The global growth of renewable energy is increasingly driven by voluntary procurement by utilities and corporations due to declining costs of solar and wind technologies, and anticipation of a more carbon-constrained future.
The U.S. renewable energy industry has witnessed significant growth over the last several years. The implementation of a number of important decisions in 2015 by both state and federal governments further fueled its growth and continues to drive the sector. Throughout 2016, companies in the renewable energy space successfully battled against energy generated from fossil fuels in power markets and for procuring contracts across the U.S. and across the globe.
A U.S. Energy Information Administration (“EIA”) report projects total renewables used in the electric power sector to increase 44% in 2018. Electricity generation from hydropower is expected to be relatively unchanged at 7% between 2016 and 2018. Generation from renewables other than hydropower is forecast to rise 9% in 2017 and 10% in 2018.
Notably, renewable energy significantly benefits the environment as well as the economy. In addition to lowering carbon emissions, alternative sources of energy improve public health, create jobs and provide other economic benefits. Moreover, these sources of energy reduce the requirement of water for power production, offering a major advantage over fossil fuels. Offsetting these positives are the additional costs that are incurred by traditional energy sources to fully account for their environmental externalities.
A comprehensive study by the Department of Energy’s National Renewable Energy Laboratory (NREL) shows that renewables will contribute more than 80% of total electricity generation in the U.S. by 2050, compared with the present level of 30%. The need of the hour is the development of an electricity grid to withstand higher volumes of renewable energy and advanced grid planning to maintain reliability.
To this end, governments, businesses and cities around the world are making concerted efforts to speed up the evolution of energy use. With global energy system transformation being the backbone of climate action, the world has come closer under a set of major cooperative initiatives. It is these environmental considerations that are driving demand for alternative energy sources.
While these favorable demand trends have been boosting the growth prospects of this space, the abundant availability of fossil fuels and dearth of adequate investment in solar companies have emerged as key competitive challenges. Although the industry’s long-term fundamentals remain favorable, the policies of the Trump administration, like signing an order to repeal the Clean Power Plan and its decision to withdraw from the Paris climate agreement,are expected to hit the clean energy space. Given these challenges, growth in 2017 is expected to slow down.
Here, we discuss some of the major alternative energy sources:
A major growth area in the renewable space is solar energy. An EIA report indicates continued growth in utility-scale solar power capacity by almost 44% from 22 GW at the end of 2016. The projected increase will bring the amount of solar capacity to 29 GW at 2017 end and to 32 GW at 2018 end. In spite of the rapid uptake, solar will still constitute just 1% of total U.S. utility-scale generation in 2018, indicating immense scope for growth.
Solar growth has historically been concentrated in customer-sited distributed generation installations. The EIA expects utility-scale solar capacity to expand in states like California, Nevada, North Carolina, Texas and Georgia.
The solar industry in the U.S. is booming. The solar Investment Tax Credit (“ITC”) has gone a long way in providing the industry stability and expansion. In the last 10 years, solar has witnessed a compound annual growth rate of almost 60%, with the cost of installation dropping by over 70%.
Over the past few years, utility-scale solar has represented almost two thirds of the market, and this trend will likely continue in the near term, given the huge pipeline of projects under construction.
In particular, year 2016 was a record one for the U.S. solar industry. The photovoltaic (PV) market grew 97% from 2015’s individual installations of more than 370,000. Although all market segments grew in 2016, the utility sector recorded maximum growth, which more than doubled with installations totaling over 10 gigawatts (GW).
According to GTM Research, 12.6 GW of new PV installations will come on-line in 2017, reflecting a decline from the record-breaking 2016 figure. After completing a record build out in 2016 and 2017, it is projected that new projects will be procured with completion targets in the next decade. By 2021, there will be over 100 GW of solar installed in the U.S., with annual total approaching 18 GW in 2022.
Solar in China: The country has established itself as the world’s largest market for solar panels and will likely be home to a quarter of the planet’s new energy capacity from solar panels in the years to come. China is speedily adding as much power generation sources as possible, and solar is just one of them.
The National Energy Administration (NEA) said that installed renewable power capacity, including wind, hydro, solar and nuclear, will contribute about 50% of total electricity generation by 2020. In 2016, China installed 34.2 GW of new solar power, up 126% from last year’s installations, bringing the cumulative solar capacity to 77.42 GW, according to the NEA.
Under China's 13th Five Year Plan (FYP), the country 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.
China's solar industry is expected to produce 25% more panels in 2017 compared with 2016, supported by domestic sales and demand from the U.S. and emerging markets.
China had a total of 101.8 GW installed solar capacity by Jun 2017, after adding 24.4 GW in the first six months of 2017, the industry association said. It is anticipated to reach 110 GW in the near term, the target that Beijing had aimed to achieve by 2020.
