OUTLOOK

The Alternative Energy industry is going through a recovery after emerging from the global recession and the cascading fall in global crude oil prices. Last year, quite a few alternative energy companies were in the trough. And although these companies have recovered from their lows, their valuations still remain attractive.

The growth of alternative energy companies is closely tied to the fortunes of the economy. Despite some lingering concerns, particularly in the wake of the European sovereign debt issue, the global economic expansion remains on track. The outlook for the U.S. and key emerging markets remains positive. In the first quarter of fiscal 2010, the U.S. Gross Domestic Product (GDP) grew 3.2%, while sale of electricity to the industrial sector, per the Energy Information Administration (EIA), increased by 2.7% year-over-year. In its latest release, the EIA predicted that total U.S. electricity consumption would increase by 2.7% in fiscal 2010 and 1.3% in fiscal 2011.

The economic recovery has improved the outlook industrial consumption compared to the last two fiscal years. The average electricity generation in the U.S. is also expected to grow to about 11 billion kWh per day in 2010, 0.22 billion kWh more than the average electricity generation in 2009. Total consumption of electricity across all sectors is projected to grow by 2.7% during fiscal 2010 and by 1.3% in fiscal 2011.

In the near-term, however, fortunes of some companies with significant fossil fuel-based exposure and tepid top-line growth prospects in their service areas appear less "green" than their peers. In the utilities space, we are less optimistic about the prospects of Allegheny Energy Inc. ([url=http://www.zacks.com/stock/quote/aye]AYE[/url]), Unitil Corporation ([url=http://www.zacks.com/stock/quote/utl]UTL[/url]) and Pepco Holdings Inc. ([url=http://www.zacks.com/stock/quote/pom]POM[/url]). Conversely favorable rate cases and stable sales growth in the respective service areas makes companies like CMS Energy Corporation ([url=http://www.zacks.com/stock/quote/cms]CMS[/url]), DTE Energy Company ([url=http://www.zacks.com/stock/quote/dte]DTE[/url]) and UIL Holdings Corporation ([url=http://www.zacks.com/stock/quote/uil]UIL[/url]) attractive in the near-term.

While enormous potential exists, the U.S. has a lot of catching up to do get anywhere close to the global leaders in the solar energy space. According to the Solar Energy Industries Association (SEIA) -- the U.S. trade association of close to 500 companies in the solar energy industry -- Germany ranked first followed by Spain, Japan and the U.S. in terms of cumulative installed solar electric power capacity as of year-end 2009. In fiscal 2009 Germany (3.8 GW) was far ahead of the pack in terms of new installations, with Italy (700 MW) coming a distant second.

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 22GW at fiscal-end 2009, compared to only 9GW at fiscal-end 2007.

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.

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.

Location Advantage: Unlike other renewable resources such as hydroelectric 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 energy 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 as it can be sourced in urban and rural environments.

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. According to the International Energy Agency (IEA), the Paris-based energy-monitoring body of 28 industrialized countries, predicted that oil demand will average 86.4 million barrels a day in 2010, or 1.6 million barrels a day more than in 2009.

Subsidy Programs: Governments, most notably China, have increased their financial support for solar projects. China is aiming at increasing its installed solar power capacity to 2 GW by 2011 from 140 MW capacity at fiscal-end 2008. To fulfill this objective, the Chinese government offers a 20 yuan/watt subsidy to solar PV projects whose single installed capacity exceeds 50 kWp. JA Solar Holdings Company Ltd. ([url=http://www.zacks.com/stock/quote/jaso]JASO[/url]) and China Sunergy Company Ltd. ([url=http://www.zacks.com/stock/quote/csun]CSUN[/url]) under our coverage stand to benefit from this move.

Earlier under the American Reinvestment and Recovery Act (ARRA) passed in February 2009, the U.S. Treasury Department implemented a program to issue cash grants in lieu of investment tax credit for renewable energy projects. Recent focus on renewable sources will greatly benefit green crusader companies like Rentech Inc. ([url=http://www.zacks.com/stock/quote/rtk]RTK[/url]). Also, the U.S. has implemented a loan guarantee program to help developers obtain financing for solar power projects.

WEAKNESSES

Recent Start-ups: A large number of alternative energy companies are recent start-ups with limited resources. As such, quite a few depend on their customers’ ability to finance solar projects. However continuing near-term losses due to start-up costs we believe it would be prudent for investors to stay away from Evergreen Solar Inc. ([url=http://www.zacks.com/stock/quote/eslr]ESLR[/url]).

German Roll-back: Germany, one of the prime solar markets with a lucrative subsidy program, is moving aggressively to roll back a portion of its grants. In May 2010, the lower house of the German parliament reduced subsidies for power generated by rooftop solar units by 16% and for open field units by 15%. The roll-back will be effective from July 1, 2010. This in the near term will affect solar module sales. This will affect companies such as First Solar Inc. ([url=http://www.zacks.com/stock/quote/fslr]FSLR[/url]) and SunPower Corporation ([url=http://www.zacks.com/stock/quote/spwra]SPWRA[/url]), who generate a substantial portion of their sales from Germany.

Crude Oil: As mentioned earlier, the fortunes of this industry are closely tied to the price of crude oil. And the price of oil is subject to a multitude of factors, not all of which lend themselves to conventional analysis.