The extension of key renewable tax credits, reduced solar photovoltaic (PV) capital costs and low natural gas prices, along with state-level renewable mandates, will be driving the alternative energy space’s growth trajectory.
After months of suffering from collapsing oil prices, green energy companies suddenly seem to be on firmer footing now. The Paris climate change summit gave the renewables sector a shot in the arm last year, while Congress’ vote to extend federal subsidies for renewable energy has further perked up the space.
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.
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.
Moreover, declining capital costs for technologies are improving their competitiveness. As per Solar Energy Industries Association’s (“SEIA”), national solar PV system pricing fell up to 17% over the course of 2015.
Here we take a look at the alternative energy space and attempt to identify this nascent industry's growing strengths.
President’s Green Energy Plan: "Clean energy" has long been the focus of the current administration. President Obama’s "Climate Change Action Plan" and the favorable green energy trends have already done a lot in pushing the sector northward.
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, was forcing developers to rush 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.
The wind sector also 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.
In addition, the Obama administration’s efforts to restrict carbon emissions are a net positive for renewable energy stocks. On Aug 3, 2015, the White House revealed the final version of its ambitious climate policy. This Environmental Protection Agency (EPA) program seeks to cut CO2 emissions from the nation's power plants.
The administration has vowed for CO2 reduction of 28% by 2025 and 32% by 2030, from 2005 levels. This version turns out to be a little stronger than the draft proposal released last summer, wherein the EPA had proposed total CO2 reduction of 29% by 2025 and 30% by 2030.
The plan sets carbon pollution reduction goals for power plants and requires states to implement plans to meet these goals. States have until this month to submit plans, but all must comply by 2022. of U.S. electricity and coal plants are the largest source of carbon emissions in the country. Increasing regulatory mandates to safeguard the environment will be a catalyst for renewable stocks.
The proposed rule has influenced utility providers like NRG Energy Inc. (NRG - Analyst Report) , Sempra Energy (SRE - Analyst Report) and Duke Energy Corp. (DUK - Analyst Report) to gradually shift their mode of power generation to solar, wind and water.
The EIA projects that utility-scale solar capacity will expand by more than 13.3 GW between 2016 and 2017 in the U.S., in tandem with considerable consumption growth 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 said period.
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 - Analyst Report) and First Solar Inc. (FSLR - Analyst 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 the 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. (SCTY - Snapshot Report) 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.
India’s Solar Initiatives: While the U.S. and China have been in the forefront in recent years in driving the industry, other nations are also developing their home-grown solar generation capacity as a remedial measure to solve the electricity crisis. The latest to join this list is Asia's third-largest economy, India, which has committed to generate 40% of its total power capacity from renewable sources by 2030.
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 with a forecast of installing 4.8 GW in 2016. This has kindled the interest of global solar players in the Indian market.
First Solar and SunEdison Inc. have ample businesses in India and, together with local firms, are investing considerably in the country. Recently, First Solar has connected 130 megawatts (“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 - Analyst Report) investment plans in India include a 500 MW solar module facility which will be operational by 2017. Another Chinese player Trina Solar Ltd. (TSL - Snapshot Report) is planning to build 700 MW capacity for solar cells and 500 MW capacity for solar modules in the country. These are encouraging signs of the solar industry’s prospects 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 22–24% of power from renewable energy sources by fiscal 2030.
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.
According to Japan, Group unit Padaeng Industry (PDI) Asia Solar will invest in three projects totaling 13 MW in the nation. The first installation of 2 MW array in Nanao, Ishikawa prefecture is expected to be operational by the third quarter of 2016.
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 major uptake was mainly due to the booming residential PV market and continued realization of the utility sector’s double-digit GW project pipeline.
The tax credit renewal brings a fresh lease of life to solar adoption. Plus, “the extension is likely to add another 140,000 jobs or more,” as per SEIA.
Check out our latest Alternative Energy Outlook here for moreon 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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