2 Renewable Picks on Hopes of Investment Credit Extension - Analyst Blog
President Barack Obama’s fiscal 2016 budget proposal, unveiled on Feb 2, had a clear focus of combating climate change and promoting renewable energy technologies. The budget proposal seeks an approximate 7.2% rise in funding for clean energy.
This can only bode well for renewable stocks, especially solar, which have been a little under the weather in the aftermath of the oil price carnage. Shares of First Solar Inc. (FSLR), SunPower Corp. (SPWR) and SunEdison Inc. (SUNE) gained 7.5%, 6.8% and 6.7%, respectively, yesterday following the news.
Fiscal 2016 Budget Proposal to Cut Emissions
President Obama’s $3.99 trillion budget proposal for fiscal 2016, starting Oct 1, asks Congress for a permanent extension of tax credits for the solar and wind industry. In a section titled "Improving Incentives for Research and Clean Energy," the FY2016 budget request comprises a $7.4 billion fund for clean energy technologies, up 7.2% from the $6.9 billion proposal for fiscal 2015 and above the $6.5 billion enacted by Congress for this year.
The present proposal includes funding and incentives for the renewable sector and nuclear power industries. The budget seeks to permanently extend the 30% investment tax credit (“ITC”) for solar systems, which is otherwise slated for expiry by 2016 end. It has also asked Congress to permanently restore a production tax credit (“PTC”) for wind farm operators that already expired at the end of 2013. These tax incentives are likely to cost the government approximately $31.5 billion over a decade.
The budget included a provision of a $4 billion fund to support states to enhance reductions in carbon emissions from power plants.
Tax Credits as They Stand Now
At the federal level, the ITC is currently at 30%, which will remain in effect through Dec 31, 2016. Beginning 2017, the tax credit will go down to 10%. The industry saw many companies taking advantage of the 30% ITC and building more panels, storage capacity and other production items up to the end of 2015.
The President’s various climate proposals have faced significant hurdles from the Republican-controlled Congress. GOP leaders and conservative lawmakers have harshly opposed Obama’s Clean Power Plan and have fought to reduce federal support for clean energy research. The U.S. Environmental Protection Agency or EPA's proposal to cut carbon and other air pollution from power plants and oil and gas facilities are a target of some lawmakers.
In spite of the critics, Obama has stressed in his budget request that costs linked to reducing greenhouse gas emissions and climate change are worth the financial pain the country has to bear in transitioning to a greener economy. As per the latest budget proposal, the government has incurred over $300 billion in direct costs in the past 10 years owing to extreme weather and fire alone.
However, chances of a green signal from the Republican-controlled Senate and House for this budget or the permanent extension of the tax credits for solar and wind look to be slender. Still, the extent of these requests signals unambiguously what the administration’s priorities are for the coming fiscal.
Given the backdrop, let’s look into a couple of solar stocks which are expected to eventually benefit from the green energy drive of the U.S. government.
The Solar Industry is currently ranked #52 out of 258 total industries (top 20%). In the past week, this industry has moved up 71 places to its current rank, indicating the positive growth potential of the industry.
First Solar Inc.
First Solar manufactures solar modules with an advanced thin film semiconductor process that significantly lowers solar electricity costs. Though the market for solar technology is competitive, First Solar is poised to develop economically sustainable businesses as it has an established expertise and meaningful photovoltaic generation solutions in other areas of the solar value chain, such as, project development, EPC or Engineering, Procurement and Construction capabilities, and Operations & Maintenance (O&M) services.
The company, with a Zacks Rank #3 (Hold), is busy building solar plants for major U.S. power companies rather than just supplying panels. The company booked 521 megawatt (“MW”) of new power-plant orders in the third quarter of 2014, bringing the nine-month figure to 1.7 gigawatt (“GW”).
SunEdison Inc.
With more than 50 years of experience in the design and development of silicon wafer technologies, SunEdison has evolved into a leading global producer of silicon and polysilicon wafers for the semiconductor and solar cell manufacturing industries.
This Zacks Ranked #3 company’s focus on expanding clean energy capabilities through acquisitions should drive its long-term growth. We believe that the demand for clean energy will increase manifold over the long term, and being the world’s leading developer of renewable energy, SunEdison is well positioned to capitalize on this opportunity.
Recently, SunEdison has entered into a strategic alliance with Indian conglomerate Adani Enterprises to expand its base in India. Under the joint venture agreement, the companies will invest approximately $4 billion to develop solar photovoltaic projects in Gujarat, India. We believe that SunEdison’s strategic decision to produce solar panels from low-cost production regions like India gives it an added cost advantage over its U.S.-based solar cell manufacturing peers.
In Jan 2015, the company announced that it will be buying new turbines to facilitate the development of 1.6 GW of additional wind energy projects qualifying for the PTC. The purchase of these PTC qualified turbines is in line with SunEdison’s strategy of branching out to every other renewable energy option from its initial solar focus.
To Sum Up
Investors should closely track the political factors that could impact alternative energy stocks. These include eco-friendly mandates and renewable energy agendas to see if potential benefits will spill over to the U.S. renewable companies of the likes of First Solar and SunEdison among others. The alternative energy landscape is dramatically changing in the U.S. with the utilities also ramping up their renewable portfolios and seriously considering energy storage.
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FIRST SOLAR INC (FSLR): Free Stock Analysis Report
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