Like everyone else, the Alternative Energy industry was hit hard by the Great Recession and essentially remains in a recovery mode. And while stock prices of alternative energy companies have recovered from their lows, valuations still remain quite attractive by historical standards.
Overall industry fundamentals are expected to continue the improving trend into the second half of 2010 and beyond. Notwithstanding current concerns about the near-term the economic outlook, the improving economic scene — both here in the U.S. as well as worldwide — should help the industry’s recovery process along. Overall, results from alternative energy companies in the second half of 2010 are expected to be a significant improvement over the year-earlier levels.
The growth outlook of alternative energy companies is closely tied to the fortunes of the economy. Despite some lingering concerns, the global economic expansion remains on track. While the U.S. economy is expected to experience a slowdown in the second half of 2010, the overall trend is expected to remain positive. And the outlook for the major emerging market economies remains positive.
In the first half of fiscal 2010, the U.S. Gross Domestic Product (GDP) grew 3%, while daily electricity consumption, per the Energy Information Administration (EIA), increased by 4.1% to 10.4 billion kilowatt hours per day. In its latest release, the EIA predicted that total U.S. electricity consumption would increase by 4% in fiscal 2010.
A number of traditional utility companies have growing alternative energy operations. But the fortunes of some of these companies, particularly those with significant fossil-fuel exposures, are less attractive than their peers.
In the utilities space, we are less optimistic about the prospects of OGE Energy Corporation (OGE), PPL Corporation (PPL), Xcel Energy Inc. (XEL) and Unitil Corporation (UTL). Conversely, favorable rate cases and stable sales growth in the respective service areas make companies like Brookfield Infrastructure Partners L.P. (BIP), Pepco Holdings Inc. (POM), Northeast Utilities (NU), Alliant Energy Corporation (LNT) and Cleco Corporation (CNL) attractive in the near-term.
A major growth area in this space is Solar Energy. The U.S. has a lot of catching up to do, despite enormous potential, to get anywhere close to the global leaders. According to the Solar Energy Industries Association (SEIA) — the U.S. trade association of close to 500 companies in the solar energy industry — Germany ranked first followed by Spain, Japan and then the U.S. in terms of cumulative installed solar electric power capacity, as of year-end 2009. In fiscal 2009, Germany (3.8 GW) was far ahead of the pack in terms of new installations, with Italy (700 MW) coming a distant second.
According to the European Photovoltaic Industry Association (EPIA) — the world industry association for solar photovoltaic electricity market — the cumulative global installed PV capacity stood at almost 22 GW at the of 2009, compared to only 9 GW at the end of 2007.
Here we take a look at the Solar Energy space and attempt to identify this nascent industry’s strengths and weaknesses.
Environmental Advantage: Solar power is one of the most benign electricity resources. Solar cells generate electricity without air or water emissions, noise, vibration, habitat impact or waste generation.
Fuel Risk Advantage: Unlike fossil and nuclear fuels, solar 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 insure high reliability while providing a long-term, fixed-price electricity supply.
Location Advantage: Unlike other renewable resources such as hydroelectric and wind power, 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 energy losses associated with the 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 being a ubiquitous source.
Environmental Legislations: Alternative energy companies are increasingly benefiting from popular support in the U.S. through new legislation stipulating higher capital spending. At the federal level, Congress has extended the 30% federal investment tax credit (ITC) to both residential and commercial solar installations until December 31, 2016. Also, under the American Reinvestment and Recovery Act (ARRA) passed in February 2009, the U.S. Treasury Department implemented a program to issue cash grants in lieu of investment tax credit for renewable energy projects.
Also, the U.S. is in the process of implementing legislations to encourage retirement of fossil fuel based generation assets. For example, through the American Power Act currently under review, sponsored by Senators John Kerry and Joe Lieberman, is pushing for an industry-wide cap-and-trade system to reduce greenhouse gas emissions.
Subsidy Programs: Governments, most notably China, Japan, Canada, U.K., Australia, India and Middle East, have increased their financial support for solar projects. China is aiming at increasing its installed solar power capacity to 20 GW by 2020 from 140 MW capacity at the end of 2008.
Specific solar energy stocks under our coverage that stand to benefit from this environment with a Zacks #1 Rank (short-term Strong Buy rating) include China Sunergy Co. Ltd. (CSUN), LDK Solar Co. Ltd. (LDK), Real Goods Solar Inc. (RSOL), ReneSola Ltd. (SOL), Solarfun Power Holdings Co. Ltd. (SOLF) and Trina Solar Ltd. (TSL).
Recent Start-ups: A large number of these companies are recent start-ups with limited resources. As such, quite a few depend on their customers’ ability to finance solar projects and remain exposed to continuing near-term losses due to start-up costs. Companies such as Evergreen Solar Inc. (ESLR) and Ascent Solar Technologies Inc. (ASTI) would fall in this category.
Subsidy Roll-back: Budgetary constraints have caused prime solar markets in Europe like Germany, Italy, Spain and U.K. to roll back a portion of its grants. This may affect companies such as First Solar Inc. (FSLR) and SunPower Corporation (SPWRA), which generate a substantial portion of their sales from markets like Germany.
Fortunes Tied to Crude: Alternative energy stock prices generally rise and fall in direct proportion to the price of crude oil. While in times of high oil prices this may present an opportunity, it also increases volatility in the sector. The improving economic scene, both here in the U.S. as well as worldwide, had been the main driver of the oil rally that saw the commodity zoom past the $85 per barrel level in late April/early May 2010.
However, in recent days, concerns about the European debt crisis and China’s growth outlook have renewed apprehensions about the global growth and energy demand. As a result, oil prices have slumped to around $72 per barrel. Also, the Paris-based International Energy Agency (IEA), the energy-monitoring body of 28 industrialized countries, said that global oil demand growth will slow next year on the back of less government money being pumped into the economy by the advanced Western countries.
New technologies are emerging: The alternative energy industry remains an emerging sector with a consistent focus on the lowest cost technology to be cost competitive with traditional means of electricity generation. This may prove disastrous for existing companies ruling the solar roost should a cheaper alternative emerge.