Historically, the growth outlook of alternative energy companies
has been inversely related to the prices of petroleum products and
directly related to the state of the economy. While that
relationship remains in place, other macroeconomic uncertainties
are weighing on the sector's fortunes.
The more notable of such recent headwinds has the Euro-zone debt
crisis, which has been a threat to the global economy. The overall
fear of contagion emanating from Europe has significantly subsided
lately, though the region is expected to undergo an economic
downturn as a result of the episode.
The outlook for the U.S. economy has meaningfully stabilized, with
a host of variables showing distinct improvement over the last few
months. The question now is with respect to the impact that the
slowdown in China and recession in Europe will have on the U.S.
The apparent 'decoupling' between improving U.S. prospects and
sub-par outlook abroad has nevertheless a bearing on the
alternative energy sector, primarily through restricted government
spending levels. This reduced demand environment due to
overburdened government finances has come at a particularly
inopportune time for alternative energy operators due to the
sector's supply glut.
On the other hand, steadily rising oil prices and China's new solar
power tariff regime are clear pointers for investors to look beyond
the near-term earnings horizon for healthier performance. The U.S.
Energy Department in its monthly Short-Term Energy Outlook for
March increased its crude-oil price forecast for 2012 by
approximately 5%. The agency now expects that the West Texas
Intermediate oil will average $106.00 a barrel in fiscal 2012, up
from the February projection of $101.00.
As per the EIA, supply disruptions in the Middle East and Africa
contributed to a significant increase in world crude oil prices.
Consequently, we believe that the oil price upside will only boost
the emerging positive alternative energy narrative.
A worldwide industry association for solar photovoltaic electricity
market, the European Photovoltaic Industry Association (EPIA)
forecasts that the power generated from solar modules in Europe
could be competitive in relation to conventional forms of energy by
the end of the current decade. The major solar markets under survey
were Germany, Italy, France, Spain and Britain.
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
Great Plains Energy Incorporated
UniSource Energy Corporation
Xcel Energy Inc.
Conversely, favorable rate cases and stable sales growth in their
respective service areas make companies like
Pike Electric Corporation
CH Energy Group Inc.
Consolidated Edison Inc.
DTE Energy Company
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. Solar Energy Industries
Association (SEIA) is the U.S. trade association of approximately
1,100 companies in the solar energy industry. It estimates that in
fiscal 2011 the U.S. solar energy industry grew 109% year over year
to reach 1,855 MW, which represents 7% of all PV globally, up from
887 MW and 5% of global installations in 2010.
According to SEIA, this unprecedented growth was spurred in part by
declining installed solar photovoltaic (PV) system prices, which
fell 20% in fiscal 2011 on the back of lower component costs,
improved installation efficiency, expanded financing options, and a
shift toward larger systems nationwide. In addition, the
anticipated expiration of the U.S. government's Treasury Program,
which ended on December 31, 2011, drove developers to commission
projects before the end of the year.
According to EPIA, the cumulative global installed PV capacity
stood at almost 67.4 GW at the end of 2011, compared to only 39.7
GW at the end of 2010. The agency reports that almost 21 GW of this
growth occurred in Europe. In fiscal 2011 the two biggest markets,
Italy and Germany, accounted for nearly 60% of global market
growth. The number of markets reaching more than 1 GW of additional
capacity during fiscal 2011 rose from 3 to 6. In 2010 the top 3
markets were Germany, Italy and the Czech Republic; in 2011 Italy
led the ranks followed by Germany, China, the USA, France and
Japan, each with over 1 GW of new capacity.
Here we take a look at the Solar Energy space and attempt to
identify this nascent industry's strengths and weaknesses.
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. 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.
The long-term bullishness is shared even by oil goliaths like
Royal Dutch Shell plc
) who expect that by fiscal 2050, one-third of the global energy
needs will come from renewable sources.
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
In light of the Fukushima Daichi episode in Japan, the global focus
has tilted towards solar in a big way. Germany plans to phase out
nuclear power plants by 2022. This move will definitely boost solar
fortunes in one of its largest global markets.
Unlike other renewable resources such as hydroelectricity 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 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.
Alternative energy companies are increasingly benefiting from new
legislation in the U.S. stipulating installation of renewable
sources of electricity generation as mandated by Renewal Energy
). At the federal level, Congress has extended the 30% federal
investment tax credit (
) to both residential and commercial solar installations until
December 31, 2016. Also, under the American Reinvestment and
Recovery Act (ARRA), the U.S. Treasury Department earlier
implemented a program to issue cash grants in lieu of investment
tax credit for renewable energy projects.
Governments, most notably in China, Japan, Canada, U.K., Australia,
India and the Middle East, have increased their financial support
for solar projects. In China, governmental authorities recently
adopted a national feed-in tariff (FiT) policy for large scale
alternative energy projects. China also expanded the Golden Sun
Program, an upfront cost subsidy program, aimed primarily at
distributed generation. In addition, according to the current draft
of the 12th 5-year plan for solar energy, the government intends to
raise the 2015 goal for total cumulative solar energy capacity to
15 GW and 50 GW by 2020.
In Europe, the European Union's goal of a 20% share of renewable
sources in the energy basket by 2020 will keep the flow of new
projects going. Specific solar energy stocks under our coverage
that stand to benefit from this environment with a Zacks #2 Rank
(short-term Buy rating) include
Ascent Solar Technologies Inc.
