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Are Go-Green Plans Brightening Alt-Energy Stocks?

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The extension of key renewable tax credits, reduced solar photovoltaic (PV) capital costs, and low natural gas prices along with state-level renewable mandates will be driving the alternative energy growth trajectory.

After months of suffering from collapsing oil prices , green energy companies suddenly seem to be on firmer footing now. The historic Paris climate change summit gave the renewables sector a shot in the arm last year, while Congress' vote to extend federal subsidies for renewable energy has also perked up the space.

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.

Solar and wind 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 photovoltaics ("PV") - are supported extensively, niche renewable energy sources such as geothermal and concentrated solar power ("CSP") are also on the rise, natural conditions permitting.

Moreover, declining capital costs for technologies are improving their competitiveness. As per Solar Energy Industries Association's ("SEIA"), national solar PV system pricing fell up to 17% over the course of 2015.

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

A Greener White House: "Clean energy" has long been the focus of the current administration. President Obama's "Climate Change Action Plan" and the favorable green energy trends have already done a lot in pushing the sector northward.

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, was forcing developers to rush 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.

The wind sector also benefited significantly from the production tax credit ("PTC") extension. The PTC, which had expired at 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.

In addition, the Obama administration's efforts to restrict carbon emissions are a net positive for renewable energy stocks. On Aug 3, 2015, the White House revealed the final version of its ambitious climate policy. This Environmental Protection Agency (EPA) program seeks to cut CO2 emissions from the nation's power plants.

The administration has vowed for CO2 reduction of 28% by 2025 and 32% by 2030, from 2005 levels. This version turns out to be a little stronger than the draft proposal released last summer, wherein the EPA had proposed total CO2 reduction of 29% by 2025 and 30% by 2030.

The plan sets carbon pollution reduction goals for power plants and requires states to implement plans to meet these goals. States have until Sep 2016 to submit plans, but all must comply by 2022. Coal generates about 40% of U.S. electricity and coal plants are the largest source of carbon emissions in the country. Increasing regulatory mandates to safeguard the environment will be a catalyst for renewable stocks.

The proposed rule has influenced utility providers like NRG Energy Inc. (NRG), Sempra Energy (SRE) and Duke Energy Corp. (DUK) to gradually shift their mode of power generation to solar, wind and water.

The EIA projects that utility-scale solar capacity will expand by more than 13 GW between year-end 2015 and 2017 in the U.S., in tandem with considerable consumption growth in renewables for electricity and heat generation purpose. California, along with North Carolina and Nevada, will account for most of the projected utility-scale capacity additions over the said period.

Anti-Dumping Tariff and Trade Conflict: 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. (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 has also slapped 39% anti-subsidy tariffs on most China-made panels. The move is intended to close a gap in which Chinese companies could use solar cells made in Taiwan to avoid paying higher tariffs.

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 the 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. (SCTY) 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.

Residential solar in the U.S. has been one of the success stories in the alt-energy space. Per the latest report from SEIA, residential PV installation grew 66% year over year in 2015.

India Coming Up in Solar: While the U.S. and China have been in the forefront in recent years in driving the industry, other nations are also developing their home-grown solar generation capacity as a remedial measure to solve the electricity crisis. The latest to join this list is Asia's third largest economy, India, which has committed to generate 40% of its total power capacity from renewable sources by 2030.

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. Moreover, India intends to increase its renewable energy share to at least 15% from the present 6% by 2020. The pace of installation is projected to accelerate rapidly between 2016-2017 with an annual target of 12 GW. This has kindled the interest of the global solar players in the Indian market.

First Solar has ample businesses in India and, together with local firms, is investing considerably in the country.

JA Solar Holdings Co., Ltd.'s (JASO) investment plans in India include a 500 MW solar module facility which will be operational by 2017. Another Chinese player Trina Solar Ltd. (TSL) has a 2 GW module production commitment in the country. These are encouraging signs of the solar industry's prospects in India.

Land of the Rising Sun: Japan has recently 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 22-24% of power from renewable energy sources by fiscal 2030.

Japan's need for electricity is 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 very industrialized nation.

Companies like First Solar are investing substantially to install emission-free renewable set-ups. The country is expected to become the second largest market for solar products after China. First Solar -- the largest U.S. solar company -- has been teaming up with Japanese counterparts to develop, build and operate solar power plants.

A Dovish Fed: The Fed kept the short-term interest rate steady in the 0.25-0.50% band and indicated that only two rate hikes are likely for the year. At the end of the Federal Open Market Committee's March meeting, the central bank announced that it now expects the federal funds rate to rise to 0.875% by the end of the year compared with its earlier expectation of 1.375% that took into account four hikes. In comparison, interest rates before the Great Recession floated around 5% and reached the upper-teens between the late 70s and early 80s.

The Fed's loose monetary policy has been a boon for the entire market, but it has been particularly helpful for the capital intensive and young solar industry. Given the solar industry's long-term cash generation assets and their unchanged risk factors, the December rate increase is not likely to impact the cost of loans through this platform.

Summing Up

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

The tax credit renewal brings a fresh lease of life to solar adoption. Plus, "the extension is likely to add another 140,000 jobs or more," as per SEIA.

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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TRINA SOLAR LTD (TSL): Free Stock Analysis Report

SEMPRA ENERGY (SRE): Free Stock Analysis Report

SUNPOWER CORP-A (SPWR): Free Stock Analysis Report

SOLARCITY CORP (SCTY): Free Stock Analysis Report

NRG ENERGY INC (NRG): Free Stock Analysis Report

JA SOLAR HOLDGS (JASO): Free Stock Analysis Report

FIRST SOLAR INC (FSLR): Free Stock Analysis Report

DUKE ENERGY CP (DUK): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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