Alt-Energy Up on Emerging Markets

Overview

The demand for alternative energy is growing rapidly for electricity generation in the U.S., accounting for nearly 40% of all new, domestic power capacity installed last year. Driven primarily by the growth in wind and solar photovoltaics (PV.V), alternative energy will likely become the world's second most important source of electricity apart from coal by the next five years.

Although some better-established sources of alternative energy, like hydro, wind, biomass and waste, not to mention solar PV, are supported extensively, niche renewable energy sources such as geothermal and concentrated solar power (:CSP) are also on the rise, natural conditions permitting.

Other upcoming alternative sources include the prospect of harnessing sea power. Numerous new ocean power technologies are on the verge of commercial development. Although this form of renewable energy is one of the most notable, it involves technologies with high research and development as well as startup costs. This has inhibited its all-out adoption so far.

Solar

A major growth area in the renewable space is solar energy. With the increasing need for developing renewable energy in response to stringent environmental regulations, countries worldwide are relying on solar energy for electricity generation.

The solar industry rallied in 2013 after a tough spell from 2011. For 2014, the EIA projects that U.S. solar energy consumption will boom by roughly 35%. The expected increase in demand is likely to fuel top-line growth at the solar manufacturers.

Again, President Obama's new environmental plan, unveiled in Jun 2013, putting further limits on existing coal-fired plants, gave a shot in the arm to the U.S. solar sector. The President issued directives asking environmental regulators to set up carbon pollution standards for active plants. Coal generates about 40% of U.S. electricity and coal plants are the largest source of carbon emissions in the country.

Per the Solar Energy Industries Association (:SEIA), the U.S. trade association of approximately 1,000 companies in the solar energy industry, the U.S. solar energy industry grew 21% year over year to reach 1,133 megawatt (MW) in the second quarter of 2014. This marked the fourth-largest quarter of solar installations in the history of the market, buoyed by the utility solar PV market, which installed 625 MW in the quarter, up 15.1% year over year. In the first half of 2014, 53% of all new electricity generation came from solar energy.

The first quarter of 2014 was an astounding period for CSP growth given the completion of the 392-MW Ivanpah project and the second 125-MW phase of the Genesis Solar project. However, Q2 did not see any CSP projects coming online. Yet, commissioning work continues at Crescent Dunes and a total of 857 MW is slated for completion by 2014 end. This will make 2014 the biggest year ever for CSP. SEIA expects PV installations to reach 6.5 GW this year, up 36% over 2013 and more than three times the market size of just three years ago.

Indeed the PV market is fast 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 136.7 gigawatt (:GW) at the end of 2013, up 35% from the prior year. Europe is gradually losing its leading position in the PV market with Asia taking the lead.

A Look at China’s New Policy for More Distributed Solar: China, the world’s prime manufacturer of solar panels, is emerging as the leading market for solar photovoltaic (PV.V) to meet the growing need for clean energy. The Chinese government announced new policies to encourage local governments to promote more solar installations on home and business rooftops, and ground mounted plants of up to 20 megawatt (MW). China installed a record 12 GW of solar panels in 2013, making it the world's largest solar market in 2013, overtaking longtime leader Germany.

China’s National Energy Administration has called on local governments of all regions to focus on distributed generation, to reform and reinforce feed in tariffs, provide additional financial incentives, and fast track connections.

During the first half of 2014, China added 3.3 GW of solar capacity, as per a National Energy Administration statement. This included 2.3 GW of utility-scale capacity and roughly 1 GW of distributed-generation PV. China, the world’s largest carbon emitter, has set a goal of 35 GW of installed solar power by the end of 2015.

The following leading Chinese solar stocks are sure to make the most of the favorable government stimulus: Yingli Green Energy Holding Co. Ltd. (YGE), Trina Solar Ltd. (TSL), JinkoSolar Holding Co., Ltd. (JKS) and JA Solar Holdings. Inc. (JASO).

Ontario, Canada-based solar product manufacturer Canadian Solar Inc. (CSIQ) is also well positioned with its diversified manufacturing base and project portfolio in Canada, China, Japan and the U.S. The company, like its U.S.-based peer SunPower Corporation (SPWR), is currently expanding its operations in Asia, primarily in China and Japan, encouraged by increasing solar uptake in these countries.

