Historically, the growth outlook of alternative energy companies
has been inversely related to the prices of petroleum products and
directly related to the fortunes of the economy. In the near term,
however, the fortunes of the alternative energy players are
undergoing a radical transformation.
On one hand, the continuing European debt crisis has led to the
U.S. Federal Reserve reducing its growth forecast, raised
projections for unemployment and leaning on buying more mortgage
debt to tide over a troubled economy.
The U.S. economy was not able to completely shake off the negative
momentum that plagued it in 2010. In the first nine months of 2011,
the economy was affected by unseasonal and harsh weather,
heightened uncertainty spawned by the crisis in the Eurozone, a
drop in federal defense purchases, and the supply-chain disruptions
associated with the Japan quake and ensuing crisis.
As a result the U.S. jobless rate rose to 9.0% in October 2011.
Going forward, Zacks expects unemployment rate for fiscal 2012 and
2013 at 8.9% and 8.4%, respectively. U.S. Federal Reserve also
raised its projections for unemployment. This has led to
implementation of Operation Twist (sterilized large-scale asset
purchases) by Fed to lower rates.
As the Fed sells 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 now expect the 10-year Treasury note
yield to hover around 2.8% in fiscal 2012, reflecting both
persistent flight-to-quality effects and the impact of Operation
Twist.
We expect the Euro-area crisis to continue to cast a spell over
financial markets. The heightened uncertainty may contribute to
sharply lower equity prices and wider risk spreads. This we
invariably feel will lead to slow consumer spending and the general
pull-back from risk may yet manifest itself in hiring and capital
expenditure decisions.
This would not be a welcome environment for alternative energy
players who in recent times have been reeling under weak demand
owing to the supply glut. Faced with struggling economies,
regulators in Europe and U.S. may opt to be tight-fisted over
spending on alternative energy projects.
On the other hand, steadily rising oil prices and China’s new solar
power tariff regime is a clear pointer 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
November increased its crude-oil price forecast for 2011 by 1.6%.
The agency now expects that the West Texas Intermediate oil will
average $93.80 a barrel in fiscal 2011, up from the October
projection of $92.36.
As a result, we believe that the oil price upside will only boost
the emerging positive alternative energy narrative.
According to the European Photovoltaic Industry Association (EPIA),
the world industry association for solar photovoltaic electricity
market, based on a study looking at five major solar markets --
Germany, Italy, France, Spain and Britain -- power generated from
solar modules in Europe could be competitive in relation to
conventional forms of energy by the end of the current decade.
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
Atlantic Power Corporation (AT),
DPL
Inc. (DPL),
Dynegy Inc. (DYN) and
UniSource Energy Corporation (UNS).
Conversely, favorable rate cases and stable sales growth in the
respective service areas make companies like
CPFL Energia
S.A. (CPL), The
AES Corporation (AES),
Cleco Corporation (CNL) and
Duke Energy
Corporation (DUK) attractive.
Like everyone else, the Alternative Energy industry was hit hard by
the Great Recession and essentially remains in recovery mode. And
while the economy is in recovery mode, so is our hope for the
industry.
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
approximately 1,000 companies in the solar energy industry, in
fiscal 2010 the U.S. solar energy industry grew 67% year over year
(compared to overall GDP growth of just 3%) with installations
valued at $6 billion. That trend continues in 2011 with new
photovoltaic (PV) installations in 2Q11 up 69% year over year.
The agency also strongly believes that solar is already the fastest
growing energy sector in the U.S. and by 2014 it will likely be the
largest source of new electric capacity in U.S.
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
16.5 GW at the end of 2010, compared to only 9 GW at the end of
2007. Per EPIA estimates in 2010, Germany ranked first followed by
Italy and Spain in terms of cumulative installed solar electric
power capacity, as of year-end 2010.
Here we take a look at the Solar Energy space and attempt to
identify this nascent industry’s strengths and weaknesses.
OPPORTUNITIES
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. Over time, rapid population growth, depletion of
non-renewable conventional sources, 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 (RDS.A) and
BP
plc (BP) 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 supply.
In light of the Fukushima Daichi episode in Japan, the global focus
has tilted towards solar in a big way. German plans to phase out
nuclear power plants by 2022 will definitely boost solar fortunes
in one of its largest global markets.
Location advantage: 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 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.
Environmental legislations: 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). 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 implemented a
program to issue cash grants in lieu of investment tax credit for
renewable energy projects.
Subsidy programs: Governments, most notably in China,
Japan, Canada, U.K., Australia, India and the Middle East, have
increased their financial support for solar projects. China is
aiming at increasing its installed solar power capacity to 10 GW by
2015 from 878 MW at the end of 2010.
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 #1 Rank
(short-term Strong Buy rating) include
Westinghouse Solar
Inc. (WEST).
WEAKNESSES
Excess capacity: 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 thrown up a lot of unutilized capacity for the
industry.
Looking forward to the near-term, the industry, facing a supply
glut owing to higher production in 3Q2011, will reflect on the
aftershocks of inflated inventory and underutilization of capacity
leading to lower Average Selling Prices. Solar players like
STR Holdings Inc. (STRI),
JinkoSolar
Holding Co. Ltd. (JKS) and
Real Goods Solar
Inc. (RSOL) are in for a turbulent 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
remain exposed to continuing near-term losses due to start-up
costs. Companies such as
Trina Solar Limited (TSL)
and
Yingli Green Energy Holding Co. Ltd. (YGE)
would fall in this category.
Subsidy roll-back: 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. (FSLR) and
SunPower
Corporation (SPWRA), which generate a substantial portion
of 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.
As per the latest release by the Energy Information Administration
(EIA), which provides energy statistics of the U.S. Government,
global crude oil and liquid fuels consumption will grow from its
record-high level of 87.1 million barrels per day (BPD) in 2010 to
88.2 million BPD in 2011, and will reach 89.6 million BPD in 2012.
In its monthly Short-Term Energy Outlook, the agency said the world
fuel consumption growth through 2012 will be largely driven by the
increased demand from emerging economies.
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.
AES CORP (AES): Free Stock Analysis Report
ATLANTIC PWR CP (AT): Free Stock Analysis Report
BP PLC (BP): Free Stock Analysis Report
CLECO CORP (CNL): Free Stock Analysis Report
CPFL ENERGI-ADR (CPL): Free Stock Analysis Report
DPL INC (DPL): Free Stock Analysis Report
DUKE ENERGY CP (DUK): Free Stock Analysis Report
DYNEGY INC (DYN): Free Stock Analysis Report
JINKOSOLAR HLDG (JKS): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
REAL GOODS SOLR (RSOL): Free Stock Analysis Report
STR HOLDINGS (STRI): Free Stock Analysis Report
TRINA SOLAR LTD (TSL): Free Stock Analysis Report
UNISOURCE ENRGY (UNS): Free Stock Analysis Report
WESTINGHOUSE SL (WEST): Free Stock Analysis Report
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