There is broad global consensus that the overuse of fossil fuels, which emits hazardous carbon dioxide and has expedited the process of climate change. Realizing the need for a cleaner energy environment, consumers have rapidly increased the adoption of alternative energy sources, nay renewables, over the last decade.
The outlook for the renewable energy industry is favorable, as utilities and corporations are increasingly shifting to renewables -- owing to declining costs of solar and wind technologies, and rising demand for more carbon-constrained practices. Evidently, renewable energy sources are set to represent almost three quarters of the $10.2 trillion the world will invest in new power-generating technology by 2040 (according to Bloomberg New Energy Outlook).
Stocks in the Alternative Energy industry have put on an impressive show in the past year, handily outperforming the broader market, as a reflection of this positive backdrop. The Zacks Alternative Energy industry has rallied 23.1% in the past year, surpassing the S&P 500 index’s 13.2% gain.
U.S. Renewable Trends
The U.S. renewable energy industry has witnessed significant growth over the last several years, with a number of important decisions in 2015 by both state and federal governments really helping the space. The U.S. renewable energy industry cheered Republicans’ maintaining of key tax credits in the December 2017 tax legislation, which were at a risk of being removed. This has boosted analysts’ confidence in the industry’s prospects.
According to the U.S. Energy Information Administration (“EIA”), total renewables used in the electric power sector was 15% in 2016, which rose to 17% in 2017. Electricity generation from hydropower accounted for more than 7% in 2017 and is expected to fall below 7% in 2018 and 2019. Generation from renewables other than hydropower is expected to rise from below 10% in 2017 to 10% in 2018 and nearly 11% in 2019.
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 United States by 2050, compared with the present 30%.
The main drivers for the U.S. renewable industry are new onshore wind and solar capacities, such as multi-year federal tax incentives combined with renewable portfolio standards as well as state-level policies for distributed solar PV. Moreover, the nation is increasing its offshore wind capacities as majority of the electricity demand comes from coastal areas.
However, uncertainty over international trade and energy policies may impede the expansion of renewables. In particular, Trump’s signing of an order to repeal the Clean Power Plan and decision to withdraw from the Paris climate agreement may deal a severe blow to the clean energy space.
Apart from being the largest solar installer globally, China has successfully expanded its realms in other alternative energy sources like wind and hydro, posing a competitive threat to the U.S. alternative energy industry.
Here, we discuss some of the major alternative energy sources:
A key area in the renewable space is solar energy. Per an EIA report, solar electricity generation in 2017 was 211 gigawatt-hour/day (GWh/d), which is likely to increase to 246 GWh/d in 2018 and 294 GWh/d in 2019. In spite of the rapid uptake, solar contributed just 1.3% of the total U.S. utility-scale generation in 2017, indicating immense scope for growth.
Over the past few years, utility-scale solar 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. According to an EIA report, nearly 4.7 GW of utility-scale solar PV systems were added in the U.S. in 2017.
As per the latest U.S. Solar Market Insight report, the U.S. installed 10.6 GW of solar PV capacity in 2017 to reach the total capacity to 53.3 GW, enough to power 10.1 million homes. This shows a 30% decline from a record-breaking 2016 but a 40% improvement over the 2015 level. Moreover, total installed U.S. PV capacity is expected to more than double over the next five years and more than 15 GW of PV capacity will be installed annually by 2023.
However, Trump’s recent imposition of a 30% tariff on import of crystalline-silicon solar cells and modules is expected to drive solar installations. Following this, GTM Research issued a revised report that shows that the U.S. solar market will see a net reduction in installations of around 11% as a result of the latest tariffs.
Utility PV continues to hold the largest share of annual installations in the U.S. solar market. Notably, voluntary procurement, rather than state-mandated Renewable Portfolio Standards, will continue to be the primary driver of new utility PV demand, which is anticipated to drive one-third of utility build-out in 2018.
As one of the first technologies used to generate electricity, hydro has been the largest source of renewable electricity in the United States. Hydro generation is typically highest in the spring when precipitation and melting snow pack increase water runoff.
Notably, hydro provided 7.4% of total utility-scale generation in 2017, courtesy of a relatively wet year for the United States. However, based on projections of water runoff, the EIA projects hydroelectricity generation to be slightly lower at 6.5% of total utility-scale generation in 2018 and 6.6% in 2019.
It goes without saying that hydroelectricity has immense prospects in the Unites States. Evidently, the U.S. Department of Energy’s Hydropower Vision analysis finds that U.S. hydropower can rise from 101 GW of capacity in 2015 to nearly 150 GW by 2050. The analysis further predicts that this hydropower growth can save $209 billion by avoiding global damages from greenhouse gas emissions through 2050. With this level of deployment, more than 35 million average U.S. homes might be powered with hydroelectricity by 2050.
