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Alternative Energy Outlook - September 2016

Zacks Equity Research

The U.S. renewable energy sector witnessed a number of important decisions last year from both state and federal governments. These decisions continue to play a key role in determining this industry’s future growth trajectory.

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 the demand for alternative energy sources.

A U.S. Energy Information Administration (“EIA”) report projects that electricity generation from renewable sources will increase 9.5% in 2016 and 5.8% in 2017 in the country. Generation from renewables other than hydropower is forecast to climb 11.8% in 2016 and 11.1% in 2017. A more comprehensive study by the Department of Energy’s National Renewable Energy Laboratory (NREL) shows that the country will be able to generate most of its power requirements 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.

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, which is projected to average almost 13.3 gigawatt (“GW”) in the 2016–2017 period. In spite of the rapid uptake, solar will still be just 1% of the 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.

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 through 2016, given the huge pipeline of projects under construction.

The Solar Energy Industries Association (“SEIA”), expects the U.S. solar market to witness strong growth in 2016 with installations peaking 14.5 GW DC, representing almost double the capacity over 2015. At the end of this decade, there will be vigorous growth across all three market segments, attaining a 20 GW annual solar market.

Solar in China:Although Chinese economic woes continue to hurt the market, the longer-term prospects for solar in China remain intact. The country 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 investments 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 110–150 GW of capacity by 2020.

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 22% 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) and Trina Solar Ltd. (TSL).

Ontario, Canada-based solar product manufacturer, Canadian Solar Inc. (CSIQ) 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 U.S. wind industry has installed 310 MW during the second quarter of 2016, bringing installed wind capacity to 74,821 MW. Wind capacity of over 12,450 MW is currently under construction and another 5,800 MW is in advanced stages of development.

Following the five-year extension of the Production Tax Credit (PTC) in Dec 2015, utilities announced plans to develop and have possession of up to 2,600 MW in new wind project capacity during the second quarter. Meanwhile, over 1,800 MW of additional power purchase agreements (“PPA”) were announced, with utilities signing 81% of the contracted capacity.

As per the EIA, wind capacity grew 12% in 2015 and it is expected to increase another 11% in 2016 and 11% 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 255-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 255+ 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.

The Zacks Industry Rank for the Other Alternative industry is #87 out of 255. This puts the industry to the top one-third of the list, representing a positive outlook.

Within the Zacks Industry classification, the Zacks Industry Rank for Solar is #175 out of 255. This corresponds to the middle third of the list, implying a neutral 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 2015 being the most important 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 Sunrun Inc. (RUN) holds a Zacks Rank #1 (Strong Buy), Sunworks, Inc. (SUNW) and Vivint Solar, Inc. (VSLR) carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

What’s in Store for Q3

The third quarter is drawing to a close. In tandem with the past few years’ trend, estimates for the quarter have come down since the beginning of the quarter. Overall earnings for the S&P 500 companies are anticipated to witness a 3.0% decline on 1.6% higher revenues, with 9 of the 16 Zacks sectors recording growth in the negative territory. For more details, you may go through our Earnings Trends report.

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