Recently, its wholly owned subsidiaries planned to team up with Sichuan Development Investment Management Ltd. (Sichuan Development) along with third party investors to form an investment fund, worth $800 million (RMB5 billion), in China. The fundraising primarily aims to promote construction, development and ownership of utility-scale and distributed generation solar power projects in Sichuan Province, China as well as other locations in the country.

Wind

The American Wind Energy Association (:AWEA) reported that the wind industry grew radically during the first half 2014. The U.S. industry installed 815 MW during the first half of 2014, up significantly from what the industry installed during the first three quarters of 2013. This brought the total installed capacity to 61,496 MW. The majority of wind construction activity continues to be focused in Texas. It is noteworthy that during the first half of 2013 the industry installed only 1.6 MW.

Approximately 9,400 MW of projects with long-term power purchase agreements in place were announced during 2013-14. EIA expects wind capacity to expand 9.2% in 2014 and 16.2% at the end of 2015. Electricity generation from wind is expected to contribute 4.6% to the total electricity generation basket by the end of 2015 in the U.S.

Hydro

Hydropower is considered the leading renewable energy source in the U.S. With the emergence of new technologies, like marine and hydrokinetics, this industry is likely to continue to generate vast amounts of sustainable energy throughout the country.

Hydropower is also the cheapest source of electricity as it has the lowest cost per kilowatt hour compared to all other sources and is independent of the volatile movement in fuel costs. EIA projects that conventional hydropower generation will decline by 4.2%, while non-hydropower renewables used for electricity and heat generation will grow by approximately 5.5% in 2014.

In 2015, growth in renewables consumption for electric power and heat generation is projected to continue at a rate of 4.4%, as a 4.5% increase in hydropower is combined with a 4.4% increase in non-hydropower renewables.

Zacks Industry Rank – Neutral Outlook

We rank all the 259-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

The way to look at the complete list of 259+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is neutral while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative.

Within the Zacks Industry classification, the Zacks Industry Rank for Solar is #112 out of 259. This corresponds to the middle one-third of the list, implying a neutral outlook.

The Zacks Industry Rank for the Other Alternative industry is #154 out of 259. This also puts the industry in the middle one-third of all industries.

The stocks that are making the most of the favorable market dynamics include Canadian Solar Inc. and ReneSola Ltd. (SOL) holding a Zacks Rank #1 (Strong Buy), while Enphase Energy, Inc. (ENPH) carries a Zacks Rank #2 (Buy).

We remain apprehensive on the Zacks Ranked #4 (Sell) companies Yingli Green Energy Holding Co. Ltd. (YGE) and Quantum Fuel Systems Technologies Worldwide Inc. (QTWW). In addition, we are skeptical of these Zacks Ranked #5 (Strong Sell) stocks – JA Solar Holdings Co., Ltd. (JASO) and Real Goods Solar, Inc. (RGSE).

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.

EARNINGS TRENDS

As far as the overall results of the alternative energy industry are concerned, second quarter 2014 was good on the whole. A number of solar power stocks came up with accelerating earnings this season.

Though sluggish numbers from SunPower Corp. pushed the stock down, earnings from SunEdison Inc. (SUNE) and a narrower-than-expected loss at SolarCity Corp. (SCTY) were particularly encouraging, spreading optimism in the broad sector. In addition, First Solar Inc. (FSLR) − the largest U.S. solar manufacturer − put up an impressive performance despite the earnings and revenue miss. Investors did not take the earnings miss seriously as the project delays that hurt results are not expected to be a long-term financial overhang for the company.

Notably, solar cell manufacturer Canadian Solar Inc.’s share price rallied by more than 24% following its second quarter 2014 results. The company reversed its year-ago loss and the reported number was also considerably above the profit earned in the sequentially preceding quarter. The upside was driven by an increase in shipment volume and higher revenues.

For 2014, we expect the solar companies to witness an impressive year with most returning to profit, building on last year's strength.

For more information about earnings for this sector and others, please read our Earnings Trends report.

OPPORTUNITIES

New tariffs and solar-trade war: Washington has once again punched new import duties on solar panels and other related products from China. While the new duties would further escalate tensions between the two countries, the U.S. believes that the Chinese manufacturers have hitherto benefited from unfair subsidies offered by their government. The preliminary duties, as determined by the U.S. Department of Commerce (DOC), will range from 18.56% to 35.21% on Chinese solar panel imports.

The latest move therefore marks an escalation of the U.S.-China trade conflict that has been simmering since 2012. Extra duties will now be imposed on both the cells and the final solar panel products.

