Will Continued Investments Drive Alternative Energy Stocks?

Despite the uncertainty related to U.S. tax policy or commitment to fight climate change, the momentum achieved by the renewable energy sector is unlikely to subside. Contracts from small- to medium-size companies will continue to flow in even if large corporations choose to tread cautiously.

The declining cost of energy storage should further aid the penetration of renewable resources. The underlying driver for each of these market trends is significant customer demand for renewables. It is expected that the renewable space will continue to innovate in the remainder of 2017 to offer consumers clean, affordable renewable energy.

Stocks in the Zacks Alternative Energy industry, part of the Zacks Oil/Energy sector, were up 4.3% in the last year against a 9.5% loss for the Oil/Energy sector and 10.7% gain for the S&P 500 index. Since Nov 8, the Zacks Alt-Energy industry is up 16.2% against 10.6% loss for the Oil/Energy sector and 17.2% gain for the S&P 500. This shows that Trump’s presidency hasn’t harmed the industry as anticipated.

Solar and wind – two major alternative energy sources – are gradually transforming the way we produce and consume energy, driving the ongoing global energy transition. Although some better-established sources of alternative energy – hydro, wind, biomass and waste, not to mention solar PV – are supported extensively, niche renewable energy sources such as geothermal and concentrated solar power (“CSP”) are also on the rise, natural conditions permitting.

Wind and solar are not only essential when it comes to reducing carbon emissions but also have a remarkable contribution in saving lives. This is because these renewable sources edge out fossil fuels and reduce air pollutants in addition to carbon emissions. This leads to improved air quality, with a corresponding drop in premature deaths.

According to recent reports, renewable energy has surpassed nuclear power as a percentage of U.S. energy generation. Declining cost of solar generation is anticipated to be the driving factor behind a dramatic increase in renewable power.

Again, the extension of key renewable tax credits and reduced solar photovoltaic (PV) capital costs will be driving the alternative energy space’s growth trajectory.

Moreover, former President Obama’s "Climate Change Action Plan," which is still valid, has propelled the sector northward. Efforts to restrict carbon emissions are a positive for renewable energy stocks. As per U.S. Energy Information Administration (EIA), in 2016, CO2 emissions declined 1.7%. Going ahead, energy-related CO2 emissions are expected to decline 0.5% in 2017.

The plan urged utility providers to gradually shift their mode of power generation to solar, wind and water. Some of such utilities are Duke Energy Corp. (DUK) and NRG Energy Inc (NYSE:NRG). (NRG). Both Duke Energy and NRG Energy carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The EIA observes that even if the Trump administration abolishes the Clean Power Plan, the renewable space will continue to grow in the U.S. albeit at a slower rate. EIA projects U.S. renewable generation capacity to grow by an average of 1.9% per year between 2017 and 2050.

Apart from this, Francesco Starace, chief executive of Italy-based Enel (MI:ENEI), the largest European power company, said that investment in renewable energy across the globe including the U.S. will continue to grow regardless of President Trump’s attempt to revive fossil fuels. This is because investment in renewable energy was primarily driven by technological progress and market forces and hence any amendment in U.S. federal policy will have a marginal effect. He added that Enel has plans to invest €5.2 billion in renewable generation, mainly wind and solar power, both in Europe and the U.S., over the next three years.

Realizing growth opportunities in the renewable energy space, companies from other domains have also expressed their interest to invest in solar stocks. In line with this, e-commerce giant Amazon (NASDAQ:AMZN) will bring online five new solar farms, totaling 180 megawatts (MW), to help power its massive cloud data centers. The new solar facilities, located in Virginia, will be connected to the grid by the end of 2017. Amazon also has other renewable projects underway, which will be completed by this year.

Here we take a look at the alternative energy space and attempt to identify this nascent industry's strengths.

Extension of ITC: Solar and wind energy got a major boost from the environmental tax credit extension that came as part of the $1.15 trillion federal spending bill, which also lifted a 40-year ban on exporting American crude oil. The latest report from the U.S. Energy Information Administration (“EIA”) also shows that renewable energy will be the fastest growing power source through 2040, accounting for 27% of total U.S. generation.

On Dec 15, 2015, Congress passed an extension and modification of federal tax credits for new wind and solar generators. The new environmental tax credit extension allows solar power companies to keep claiming federal Investment Tax Credits ("ITC") at 30% of the price of solar energy systems installed by businesses or homeowners. The ITC, which was earlier set to expire at the end of 2016, rushed developers to finish projects. Now they look good through 2019 with the five-year extension. However, the credit will start to decline, going down to 10% in 2022.

Moreover, the wind power industry benefited significantly from the production tax credit (“PTC”) extension. The PTC, which had expired in 2014 end due to Congressional gridlock, was extended through 2020. However, the PTC that pays 2.3 cents per kilowatt-hour of electricity generated will be gradually reduced over the next four years before being completely phased out.

The EIA projects that utility-scale solar capacity will increase almost 10 gigawatts (GW) between 2017 and 2018 in the U.S., given considerable rise in consumption in renewables for electricity and heat generation purpose. California, along with North Carolina, Nevada, Texas and Georgia, will account for most of the projected utility-scale capacity additions over the period.

The EIA expects wind energy capacity additions of 14 GW in 2017-2018. With these additions, total wind capacity will reach 95 GW by the end of 2018.

