According to the Energy Information Administration (EIA), the
U.S. generated about 13% of its electricity from renewable energy
sources in 2011. Globally, however, China leads the world in total
electricity generation from renewable sources, helped by its
mammoth addition in recent times to the alternative path. The
dragon is followed closely by the U.S., Brazil and Canada.
Historically, the growth outlook of alternative energy companies
has been directly related to the state of the economy and inversely
related to the prices of petroleum products. While that
relationship remains in place, other macroeconomic uncertainties
are weighing on the sector's fortunes.
The recent trend of lower stock prices, higher spreads on
investment-grade corporate bonds, a stronger dollar and increasing
financial strains in the Eurozone are contributing to a less-robust
picture going forward. The bleak picture in U.S. has been offset
only through increases in home prices and falling energy prices.
Of the macroeconomic uncertainties, the most significant is the
recent re-intensification of a Eurozone debt crisis, which has the
potential to drag the global economy into another recession. The
region's problems are contributing to a flight toward
dollar-denominated assets that is resulting in a stronger dollar,
lower yields on term Treasury securities, and declines in major
European equity indices. The yield on the 10-year Treasury Note is
hovering around all-time lows of around 1.5%. This has resulted in
widening the spread between corporate bonds versus the treasury.
Going forward, as the Fed continue to sell shorter-dated assets and
uses the proceeds to buy longer-dated securities, effectively
removing duration from the market, longer-dated yields will be kept
lower than would otherwise be the case. As a result, we expect the
10-year Treasury note yield to hover around 2.0% in fiscal 2012,
reflecting both persistent flight-to-quality effects and the impact
of Operation Twist.
Overall, the outlook for the U.S. economy appears to have lost
momentum, with a host of variables showing weakness in the last few
months. The Fed's extension of Operation Twist and downgrading of
its growth outlook are reflections of this emerging unfavorable
trend. That said, the expectation is that the U.S. economy will
continue to expand a moderate pace, which given all problems in
Europe and questions about China, has be considered a favorable
Another direct fallout of the Eurozone crisis is weakness in global
oil demand leading to oil prices going down. However, the blame for
the southward oil prices also falls on Saudi Arabia increasing
production. To add to the woe, high U.S. crude stocks and worries
about China's growth outlook have been weighing on investor
sentiment, weakening oil prices to a ten-month low. Partly
offsetting this unfavorable view has been a tightening global
supply picture in view of the geopolitical fallout over Iran's
alleged nuclear ambitions and strong demand from developing
With a muddled home front, the question now lies largely upon the
slowdown in China and the recession in Europe and the effect it
will have on the U.S. growth momentum.
The apparent 'decoupling' between not-so-bad U.S. prospects and a
sub-par outlook abroad has nevertheless a bearing on the
alternative energy sector, primarily because of 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.
The gradually emerging solar photovoltaic (PV) industry fortunes
are currently on tenterhooks. On the one hand, 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 this tepid growth, the companies are increasingly focusing
on the Chinese, Indian and U.S. markets.
However, as things currently stand, with supply growth far
outstripping demand growth, and firms without deep pockets may not
be able to sustain over the longer run. The pain is made acute by
the steady ramping of low-cost China based players grabbing market
share from the U.S. and European contenders who have a higher cost
On the other hand, China's new solar power tariff regime is 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 June lowered its outlook
for oil prices in the second half of the year from what they
projected the month before. Consequently, we believe that the oil
price downside will only drag downward the emerging positive
alternative energy narrative.
A worldwide industry association for the 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
UNS Energy Corporation
UIL Holdings Corporation
Portland General Electric Company
ITC Holdings Corporation
Conversely, favorable rate cases and stable sales growth in their
respective service areas make companies like
National Grid plc
Atlantic Power Corporation
Duke Energy Corporation
) more attractive.
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. Per SEIA, in fiscal
2011, the U.S. solar energy industry grew 109% year over year to
reach 1,868 MW, which represents 7% of all PV globally, up from 887
MW and 5% of global installations in 2010.