The department will initially impose duties of 35.21% on imports of panels and other products made by Wuxi Suntech Power as well as five other affiliated companies, 18.56% on imports of Trina Solar Ltd. (TSL) and 26.89% on imports from other Chinese producers. This would be applied to products that are not already affected by the first round of duties. Hence, panels assembled from cells made in Taiwan will also come under the gambit.

On top of that, the preliminary decision on the anti-dumping section pegged duties in the range of 26% to 165.04% for Chinese goods. Taiwanese producers face anti-dumping duties of up to 44.18%, with the highest rate being applied to Motech Industries.

The U.S. DOC will make its final decision by Dec 15, 2014. The U.S. International Trade Commission is also due to make a decision on whether the imports pose or threaten injury to U.S. producers by Jan 29, 2015.

As the unseemly battle for solar dominance rages, which will not be in the best interest of this emerging industry, it seems for now some U.S. solar stocks like SunPower Corp., First Solar Inc. or SunEdison Inc. will make the most of the conflict.

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.

Location advantage: 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.

Among the renewable energy pack, we would advise investors to look for companies like rooftop solar energy systems provider SolarCity Corp. 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. The company is now set to grasp the largely untapped abundant solar power resources in one of the sunniest U.S. states, Nevada. This pioneer in residential solar is making a big expansion in Las Vegas.

In late May 2014, SolarCity teamed up with Groupon to form one of the first online offers of its kind for solar systems, a new way to sign up more customers in the increasingly competitive rooftop solar market. This online discount deal will undoubtedly extend the reach of the evolving solar industry.

In Apr 2014, San Jose, CA-based solar manufacturer SunPower and Google Inc. (GOOGL) teamed up to form a $250 million fund to help homeowners across the U.S. to install solar panels at home. This pact is essentially aimed at financing residential solar system installations that SunPower will then lease out to homeowners.

Residential solar in the U.S. is now a sizzling story. This market even outpaced the commercial and utility segments last year and has already started to attract more conventional electric power companies that produce power mostly from coal and natural gas. As per SEIA, residential PV installation grew 45% year over year and 2% sequentially in the second quarter of 2014.

Japan looks bright: We note that Japan has recently been a happy hunting ground for solar companies in search for new markets. The country is going to be a key energy market with the government setting up a target of installing 28 GW of solar energy power by 2020. With around 6.9 GW, Japan was the second biggest global market in 2013.

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 -- is thus teaming up with Japanese counterparts to develop, build and operate solar power plants.

India looks promising: While the U.S. and China have been playing a big role in recent years in driving the industry, other nations are also pushing hard to have a home-grown solar generation capacity as a remedial measure to solve their electricity crisis. The latest to join this list is Asia's third largest economy, India. The Indian government in Jan 2010 had set a target of adding 20,000 MW of grid connected solar power plants by 2022.

The newly elected pro-business Modi government now has an ambitious plan of connecting all Indian households with solar energy by 2019. Until the Indian producers come of age and compete with the global players on an equal footing, the non-levy of anti-dumping will allow the large global solar panel producers to tap this growing market.

India could be the land of opportunity for the Chinese solar cell manufacturers. Trina Solar has plans to set up 1500 MW of grid connected solar power projects in India.

Environmental legislation: 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 29 states, the District of Columbia and two territories that have RES legislation in place. Another eight states and two territories also have goals for adopting renewable energy standards.

At the federal level, investment tax credit (ITC) is currently at 30%, which is set to expire in 2015, and then go to 10% in 2016. The industry will likely see many companies taking advantage of the 30% ITC, and build more panels, storage capacity, and other production items up to the end of 2015. Once the ITC drops to 10%, these companies can also utilize a higher rate of depreciation to protect their profits. So the cut in ITC for 2016 will not likely dent these companies' profitability.

The wind sector 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 received life extension of half a dozen times.

In the first decade of a renewable energy facility's lifespan, the PTC provided 2.3 cents/kilowatt-hour ITC benefit for wind turbines and 1.1 cents for some other renewable energy sources. In early 2013, the renewable electricity PTC was extended for one more year. However, it expired on January 1, 2014 due to Congressional gridlock.

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. Recently, the Obama administration rolled out its plan to curtail carbon emissions from power plants by 30% by 2030 from 2005 levels.

The proposed rule is expected to come into effect next year. This 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.