Anti-Dumping Duties and Solar Trade War: Washington imposed import duties on solar panels and other related products from China and Taiwan. The U.S. believes that Chinese manufacturers have benefited from unfair subsidies offered by their government. U.S. solar stocks like SunPower Corp. (SPWR) and First Solar Inc (NASDAQ:FSLR). (FSLR) are expected to make the most of the trade conflict between the U.S. and China.

The U.S. Department of Commerce (“DOC”), in Dec 2014, set anti-dumping duties at about 52% on most module imports from China and at 19.5% on most imports of Taiwanese cells. It also slapped 39% anti-subsidy tariffs on most China-made panels. The move intended to close a gap in which Chinese companies could use solar cells made in Taiwan to avoid paying higher tariffs.

Imposing of these anti-dumping duties has benefited many U.S. alternate energy companies like Vivint Solar, Inc. (VSLR), Enphase Energy, Inc. (ENPH) and First Solar. While Vivint Solar carries a Zacks Rank #2 (Buy), Enphase Energy and First Solar carry a Zacks Rank #3 (Hold).

The Sun Is Everywhere: 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 end users. For most residential consumers seeking an environment-friendly power alternative, solar power is currently the only viable choice. Residential solar is undeniably gaining on utility-scale solar in the U.S. in a marked change in industry dynamics.

Among the renewable energy pack, rooftop solar energy systems provider SolarCity Corp. has an innovative game plan. This downstream solar company plays on its strength, providing renewable power lower than the grid price to residential and commercial markets in the U.S. California-based SolarCity’s MyPower loan plan allows its customers to own their solar systems and still pay less for electricity when compared to leasing them through power purchase agreements.

China’s Solar Plans: China continues to hold the leading position around the globe in solar-power installations. Last year, Chinese overseas investment in renewable energy projects was a record $25 billion. The country’s energy agency announced that it will invest $364.0 billion in renewable power generation by 2020.

The National Energy Administration (NEA) said China had installed a total of 101.82 GW of solar capacity by June 2017, after adding 24.4 GW in the first six months of 2017. It is expected to reach 110 GW soon, the target Beijing had aimed to achieve by 2020.

Per the 13th Five Year Plan (FYP), China has set a target of attaining 150GW to 200GW of solar PV capacity by 2020. It also intends to shift focus from grid-scale expansion to quality and efficiency. The FYP also plans to achieve non-fossil fuel-fired energy consumption of around 15% by 2020 and 20% by 2030.

China's solar industry is expected to produce 25% more panels in 2017 compared with last year, supported by domestic sales and demand from the U.S. and emerging markets. Again, in the long term, there is great potential for China's solar industry to develop, with the walk-out of the U.S. from the Paris Accord.

India’s Solar Initiatives: While the U.S. and China have led the industry in recent years, other nations are also developing their home-grown solar generation capacity as a remedial measure for electricity crisis. The latest to join this list is Asia's third-largest economy, India, which has a target of adding 175 GW of solar, wind and other renewable energy by 2022.

India is striving to enhance its solar energy capacity to 100 GW by 2022, which will include 60 GW from grid-connected solar projects and 40 GW from rooftop solar. The pace of installation is projected to accelerate rapidly. It is expected that around 1.1 GW of rooftop solar capacity will be added in 2017, up 75% from 2016. This has kindled the interest of global solar players in the Indian market.

At the end of 2016, India boasted a pipeline of around 14 GW of utility scale projects, out of which 7.7 GW is expected to be commissioned this year. It is expected that the country will add a total of 9.4 GW in 2017. This new forecast is higher than the one provided earlier this year. In May, it was projected that India will add 8.8 GW in 2017 as a result of which the country will become the world's third-biggest solar market after China and the U.S.

The India Solar Compass report, a quarterly update on the Indian solar market, stated that in the second quarter of 2017 solar sector tariffs in India fell below the vital threshold of INR 3 per unit, making solar power the cheapest new source of power in the country.

The report additionally said that the expected new utility scale capacity addition in the third and fourth quarter of 2017 will be 1,565 MW and 2,265 MW, respectively. Of the 9.4GW in 2017, total rooftop solar capacity is expected to be 1,056 MW.

Company-wise, First Solar and SunEdison Inc. have ample businesses in India and, together with local firms, are investing considerably in the country. In 2016, First Solar connected a 130 MW utility-scale solar power to the nation’s grid. These plants are part of a 260-MW project portfolio wholly owned by First Solar in India.

JA Solar Holdings Co., Ltd.’s (JASO) investment plans in India include a 500 MW solar module facility, which will be operational by this year. Another Chinese player Trina Solar Ltd earlier announced its plan to build 700 MW capacity for solar cells and 500 MW capacity for solar modules in the country. These are encouraging signs for the industry in India.

Solar in Japan: Japan has been a happy hunting ground for solar companies in search of new markets. The country is going to be a key energy market as the government has set a goal of generating 12% of power from solar PV by fiscal 2030, up from the present level of 4%.

In particular, the solar power boom in Japan ramped up considerably in 2016. Electricity generation from solar PV alone grew to 4.3% last year, up from 2.7% in 2015. Overall, in 2016, renewable energy sources comprised 14.2% of total electricity generation. It has been projected that Japan will install 8 GW of solar PV in 2017.

Japan's need for electricity was on the rise, particularly after the Fukushima nuclear power plant accident, which 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 industrial hub.

Summing Up

It is evident that demand for renewables is strengthening at a rapid clip. Moreover, the gradual expansion of the solar markets should bode well for all global players and instill confidence in the industry over the long term. The increased adoption was mainly due to the booming residential PV market and continued realization of the utility sector’s double-digit GW project pipeline.

Check out our latest Alternative Energy Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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