President Obama's new environmental plan, unveiled in Jun 2013, putting further limits on existing coal-fired plants, gave a shot in the arm to the U.S. solar sector. The results were well reflected in the third quarter performance. The president 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.
As a result, the U.S. Environmental Protection Agency is issuing directives to lower carbon emission from newer coal-based power plants while strengthening the existing policies on green-house gas emissions. This development has emerged as a major headwind for coal-fired utility stocks and has proved to be beneficial for renewable energy stocks like First Solar Inc. (FSLR).
That said, the U.S. still has a lot of catching up to do, despite enormous potential, to get anywhere close to the global leaders. Per the Solar Energy Industries Association (SEIA), the U.S. trade association of approximately 1,000 companies in the solar energy industry, as much as 930 MW of solar energy came on stream during the quarter, representing 35% growth over the prior-year quarter and 20% sequentially thanks to unmatched installation levels in the utility market and residential installations.
The third quarter of 2013 was one of the most happening quarters in the renewable space driven by a record level of residential installations and a strong quarter in the utility segment. It was the second largest quarter in the history of the U.S. solar market and the largest quarter ever for residential PV installations.
Looking at the cost side, the average cost of a completed PV system dropped by 16% during the third quarter 2013 on a year-over-year basis. Again, the average price of a solar panel has dropped by 60% since the beginning of 2011. These price drops will encourage more solar uptake by consumers.
Indeed the PV market is gradually becoming global. According to the European Photovoltaic Industry Association (EPIA), a worldwide industry association for the solar photovoltaic electricity market, the cumulative global installed PV capacity stood at almost 102.2 gigawatt (GW) at the end of 2012, compared to only 71.1 GW at the end of 2011. Europe took the lead with over 70.0 GW of installed PV capacity during the year.
As per media reports, China installed a record 12 GW of solar panels in 2013, making it the world's largest solar market in 2013, overtaking longtime leader Germany.
Last September, China's Ministry of Finance announced that local solar manufacturers will receive immediate refunds of 50% of the value-added tax (VAT) for sales taking place from Oct 2013 through Dec 2015. The Chinese government has set a solar installation target of 35 GW by 2015.
While the U.S. and China have been playing a big role in recent years in driving the industry, other nations are also pushing hard to have a home-grown solar generation capacity as a remedial measure to solve their electricity crisis. The latest to join this list is Asia's third largest economy, India. The country recently planned for a $4.4 billion solar plant which could perhaps be the world's largest.
Again, in Japan, companies like First Solar are investing substantially to install emission-free renewable set-ups. The country is expected to become the second largest market for solar products after China. First Solar -- the largest U.S. solar company -- is thus teaming up with Japanese counterparts to develop, build and operate solar power plants.
Wind
The American Wind Energy Association (AWEA) reported that the wind industry slowed radically during the first half of 2013 following a record fourth quarter 2012 installations. U.S. wind growth stagnated in the first half of 2013, with no new installations completed in the second quarter compared with 1.6 MW in the preceding quarter. However, the third quarter 2013 saw industry-wide installations of 69 MW, thereby bringing the total installed capacity to 60,078 MW.
There are more than 6,000 MW of long-term power purchase agreements signed since Jan 2013. As of Sep 2013, 2,327 MW of projects were under construction across 13 states: Texas, Michigan, Nebraska, Washington, Kansas, California and North Dakota. Other states having wind projects under construction comprise New York, Minnesota, Iowa, Colorado, Massachusetts and Indiana.
EIA expects wind capacity to expand 8.8% in 2014 to about 66 GW and 14.6% to over 75 GW at the end of 2015. Electricity generation from wind is projected to increase by 2.2% this year and 11.4% in 2015, contributing over 5% of total electricity generation by the end of 2015.
Hydro
Hydropower is considered as 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 the cheapest source of electricity as it has the lowest cost per kilowatt hour compared to all other sources and is independent of the volatile movement in fuel costs. EIA projects that both hydropower and non-hydropower renewables used for electricity and heat generation will grow by approximately 3.0% in 2014.
In 2015, the growth in renewables consumption for electric power and heat generation is projected to continue at a rate of 4.7%, as a 2.2% increase in hydropower is combined with a 6.1% increase in non-hydropower renewables.
On Aug 9, 2013, President Obama signed into law two bills aimed at boosting the development of the nation's largest renewable electricity resource, hydropower. Enactment of laws is a prudent step to uphold hydropower development.