NRG Energy is diversifying its generation mix through the expansion of renewable assets. The company's recent acquisition of the assets of Edison Mission Energy, a subsidiary of Edison International (EIX), and Roof Diagnostics Solar will support its renewable asset expansion program.

Duke Energy's business unit, Duke Energy Renewables, is a leader in developing innovative wind and solar energy solutions. Since 2007, Duke Energy has invested more than $3 billion to expand its portfolio of wind and solar power projects.

Also, Florida-based utility service provider NextEra Energy Inc. (NEE), the major U.S. producer of electricity from wind and sunshine, now plans for an initial public offering of a unit -- NextEra Energy Partners LP -- that will own and operate renewable power plants. This unit will own interests in 10 wind and solar projects in North America with a total output of about 990 MW.

The EIA projects that utility-scale solar capacity will expand by about 104% between year-end 2013 and year-end 2015 in the U.S., in tandem with considerable consumption growth in renewables for electricity and heat generation purpose. California is expected to grab most of the growth with approximately 70% of the new capacity being built in the state.

WEAKNESSES

Subsidy roll-back: Budgetary constraints have caused the 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. In Apr 2012, an amendment of the EEG came into force that introduced a monthly reduction in feed-in tariffs (FiTs) by 1%, which can rise or fall depending on solar growth.

These FiT changes particularly affected the competitiveness of large-scale free field PV systems and modules. 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 steady focus on the lowest-cost technology and cost-competitiveness from traditional means of electricity generation. This may prove disastrous for existing companies ruling the solar roost should a cheaper alternative emerge.

Conclusion

Globally, 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. On the other hand, European PV markets experienced a slowdown in 2013 due to the declining political support for PV. Notably, Italy witnessed a 70% market decline year over year. Germany also experienced a steep PV market decline of 57%.

So, all leading solar cell manufacturers are looking for opportunities in the emerging markets. These markets primarily comprise the Asia-Pacific region with China, India and Japan being the key destination for the global solar giants. China is targeting to install 70 GW of solar power by 2017; India is aiming to install 20 GW of solar power by 2022; and Japan is stepping up its solar panel installation post the deactivation of its nuclear reactors. Indeed, the long-term outlook seems bright. This is especially true as global warming and high fuel emission issues are leading to rising popularity of clean energy sources.

The demand for renewable energy, in particular solar and wind, is rapidly growing for electricity generation in the U.S. As per EIA, renewable electricity generation in the U.S. would grow by 69% over 28 years (from 2012-2040), including an impressive increase of 140% or more in generation from non-hydropower renewable energy sources.

This boom in the alternative energy sector is also likely to outpace the mounting shale oil and gas business in the years to come. The depletion of fossil fuel reserves, higher oil and gas prices, new and advanced technologies, accompanied with more competent alternative energy applications have made green power more feasible.

However, the fresh ruling on anti-dumping duties, which have earlier ruined many solar companies, will unfortunately put a hold on the entire U.S. solar industry. These taxes will immediately boost the price of solar power. U.S.-based downstream PV companies such as SolarCity and SunEdison are major importers of modules fabricated in China but use non-Chinese solar cells for rooftop, commercial and utility-scale PV projects in the U.S. These companies will be also hit by this imposition.

So, if we are to expand renewable manufacturing infrastructure worldwide to fight the climate crisis, the U.S. as well as the Chinese manufacturers should try to settle their dispute before the industry is hurt at large. Given these challenges, we remain in the neutral zone for the time being.

CANADIAN SOLAR (CSIQ): Free Stock Analysis Report
DUKE ENERGY CP (DUK): Free Stock Analysis Report
NEXTERA ENERGY (NEE): Free Stock Analysis Report
FIRST SOLAR INC (FSLR): Free Stock Analysis Report
GOOGLE INC-CL C (GOOG): Free Stock Analysis Report
JA SOLAR HOLDGS (JASO): Free Stock Analysis Report
JINKOSOLAR HLDG (JKS): Free Stock Analysis Report
NRG ENERGY INC (NRG): Free Stock Analysis Report
SEMPRA ENERGY (SRE): Free Stock Analysis Report
EDISON INTL (EIX): Free Stock Analysis Report
SOLARCITY CORP (SCTY): Free Stock Analysis Report
SUNPOWER CORP-A (SPWR): Free Stock Analysis Report
TRINA SOLAR LTD (TSL): Free Stock Analysis Report
SUNEDISON INC (SUNE): Free Stock Analysis Report
YINGLI GREEN EN (YGE): Free Stock Analysis Report


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