In Australia, the solar industry is driven by several regulatory
initiatives that support the installation of solar PV modules in
both rooftop and free-field applications, including the federal
government's nationwide Renewable Energy Target, which has set a
renewable energy goal for Australia of 20% by 2020. Clean Energy
Finance Corporation (
) and Australian Renewable Energy Agency (ARENA), both established
in 2011, will begin implementation in 2012. In India, the National
Solar Mission includes a goal of installing 22 GW of solar power by
In the Middle East and Africa, several countries have announced
sizeable solar targets, although policy mechanisms are not yet
firmly established. In the Kingdom of Saudi Arabia, a solar policy
with targets and incentives is expected in 2012. The size of the
program is expected to be tens of gigawatts of solar by 2030, or as
early as 2020.
In the United Arab Emirates, Abu Dhabi has set a target of sourcing
7% of electricity supply from renewables by 2020 and in 2011 issued
a tender for the first of three 100 MW PV projects. In January
2012, Dubai announced plans for a 1 GW solar farm by 2030. In
Morocco, the government has set a 2 GW solar goal by 2020. Other
markets such as Algeria, Egypt, Jordan, Kuwait, Oman, Qatar, and
Tunisia are also actively promoting solar and issuing tenders.
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.
As per the latest release by the EIA, which provides energy
statistics of the U.S. Government, world crude consumption grew by
more than 1 million barrels per day (BPD) in 2011 to a record-high
level of 88.1 million BPD from 87.1 million BPD in 2010. In its
monthly Short-Term Energy Outlook, the agency said that it expects
global oil demand growth of 1.3 million BPD in 2012 and 1.5 million
BPD in 2013. The agency assumes that demand will be essentially
flat in North America and Europe but this will be more than made up
by increased demand from the emerging economies.
Separately, the Organization of the Petroleum Exporting Countries
(OPEC) -- which supplies around 40% of the world's crude --
predicts that global oil demand would increase by 1.1 million
barrels per day annually, reaching 88.9 million barrels a day in
2012 from last year's 87.8 million barrels a day.
Lastly, the third major energy consultative body, the Paris-based
International Energy Agency (IEA), the energy-monitoring body of 28
industrialized countries, said that it expects world oil
consumption to grow by 1.1 million barrels per day in 2012 to 90.0
million barrels per day.
Questions about China's growth outlook remain a key source of
uncertainty in oil's demand projections. On the supply side,
growing hostilities in the Persian Gulf region due to Iran's
nuclear program remains a key risk factor for the global oil
complex. The Iranian threat has been a major contributor to the
recent surge in oil prices, a trend that is unlikely abate any time
In the near term, the solar industry is facing the problem of
excess solar cell and module capacity. Going by the trend of solar
companies citing sluggish demand and high inventory levels,
affecting margins, virtually the whole industry is in a pause. The
earlier rush in vertical integration by individual players for
self-reliance in their solar wafer/cell needs, has created a lot of
unutilized capacity for the industry.
The near-term industry outlook is thus clouded by unnecessary
inventory arising from a supply glut and a corresponding
underutilization of capacity. This has led to industry-wide sharply
falling Average Selling Prices. Solar players like
STR Holdings Inc.
Real Goods Solar Inc.
) are in for a difficult future in the near term.
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 are exposed
to continuing near-term losses due to start-up costs. Companies
JinkoSolar Holding Company Limited
Trina Solar Limited
Yingli Green Energy Holding Co. Ltd.
) come under this category.
Budgetary constraints have caused prime global solar markets like
Germany, 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.
Going forward, we expect to see a paradigm shift from a market
hoisted by growing governmental/institutional support to one of
stable growth. This may affect companies such as
First Solar Inc.
), which generate a substantial portion of sales from markets like
One of the prime solar market, Germany is consistently evaluating
changes to the German Renewable Energy Law, or the EEG, and
recently proposed significant and accelerated feed-in tariffs
(FiTs) reductions for projects up to 10 MW and an elimination of
FiTs for projects over 10 MW.
These proposed FiT changes, if adopted, would particularly impact
the competitiveness in Germany of large-scale free field PV systems
and modules to be installed in such systems. If these policy
changes proposed by the German Environment and Economy Ministers
are approved without change by the German Parliament, they will
negatively affect long-term demand and price levels for PV products
Also, the 30% grant in lieu of the federal investment tax credit
under the ARRA expired on December 31, 2011 and, unless extended,
will not be available for solar installations that begin
construction on or after January 1, 2012. If the program is not
extended, total tax equity availability could be reduced which may
adversely affect the ability to arrange financing for utility-scale
projects and may adversely affect the attractiveness of the U.S.
New emerging technologies:
The alternative energy industry remains an emerging sector with a
consistent focus on the lowest-cost technology and
cost-competitiveness using traditional means of electricity
generation. This may prove disastrous for existing companies ruling
the solar roost should a cheaper alternative emerge.
ASCENT SOLAR TE (
): Free Stock Analysis Report
BP PLC (
): Free Stock Analysis Report
CH ENERGY GRP (CHG): Free Stock Analysis Report
DTE ENERGY CO (DTE): Free Stock Analysis Report
CONSOL EDISON (ED): Free Stock Analysis Report
GREAT PLAINS EN (GXP): Free Stock Analysis
PIKE ELECTRIC (PIKE): Free Stock Analysis
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis
REAL GOODS SOLR (RSOL): Free Stock Analysis
SCANA CORP (SCG): Free Stock Analysis Report
RENESOLA LT-ADR (SOL): Free Stock Analysis
STR HOLDINGS (STRI): Free Stock Analysis Report
UNISOURCE ENRGY (UNS): Free Stock Analysis
UNITIL CORP (UTL): Free Stock Analysis Report
XCEL ENERGY INC (XEL): Free Stock Analysis
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