A recent EIA report shows that wind power generation will surpass hydroelectricity in 2018. Although changes in weather patterns affect wind generation, the forecast for wind power output is more dependent on the capacity and timing of new wind turbines coming online.
In this line, the EIA expects significant levels of new wind capacity to come online in 2018 and 2019, keeping with the latest trend. The EIA expects wind capacity to increase by 8.3 GW in 2018 and 8 GW in 2019. If these new generating units come online as scheduled, they would add 9% to U.S. utility-scale wind capacity by the end of 2018 and another 8% by the end of 2019.
As a result, it is expected that wind generation will account for 6.4% and 6.9% of total utility-scale electricity generation in the United States in 2018 and 2019, respectively, up from 6.3% in 2017. Further, EIA estimates that wind generated on average 697 GWh/d in 2017, which will rise to 722 GWh/d in 2018 and 778 GWh/d in 2019.
The American Wind Energy Association (“AWEA”) reported that 4,125 MW of wind capacity was installed in the United States during the fourth quarter of 2017, reaching the full year’s installed capacity to 7,017 MW. Wind capacity of 13,332 MW is currently under construction, while another 15,336 MW is in the advanced stage of development. The total capacity thus comes to 28.668 MW, reflecting 34% year-over-year growth. Project developers declared 4,054 MW in new construction activity and 1,338 MW in new advanced development activity during the fourth quarter, a combined 5.393 MW.
During the fourth quarter, 16 states commissioned 29 new wind projects. Texas led with 1,179 MW, followed by Oklahoma (851 MW), Iowa (334 MW), Illinois (306 MW) and Missouri (300 MW). Presently, there are 89,077 MW of installed wind capacity in the United States, with more than 54,000 wind turbines operating in 41 states, plus Guam and Puerto Rico.
Zacks Industry Rank: Mixed Outlook
We rank all the 256-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 256 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.)
Notably, Zacks Alternative Energy-Other and Zacks Solar are two subindustries under the Zacks Energy-Alternate Sources industry. The Zacks Industry Rank for the Solar industry is #117 out of 256. This puts this industry in the top half of the list, implying a positive outlook. However, the Zacks Industry Rank for Alternative Energy-Other industry is #189, which puts it in the bottom half, thereby implying a not so satisfactory outlook.
Q4 Earnings: A Mixed Bag
Despite the adversities, the Alternative Energy-Other industry held up well in terms of Q4 results; the earnings beat ratio for the stocks in this space (percentage of companies coming up with positive surprises) was an impressive 44.4%, while year-over-year earnings growth was 18.4%. When compared to the S&P 500’s earnings beat ratio of 77.4%, Zacks Alternative Energy stocks performed better in the fourth quarter.
However, the Q4 earnings picture for Zacks Solar stocks wasn’t encouraging in terms of earnings growth. As of Apr 11, 86.7% of the stocks in this space released their quarterly numbers, with an earnings beat ratio of 53.6%, while annual earnings declined 26.1%.
Stocks Worth Considering
Investors might keep a watch on the following alternative energy stocks that have the financial strength to withstand headwinds and come up with an impressive earnings scorecard.
SolarEdge Technologies (SEDG - Free Report) has a long-term earnings growth projection of 24%. This stock registered an average positive earnings surprise of 31.9% in the trailing four quarters. Its 2018 earnings estimates moved up 32.3% in the last 60 days. The company currently sports a Zacks Rank #1 (Strong Buy).
JinkoSolar Holding (JKS - Free Report) has a long-term earnings growth projection of 10%. Its 2018 earnings estimates moved up 31.9% in the last 60 days. The company currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
FuelCell Energy (FCEL - Free Report) has a long-term earnings growth projection of 15%. This stock registered positive earnings surprise of 20% in the prior quarter. Its 2018 loss estimates improved 17.8% in the last 60 days. FuelCell currently carries a Zacks Rank #2 (Buy).
First Solar (FSLR - Free Report) has a long-term earnings growth projection of 10.1%. This stock registered an average positive earnings surprise of 535.9% in the prior quarter. Its 2018 earnings estimates improved 11.4% in the last 60 days. First Solar currently has a Zacks Rank #3 (Hold).
From this discussion, it is clear that demand for renewables is expanding at an accelerating rate as the world aims to transform into a carbon-free space. While policy uncertainties under current administration remain a headwind, big global corporations are investing substantially to cash in on the bountiful prospects of renewables.
Moreover, rise of China as a strong player in renewables, particularly solar, may also threaten the United States’ expansion, in the light of the recent import tax implementation. Nevertheless, technological advancements leading to rapid expansion of newfound renewables like offshore wind technologies should keep the U.S. alternative energy stocks afloat.
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