Alternative energy sources are gradually making inroads into the
global energy mix. Growing population, economic growth, regulations
as well as new technologies are transforming the energy landscape.
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 still remains in place, other macroeconomic
uncertainties are weighing on the sector's fortunes.
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 bleak picture is only
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. While the market has started sizing up the
odds of 'tapering' in the Fed's QE program, the fact remains that
overall stance of monetary policy continues to be very favorable
The expectation is that the U.S. economy will continue to expand
at a moderate pace, which given the problems in Europe and
questions about China, is considered a favorable outlook. This
morning's modestly better than expected May non-farm jobs report
provides further confirmation that there is plenty of underlying
momentum in the U.S. economy.
Crude oil prices are likely to exhibit a sideways-to-bearish trend
in the second half of 2013. With domestic demand relatively soft
and the global economy still showing signs of weakness, keeping
prices on the weak side.
The fortunes of the gradually emerging solar photovoltaic (PV)
industry are currently uncertain. 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 stand now,
firms without deep pockets may not be able to sustain over the
According to the Energy Information Administration ("EIA"), the
U.S. generated about 12% of its electricity from renewable energy
sources in 2012. The lion's share came from hydroelectric power
(56%), followed by wind (28%), biomass wood (8%), biomass waste
(4%), geothermal (3%) and solar (1%). 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.
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 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 1,000 companies in the solar energy industry. Per
the SEIA, in 2012, the U.S. solar energy industry grew 76% year
over year to reach 3,313 megawatt (MW), which represents 11% of all
PV globally, up from 1,887 MW in 2011.
According to SEIA, this unprecedented growth was spurred by solid
contribution in the fourth quarter of 2012. As much as 1,300 MW of
solar energy came on stream during the quarter, thanks to unmatched
installation levels in the residential and utility markets. Going
forward, SEIA forecasts that over 4,200 MW of PV and 940 MW of
concentrating solar power (CSP) will be installed this year.
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.
In 2012, the next three big markets were China, U.S. and Japan.
Besides the three countries, Australia and India will be a part of
the major solar powerhouse in the near future.
In 2012, though Europe led the list in terms of total installed PV
capacity, it accounted for 70% of the world's new PV installations,
down from 75% in 2011. This can be attributed to a tepid European
economy and a distinct downswing in the PV market, particularly in
new connected capacity, seen for the first time in 12 years.
It is believed that in 2013 the majority of new PV capacity in the
world will come from outside the Europe. China and India are
expected to be the forerunners, followed by countries in Southeast
Asia, Latin America and MENA.
As for wind energy, the American Wind Energy Association (AWEA)
reported the total installed wind power at the end of the first
quarter of 2013 was 60,009 MW. The extension of the Production Tax
Credit (PTC) and the record fourth quarter of 2012 installations
acted as a catalyst to capacity growth.
On Apr 15, renewable electricity production tax credit (PTC) was
extended. This extension would ensure significant wind capacity
additions over the next three years, thereby leading to higher
generation from wind.
Within the Zacks Industry classification, the Zacks Industry Rank
for Solar is #192 out of 261. This corresponds to the bottom
one-third of the list.
However, the Zacks Industry Rank for the Other Alternative industry
is #34 out of 261. This puts the industry in the top one-third of
all industries, corresponding to a positive outlook.
The way to look at the complete list of 260+ industries is that the
outlook for the top one-third of the list (Zacks Industry Rank of
#85 and lower) is positive, while the outlook for the bottom
one-third (Zacks Industry Rank #170 and higher) is negative.
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.
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
Among the renewable energy pack, we would advise investors to look
for companies like rooftop solar energy systems provider
) 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.
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 Renewable Energy
Standards (RES). As of now there are 30 states and the District of
Columbia in the U.S. that have RES legislation in place. Another 7
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 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 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.
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
Duke Energy Corporation
), to shift their mode of power generation to solar, wind and
Recently, a Duke Energy Corporation unit − Duke Energy Renewables −
has completed the acquisition of two commercial solar power
projects from SolarWorld for an undisclosed amount. Since 2007,
Duke Energy has invested more than $2.5 billion to grow its
commercial wind and solar business.
In the near term, the solar industry is faced with 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 solar module 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.
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 May to Jul 2013 are subject to a
1.8% monthly decrease.
These FiT changes particularly impacted the competitiveness in
Germany of large-scale free field PV systems and modules to be
installed in such systems. 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 using traditional means of electricity
generation. This may prove disastrous for existing companies ruling
the solar roost should a cheaper alternative emerge.
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 EIA, world crude consumption grew by an estimated 0.7
million barrels per day (MMBPD) in 2012 to a record high of 89.0
MMBPD. The agency, in its most recent Short-Term Energy Outlook,
said that it expects global oil demand to grow by another 0.9
million barrels per day in 2013 and by a further 1.2 million
barrels per day in 2014. Importantly, EIA's latest report assumes
that world supply is likely to go up by 0.6 million barrels per day
this year and by 1.8 million barrels per day in 2014.
The immediate outlook for oil, however, remains tepid given the
commodity's fairly positive supply picture. On the other hand, the
growth in global liquids fuel demand will be relatively soft in the
absence of a strong global recovery.
Chinese companies under pressure:
In 2012, the U.S. Department of Commerce (DoC) implemented
anti-dumping duties of effectively 25.96% and countervailing duties
of 15.24%. The U.S. DoC rolled out these tariffs to tighten supply
of Chinese solar products in the U.S. and simultaneously encourage
local players to tap the growing renewable domestic market. These
steps have made the North American solar power market increasingly
competitive for the Chinese solar power product manufacturers.
International expansion for Chinese solar manufacturing companies
are no longer an easy task. Indeed, increasing order flows do not
sufficiently offset the headwind from anti-dumping duties in Europe
as well as the U.S.
Recently, the European Commission (EU) approved a phased
introduction of punitive anti-dumping tariffs on Chinese PV imports
to Europe. The duty will be set at 11.8% initially until Aug 6,
following which it will be increased to 47.6%. The Commission
reiterated its willingness for further discussions with Chinese
exporters and with the Chinese Chamber of Commerce.
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
On the domestic front, although the economy has shown signs of
improvement, proper recovery is yet to be seen. Again, the
aftershocks of the Euro zone debt crisis would keep Europe
stagnant. Given such a scenario in the international arena, we
expect the cloud of uncertainty to persist in the near term.
Moreover, the first quarterly earnings season revealed weak results
for the overall market. To sum up, the 1Q numbers are not going to
bring sunshine back to the alternative energy sector. We
nonetheless feel that well-capitalized alternative energy companies
with a presence across the value chain will confidently sail
through this phase smoothly. Growing economies and steady demand
from the U.S. and the world will continue to drive the alternative
energy industry in the future.
With most of its solar peers in trouble due to an oversupply of
), however, seems to be in a better position with multiple
contracts and agreements. Again,
First Solar Inc.
) is continuously receiving orders from domestic as well as
international clients for solar modules and other allied services.
In 2012, the company inked several deals with Chinese, Indian and
Again, companies like a Zacks Ranked #1 (Strong Buy)
Ormat Technologies Inc.
) and Zacks Ranked #2 (Buy)
JA Solar Holdings Co., Ltd.
Yingli Green Energy Holding Co. Ltd.
) are making the most of the favorable market dynamics.
As per 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.
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