Zacks Industry Rank - Positive Outlook
We rank all the 259-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 259+ 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 #16 out of 259. This corresponds to the top one-third of the list, implying a positive outlook.
However, the Zacks Industry Rank for the Other Alternative industry is #190 out of 259. This puts the industry in the bottom one-third of all industries.
Among the 14 companies in the solar industry under our coverage, SunPower Corp. (SPWR) and First Solar sport a Zacks Rank #1 (Strong Buy), while Trina Solar Ltd. (TSL), Ascent Solar Technologies, Inc. (ASTI), JinkoSolar Holding Co. Ltd. (JKS) and SolarCity Corp. (SCTY) carry a Zacks Rank #2 (Buy). For 12 companies under other alternative energy industry, Gevo, Inc. (GEVO), is making the most of the favorable market dynamics and holds a Zacks Rank #2 (Buy).
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).
Here we take a look at the alternative energy space and attempt to identify this nascent industry's strengths and weaknesses.
EARNINGS TRENDS
As far as overall results of the alternative energy industry are concerned, 2013 was a good year overall. Most of the solar companies came up with third quarter earnings beats. High oil prices also aided solar stocks to reach new highs. Moreover, strong macroeconomic factors have helped this sector to rise above others in the energy space.
For 2014, we expect the solar companies to witness an overall impressive year with most returning to profit following a year of downturn.
For more information about earnings for this sector and others, please read our Earnings Trends report.
OPPORTUNITIES
Environmental advantage: Solar power is the most benign electricity resource. Solar cells generate electricity without air or water emissions, noise, vibration, habitat impact or waste generation. Over time, rapid population growth, depletion of non-renewable conventional sources and escalating pollution levels will help shape a much more pronounced global focus on renewable projects.
Fuel risk advantage: Unlike fossil and nuclear fuels, alternative energy has no risk of fuel price volatility or delivery risk. Although there is variability in the amount and timing of sunlight in the day, season and year, a properly sized and configured system can be designed to ensure high reliability while providing a long-term, fixed-price electricity supply.
SunPower is one of the most forward-integrated solar companies, focused on moving up the value chain. The company delivered strong third quarter 2013 results, backed by brisk demand for its solar panels in utility, commercial and residential projects. It has also raised its outlook given the strength across regions and end markets.
JinkoSolar Holding also seems to be in a strong position with multiple contracts and agreements. It reported impressive third quarter 2013 results. Following six money-losing quarters, the third quarter witnessed the second straight quarter of profit for JinkoSolar buoyed by rapidly rising demand from new solar markets.
Location advantage: Solar power is generally located at a customer's site due to the universal availability of sunlight. As a result, solar power limits the expense and losses associated with transmission and distribution from large-scale electric plants to the end users. For most residential consumers seeking an environment-friendly power alternative, solar power is currently the only viable choice.
Among the renewable energy pack, we would advise investors to look for companies like rooftop solar energy systems provider Zacks Ranked #2 (Buy) SolarCity with an innovative game plan. The downstream solar company plays on its strength providing renewable power lower than the grid price to residential and commercial markets in the U.S.
Japan Looks Bright: We note that Japan has recently been a happy hunting ground for solar companies in search for new markets. The country is going to be a key energy market and the government has set a target to install 28 GW of solar energy power by 2020.
Japan's need for electricity is rising, particularly after the Fukushima nuclear power plant accident triggered a complete phase out of all nuclear reactors in the country. Presently, the Japanese government is looking for alternate resources to meet the growing need for power in this very industrialized nation.
Environmental legislation: Alternative energy companies are increasingly benefiting from new legislation in the U.S. stipulating installation of renewable sources of electricity generation as mandated by Renewable Energy Standards (RES). As of now there are 29 states, the District of Columbia in the U.S. and 2 territories that have RES legislation in place. Another 8 states and 2 territories also have goals for adoption of renewable energy sources.
At the federal level, Congress has extended the 30% federal investment tax credit (ITC) to both residential and commercial solar installations until Dec 31, 2016. Also, under the American Reinvestment and Recovery Act (ARRA), the U.S. Treasury Department had earlier implemented a program to issue cash grants in lieu of investment tax credit for renewable energy projects.
The wind sector has also benefited significantly from the production tax credit (PTC) over the last few years. It was started in 1992 as a part of the Energy Policy Act of 1992. Subsequent to that it has received life extension of half a dozen times. In the first decade of a renewable energy facility's lifespan, the PTC provides a $0.022/kilowatt-hour investment tax credit benefit.
