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Last year was historic for the U.S. renewable energy sector, with a number of important decisions taken at both the state and federal levels, which will likely play a key role in determining the trajectory of this industry’s future growth.

Governments, businesses and cities around the world are making concerted efforts to speed up the evolution of energy use. As the global energy system transformation is 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.

A U.S. Energy Information Administration (“EIA”) report projects that electricity generation from renewable sources will increase by 11.3% in 2016 and 4.4% in 2017 in the U.S. Generation from renewables other than hydropower is forecast to grow by 13.3% in 2016 and by 8.6% in 2017. A more comprehensive study by the Department of Energy’s National Renewable Energy Laboratory (NREL) shows that the country can generate most of its electricity from renewable sources by 2050.

These favorable demand growth trends notwithstanding, the abundant availability of fossil fuels and the resultant drop in oil prices have emerged as key competitive challenges for the industry. The industry’s long-term fundamentals nevertheless remain favorable.

Below we discuss some of the major alternative energy sources:

Solar

A major growth area in the renewable space is solar energy. An EIA report indicates continued growth in utility-scale solar power capacity, which is projected to average almost 13 gigawatt (“GW”) in the 2015–2017 period. In spite of the rapid uptake, solar will still be just 1.1% of total U.S. utility-scale generation in 2017, indicating room for immense growth.

Solar growth has historically been concentrated in customer-sited distributed generation installations. The EIA expects utility-scale solar capacity to expand over states like California, Nevada, North Carolina, Texas and Georgia.

Per the latest report released by 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 reached 7,260 megawatt (“MW”) DC in 2015, up 16% over 2014. This brought the cumulative PV installations to 25.6 GW DC, the largest annual total ever, buoyed by strong contributions from each of the three segments: utility, non-residential and residential. In particular, the residential market grew 66% year over year in 2015, setting a yearly record.

The SEIA expects the U.S. PV market to witness strong growth in 2016 with installations reaching 16 GW DC, representing a staggering 119% increase over 2015 with utility-scale installations accounting for 74% of the year’s total installations.

Solar in China: Although Chinese economic woes continue to hit the market, the longer-term prospects for solar in China remain intact. China has established itself as the world’s largest market for solar panels and will likely be the 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 as possible, and solar is just one source of the new energy generation coming up in the country.

In Mar 2016, China released its 13th Five-Year Plan that outlined considerable investment in the renewables sector. The country’s National Energy Administration (NEA) announced plans to triple capacity over the next five years, to reduce China’s carbon emissions and become the world’s leader in clean energy. The nation is aiming for 143 GW of capacity by 2020.

This rise was underlined in 2015, as China, with a 43.2 GW capacity, was ahead of the long time leader Germany. China also supplied 70% of the global output of solar panels in 2015, producing an astounding 43 GW. While outlining its clean energy goals for 2016, the NEA has set a target of 15 GW of new solar PV capacity.

China had earlier pledged to attain peak carbon emissions by 2030 or earlier if possible. The country had set a daunting target of boosting the share of non-fossil fuels to 20% of its energy mix by 2030.

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

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.

Wind

The American Wind Energy Association (“AWEA”) reported that the U.S. wind industry installed 520 MW during the first quarter of 2016. This is the strongest-ever quarter since 2012 bringing the installed wind capacity to 74,512 MW. Wind capacity of over 10,100 MW is currently under construction following the five-year extension of the Production Tax Credit (PTC) in Dec 2015.
As per the EIA, wind capacity grew by 12% in 2015 and it is expected to increase by 9% in 2016 and 10% in 2017.

The AWEA noted that wind power added more capacity than any other energy source, leading the country with 41% of all new electric generating capacity in 2015 (followed by solar at 28.5% and natural gas at 28.1%).

Zacks Industry Rank – Mixed Outlook

We rank all the 257-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 257+ 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 #104 out of 257. This corresponds to the middle third of the list, implying a neutral outlook.

The Zacks Industry Rank for the Other Alternative industry is #100 out of 257. This puts the industry once again in the middle third of all industries.

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 2015 being the biggest year yet in the solar history, per the SEIA.

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 JinkoSolar Holding holds a Zacks Rank #1 (Strong Buy), Yingli Green Energy Holding Co. Ltd. (YGE - Free Report) , Gevo, Inc. (GEVO - Free Report) and Ormat Technologies, Inc. (ORA) hold a Zacks Rank #2 (Buy).

We remain apprehensive of the Zacks Ranked #4 (Sell) stocks Enphase Energy, Inc. (ENPH - Free Report) , SunPower Corp. (SPWR - Free Report) and FuelCell Energy Inc. (FCEL - Free Report) .

EARNINGS TRENDS

As far as the overall results of the alternative energy industry were concerned, the first quarter of 2016 has been quite mixed so far. It has become even more apparent that although the long-term growth story that could change energy is quite solid, the companies responsible for change don't always have a straight path to success.

As in the case of First Solar Inc. (FSLR - Free Report) , the company’s first-quarter earnings were a reversal of the prior-year loss, reflecting higher sales, gross profits, operating income and lower expenses. Yet, the shares dropped surprisingly following the release.

Then again, Canadian Solar’s (CSIQ - Free Report) first-quarter 2016 results exceeded expectations in terms of both revenues and earnings. Solar module shipments for the quarter also surpassed the company’s expectations. Consequently, the company raised its full-year revenue expectation in anticipation of higher sales of solar plants in the second half of the year.

Meanwhile, SolarCity Corp. (SCTY), the largest U.S. rooftop solar installer, posted a much wider-than-expected first-quarter loss. This can be attributed to the company’s rising expenses. Yet, its revenues soared 81.6% year over year and installations were impressive for the quarter. SolarCity shares have depreciated more than 60% year to date.

SunPower reported weak first-quarter results wherein it reported a wider-than-expected loss. Its gross margin contracted 690 basis points while operating expenses surged over 28%. That said, growth in residential and commercial markets continues to gain momentum.

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 the solar and wind-tax credit extensions.
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