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Will Global Investments Boost Alternative Energy Stocks?

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The alternative energy industry has been under a lot of pressure since the victory of Donald Trump as President, who called ‘climate change’ a ‘Chinese hoax.’ Nevertheless, all is not lost, considering the growing prospects of solar power. Relatively high oil prices are also likely to lead to increased demand for relatively cheaper solar energy.

Although Trump had revealed his plans to call off the landmark Paris deal and boost coal production, there has been no such development since he took charge. This raises optimism regarding the promising future of alternate energy stocks.

Stocks in the Zacks Alternative Energy industry, part of the Zacks Oil/Energy sector, were up 15.4% in the last year against 0.8% loss for the Oil/Energy sector and 14.6% gain for the S&P 500 index. Since Nov 8, the Zacks Alt-Energy industry is up 14.5% against 0.6% loss for the Oil/Energy sector and 11.2% gain for the S&P 500. This shows that Trump’s presidency hasn’t harmed the industry as anticipated.

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 PV – are supported extensively, niche renewable energy sources such as geothermal and concentrated solar power (“CSP”) are also on the rise, natural conditions permitting.

Again, the extension of key renewable tax credits, reduced solar photovoltaic (PV) capital costs and state-level renewable mandates, will be driving the alternative energy space’s growth trajectory.

Moreover, former President Obama’s "Climate Change Action Plan," which is still valid, has propelled the sector northward. Efforts to restrict carbon emissions are a positive for renewable energy stocks. As per U.S. Energy Information Administration (EIA), in 2016, CO2 emissions declined 1.7%. In fact, energy-related CO2 emissions are expected to decline 0.5% in 2017.

The plan urged utility providers to gradually shift their mode of power generation to solar, wind and water. Some of the utilities are Duke Energy Corp. (DUK - Free Report) and NRG Energy Inc. (NRG - Free Report) . While Duke Energy carries a Zacks Rank #4 (Sell), NRG Energy carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The EIA observes that even if the Trump administration abolishes the Clean Power Plan, the renewables space will continue to grow in the U.S. albeit at a slower rate. EIA projects U.S. renewable generation capacity to grow by an average of 1.9% per year between 2017 and 2050.

Apart from this, Francesco Starace, chief executive of Italy-based Enel, the largest European power company, said that investment in renewable energy across the globe including the U.S. will continue to grow regardless of President Trump’s attempt to revive fossil fuels. This is because investment in renewable energy was primarily driven by technological progress and market forces and hence any amendment in U.S. federal policy will have a marginal effect. He added that Enel has plans to invest €5.2bn in renewable generation, mainly wind and solar power, both in Europe and the U.S., over the next three years.

Realizing growth opportunities in the renewable energy space, companies from other domains have also expressed their interest to invest in solar stocks. In line with this, e-Commerce giant Amazon has set to bring online five new solar farms, totaling 180 megawatts (MW) to help power its massive cloud data centers. The new solar facilities, located in Virginia, will be connected to the grid by the end of 2017. Amazon also has other renewable projects underway, which will be completed by this year.

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

Extension of ITC: 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.

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, rushed developers 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.

Moreover, the wind power industry 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.

The EIA projects that utility-scale solar capacity will increase almost 10 gigawatts (GW) between 2017 and 2018 in the U.S., given considerable rise in consumption in renewables for electricity and heat generation purpose. California, along with North Carolina, Nevada, Texas and Georgia, will account for most of the projected utility-scale capacity additions over the period.

The EIA expects wind energy capacity additions of 14 GW in 2017-2018. With these additions, total wind capacity would reach 95 GW by the end of 2018.

Anti-Dumping Duties and Solar Trade War: 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 - Free Report) and First Solar Inc. (FSLR - Free Report) 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 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. 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.

China’s Solar Plans: China continues to hold the leading position around the globe in solar-power installations. Last year, Chinese overseas investment in renewable energy projects was a record $25 billion. The country’s energy agency announced that it will invest $364.0 billion in renewable power generation by 2020.

The National Energy Administration (NEA) said installed PV capacity climbed to 77.42 GW at 2016-end, with the addition of 34.54 GW during the year. The agency expects that the country will add over 110 GW of PV capacity in the 2016-2020 time frame.

Per the 13th Five Year Plan (FYP), China has set a target of attaining 150GW to 200GW of solar PV capacity by 2020. It also intends to shift focus from grid-scale expansion to quality and efficiency. The FYP also plans to achieve non-fossil fuel-fired energy consumption of around 15% by 2020 and 20% by 2030.

India’s Solar Initiatives: While the U.S. and China have led the industry in recent years, other nations are also developing their home-grown solar generation capacity as a remedial measure for electricity crisis. The latest to join this list is Asia's third-largest economy, India, which has a target of adding 175 GW of solar, wind and other renewable energy by 2022.

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. The pace of installation is projected to accelerate rapidly. It is expected that around 1.1 GW of rooftop solar capacity will be added in 2017, up 75% from 2016. This has kindled the interest of global solar players in the Indian market.

At the end of 2016, India boasted a pipeline of around 14 GW of utility scale projects, out of which 7.7 GW is expected to be commissioned this year. It is expected that the country will add a total of 8.8 GW in 2017, becoming the world's third-biggest solar market after China and the U.S.

Year 2017 is expected to be significant for the solar power sector in India, with total installed capacity reaching 18 GW.

First Solar and SunEdison Inc. have ample businesses in India and, together with local firms, are investing considerably in the country. In 2016, First Solar connected a 130 MW utility-scale solar power to the nation’s grid. These plants are part of a 260-MW project portfolio wholly owned by First Solar in India.

JA Solar Holdings Co., Ltd.’s (JASO - Free Report) investment plans in India include a 500 MW solar module facility, which will be operational by this year. Another Chinese player Trina Solar Ltd. TSL is planning to build 700 MW capacity for solar cells and 500 MW capacity for solar modules in the country. These are encouraging signs for the industry in India.

Solar in Japan: Japan has 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 12% of power from solar PV by fiscal 2030, up from the present level of 4%.

In particular, the solar power boom in Japan ramped up considerably in 2016. Electricity generation from solar PV alone grew to 4.3% in last year, up from 2.7% in 2015. Overall, in 2016, renewable energy sources comprised 14.2% of total electricity generation. It has been projected that Japan will install 8 GW of solar PV in 2017.

Japan's need for electricity was 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.

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 increased adoption was mainly due to the booming residential PV market and continued realization of the utility sector’s double-digit GW project pipeline.

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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