The following leading Chinese solar stocks are sure to make the most of the favorable government stimulus: JinkoSolar Holding Co., Ltd. (JKS - Free Report) , JA Solar Holdings, Inc. (JASO - Free Report) and Trina Solar Ltd.
Ontario, Canada-based solar product manufacturer, Canadian Solar Inc. (CSIQ - Free Report) is also well positioned with its diversified manufacturing base and project portfolio in Canada, China, Japan and the U.S.
The American Wind Energy Association (“AWEA”) reported that the country’s wind industry has installed 357 MW during the second quarter of 2017, bringing the total year-to-date installed capacity to 2,357 MW. Wind capacity of 14,004 MW is currently under construction and 11,815 MW is in advanced stages of development. This adds to a total capacity of 25,819 MW, reflecting 41% year-over-year growth. Project developers declared 2,495 MW in new construction activity and 1,346 MW in new advanced development activity during the second quarter, a combined 3,841 MW.
During the second quarter of 2017, four states commissioned a total of 143 turbines across six projects. Kansas led with 178 MW, followed by North Dakota (150 MW), Iowa (22 MW), and Nebraska (7 MW). Presently, there are 84,405 MW of installed wind capacity in the U.S., with over 52,000 wind turbines operating in 41 states plus Guam and Puerto Rico.
In the second quarter of 2017, 1,697 MW of power purchase agreements (PPA) were signed, contributing to a total of 3,443 MW of PPAs signed during 2017. Electric utilities released six requests for proposals (RFPs) for up to 1,450 MW of wind-eligible capacity, including the state of Massachusetts’ request for a minimum of 400 MW (up to 800 MW) of offshore wind capacity.
Per EIA, wind capacity at the end of 2016 was 81 GW. This is expected to increase to 88 GW by 2017 and to 102 GW by 2018. It is expected that wind generation will account for 6% of total generation in 2018.
Zacks Industry Rank – Mixed Outlook
We rank all the 265-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.
The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of industries is that we put all 265 of them into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. (To learn more visit: About Zacks Industry Rank.)
The Zacks Industry Rank for the Other Alternative industry is #166 out of 265. This puts the industry in the bottom half of the list, implying a negative outlook.
Within the Zacks Industry classification, the Zacks Industry Rank for Solar is #21 out of 265. This corresponds to the top half of the list, implying a positive outlook.
The recent losses suffered by some of the fundamentally strong solar stocks can be good buying opportunities for investors with a longer-term horizon. The U.S. solar market continues to grow with total installed solar PV capacity in the U.S. expected to almost triple over the next five years, as per SEIA. By 2022, annually, over 18 GW of solar PV capacity will be installed.
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).
While SolarEdge Technologies, Inc. (SEDG - Free Report) and Canadian Solar sport a Zacks Rank #1 (Strong Buy), Vivint Solar, Inc. (VSLR - Free Report) and SunPower Corp. (SPWR - Free Report) carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
We remain apprehensive of the Zacks Ranked #4 (Sell) stock Azure Power Global Ltd. (AZRE - Free Report) .
The Earnings Season So Far
We have almost reached the end of the second-quarter 2017 reporting cycle, and a number of alternative energy companies have also reported their results. 8point3 Energy Partners LP (CAFD - Free Report) reported earnings of 12 cents per share in second-quarter fiscal 2017 (ended May 31, 2017), missing the Zacks Consensus Estimate of 16 cents by 25%. Earnings declined 76% from 50 cents in the year-ago period.
First Solar Inc. (FSLR - Free Report) reported second-quarter 2017 earnings of 64 cents a share. The Zacks Consensus Estimate was pegged at a loss of 4 cents. The reported number declined 26.4% from the prior-year figure of 87 cents.
SunPower incurred a second-quarter 2017 loss of 39 cents per share, narrower than the Zacks Consensus Estimate of a loss of 63 cents. In the year-ago period, the company had incurred a loss of 33 cents.
Canadian Solar witnessed second-quarter 2017 adjusted loss of 15 cents per share, narrower than the Zacks Consensus Estimate of a loss of 16 cents. In the year-ago quarter, the company posted earnings of 68 cents.
JA Solar posted second-quarter 2017 adjusted earnings of 42 cents per diluted American Depositary Share (ADS). The Zacks Consensus Estimate was pegged at breakeven. The bottom line increased 40% from 30 cents in the year-ago period.
A few companies like ReneSola Ltd (SOL - Free Report) and Jinko Solar are expected to report results soon. Both the companies have an Earnings ESP of 0.00% and a Zacks Rank #3 (Hold).
We expect solar companies to witness impressive growth this year with more emphasis on installations. The companies seem to be channeling most of their revenues into installations backed by solar and wind-tax credit extensions.
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