According to the 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. Per the SEIA, the U.S.
solar bullishness continued in the first quarter, with new
installations of 506 MW of PV, up 85% year over year.
As for wind energy, per the American Wind Energy Association
(AWEA), the U.S. had a total of 48,611 MW of installed wind power
at the end of the first quarter of 2012. The agency is confident
that future growth would be vibrant riding on friendly
legislations, concern about global warming, green consumer movement
and rising demand for traditional sources.
According to the 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
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, followed by Germany, China, the U.S., France and Japan, each
with over 1 GW of new capacity.
Here we take a look at the alternative energy space and attempt to
identify this nascent industry's strengths and weaknesses.
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.
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.
In this space we are bullish on waste management service provider,
Covanta Holding Corp.
), which has tied the majority of its service contracts under
long-term agreements with inflation escalators.
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. In this context the one name we are bullish
about is Ormat Technologies Inc. (
) which engages in the geothermal and recovered energy power
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
Standards (RES). As of now there are 29 states and the District of
Columbia in the U.S. that have RES legislation in place. Another 8
states also have nonbinding goals for adoption of renewable energy
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), the U.S. Treasury
Department 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. Our
favorites in this space is
Juhl Wind, Inc.
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
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.
Owing to its Chinese focus we are keeping a close watch on
Sino Clean Energy Inc.
) which operates as a third party commercial producer and
distributor of coal-water slurry fuel.
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 include
Ascent Solar Technologies Inc.
), bearing a Zacks #2 Rank (short-term Buy rating).
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, 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 2022.
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. 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. Per EIA, 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.
However, currently energy prices have continued to fall over the
past few weeks. The U.S. average weekly price of all grades of
gasoline, already down from a high of approximately $4 per gallon
in early April, has fallen to around $3.40 per gallon. Steady
declines in energy price futures suggest that these declines are
not likely to be reversed in the near-term.
We feel that there is a very small pass-through from sharp changes
in energy prices to core inflation. Based on this assumption we
feel that the latest slew of energy price declines could also help
to slow core inflation.
Questions about China's growth outlook remain a key source of
uncertainty in demand projections for oil. 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
The Iranian threat has been a major contributor to the volatility
in oil prices, a trend that is unlikely to abate any time soon. Per
EIA estimates Iran's crude oil production would fall by 850,000
barrel per day (bpd) by the end of 2012 because of a lack of
investment, reducing its output to 2.7 million bpd from 3.55
million bpd at the end of fiscal 2011.
Based on such assumptions, the Organization of the Petroleum
Exporting Countries (OPEC) -- which supplies around 40% of the
world's crude -- predicts that global oil demand would increase to
88.7 million barrels a day in 2012. Treading the same bath another
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 in 2012 to 90.0 million barrels per day.
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
LDK Solar Co. Ltd.
STR Holdings Inc.
JinkoSolar Holding Co. Ltd.
) are in for a difficult future in the near term.
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 such as
Trina Solar Ltd.
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.
A struggling U.S. labor market underlies the high levels of high
unemployment expected to persist throughout the forecast horizon,
moderating core inflation. After eight months of a steadily
declining unemployment rate, May saw the first uptick in the
unemployment rate since June of last year. Along with recent
weakness in other labor market data, this leads us to revise our
forecast of the unemployment rate by two-tenths to 7.8% at the end
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 markets, Germany is consistently evaluating
changes to the German Renewable Energy Law, or the EEG, and
recently approved 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 FiT changes would particularly impact the competitiveness in
Germany of large-scale free field PV systems and modules to be
installed in such systems. These policy changes wrought by
the German Environment and Economy Ministers and approved by the
German Parliament will negatively affect long-term demand and price
levels for PV products in Germany.
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.
Finally, the production tax credit (PTC) is slated to be cancelled
at the fag end of fiscal 2012, if it is not renewed alternative
energy installations in the U.S. may take a backseat.
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.
In this area we are keeping close watch on companies like
Ocean Power Technologies, Inc
). Ocean Power Technologies, Inc. engages in the development and
commercialization of proprietary systems that generate electricity
by harnessing the renewable energy of ocean waves.
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