In early 2013, the renewable electricity PTC was extended for one year. This extension would ensure significant wind capacity additions over the next three years, thereby leading to higher generation from wind.
Need for a pollution-free environment: Globally, utilization of renewable energy is rising primarily due to its clean nature and a growing awareness among the masses regarding its benefits. This has influenced utility providers, like FirstEnergy Corp. (FE), Sempra Energy (SRE) and Duke Energy Corp. (DUK), to gradually shift their mode of power generation to solar, wind and water.
Duke Energy's business unit, Duke Energy Renewables, is a leader in developing innovative wind and solar energy solutions. Since 2007, Duke Energy has invested more than $3 billion to expand its portfolio of wind and solar power projects.
Currently, the company owns and operates approximately 1,700 MW of renewable energy, which includes 1,600 MW of wind power and 100 MW of solar power. In order to expand the use of renewable energy, the company is also developing an expertise in advanced technologies like the groundbreaking Notrees Battery Storage Project.
In Aug 2013, Duke Energy took over the largest solar generation facility in San Francisco - the Sunset Reservoir Solar Power Project -- from Recurrent Energy. With a capacity of 4.5 megawatt alternating current (MWAC) this solar power system consists of almost 24,000 solar panels mounted on top of the Sunset Reservoir.
Another utility, DTE Energy Company (DTE), received approval from the Michigan Public Service Commission to purchase 20 megawatt (MW) of wind power from a subsidiary of Heritage Sustainable Energy, a Michigan wind energy producer.
Also, Florida-based utility service provider NextEra Energy Inc. (NEE) has plans to add about 500-1,500 MW of U.S. wind assets in the period 2013 to 2014. NextEra is a premier utility service provider that has been aggressively expanding its renewable assets across North America. The company recently expanded its operations to Hawaii to develop underground cable infrastructure connecting the grids between the islands of Oahu, Maui and the Big Island.
The EIA projects that utility-scale solar capacity will expand by about 40% between year-end 2013 and year-end 2015 in the U.S., in tandem with considerable consumption growth in renewables for electricity and heat generation purpose.
WEAKNESSES
Subsidy roll-back: Budgetary constraints have caused prime global solar markets like Germany, U.S., Italy, Australia, U.K. and Taiwan to roll back a portion of their grants. Earlier, sales of solar players from the above countries witnessed a sharp rise mainly fueled by the rush to complete projects ahead of subsidy roll-backs.
The alternative energy players may receive another jolt from one of the prime solar markets. Germany is expected to cap subsidy payments after generation capacity reaches a certain target. Germany is consistently evaluating changes to the German Renewable Energy Law, or the EEG. The feed-in tariffs (FiTs) agency informed that solar feed-in tariffs for the rest of the year are subject to a 1.8% monthly decrease.
These FiT changes particularly impacted the competitiveness of large-scale free field PV systems and modules. Any further policy changes wrought by the German Environment and Economy Ministers and approved by the German Parliament will negatively affect the long-term demand and price levels for PV products in Germany.
New emerging technologies: The alternative energy industry remains an emerging sector with a consistent focus on the lowest-cost technology and cost-competitiveness from traditional means of electricity generation. This may prove disastrous for existing companies ruling the solar roost should a cheaper alternative emerge.
Conclusion
Since the pulse of the alternative energy industry is closely tied to the swings in the macro-economy, until the picture becomes rosier we do not expect to witness many stand-alone alternative energy companies.
The continuing financial strains in the Eurozone, slow recovery in the labor market, and ongoing fiscal contraction continue to weigh on the economic picture. This otherwise dull picture is partly offset by the steadily improving outlook for the U.S. housing sector and a stronger dollar.
Overall, the outlook for the U.S. economy appears to be gradually improving, with a host of variables showing positive trends over the last few months.
Globally, however, China leads the world in total electricity generation from renewable sources, helped by its increased allegiance in recent times to the alternative path. The dragon is followed closely by the U.S., Brazil and Canada. Again, the core European markets of Germany, Italy and Spain -- historically accounting for the lion's share of solar products -- are fast nearing maturity.
To counter tepid growth in mature markets, the companies are increasingly focusing on the Chinese, Japanese, Indian and U.S. markets. However, as things stand now, firms without deep pockets may not be able to sustain over the longer run.
As per the EIA, renewable generating capacity will account for nearly one-fifth of total capacity in 2040. Of this, solar generation will be the primary contributor to renewable capacity growth, with wind capacity occupying the second spot.