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Alternative Energy Stock Outlook - January 2017

Zacks Equity Research

Renewable energy provides multifold benefits for the climate, health as well as the economy. In addition to lowering carbon emissions, alternative sources of energy improve public health and created jobs along with providing other economic benefits. Moreover, these sources of energy reduce the requirement of water for power production, offering a major advantage over fossil fuels. Offsetting these positives are the additional costs that need to be incurred by traditional energy sources to fully account for their environmental externalities.

Per the Renewable Electricity Futures Study, given the present technologies, including wind turbines, solar photovoltaics, concentrating solar power, bio-power, geothermal and hydropower, it is expected that renewables will be expected to contribute 80% to the total generation. The only need of the hour is the development of the electricity grid to withstand a higher volume of renewable energy and incorporate advanced grid planning to maintain reliability.

A U.S. Energy Information Administration (“EIA”) report projects total renewables used in the electric power sector to dip 0.3% in 2017, followed by an increase of 7.3% in 2018. Electricity generation from hydropower is expected to fall 2.2% in 2017, followed by a 4.2% increase in 2018. Generation from renewables other than hydropower is forecast to rise 1.3% in 2017 and 9.8% in 2018.

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.

The U.S. renewable energy sector witnessed the implementation of a number of important decisions in 2015 from both the 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.

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. While the industry’s long-term fundamentals remain favorable, the incoming U.S. administration’s policies will likely remove some, if not all, of the policy shields from this space.

Here, 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, in fact by almost 8.5 gigawatt (“GW”) in the 2017–2018 period. The projected increase would bring the amount of solar capacity to 26.5 GW at 2018 end. In spite of the rapid uptake, solar will still constitute just 1.2% of the total U.S. utility-scale generation in 2018, indicating immense room for 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 in the near term, 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 economic woes in China continue to hurt the market, longer-term prospects for solar in the nation remain favorable. 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.

The National Energy Administration (NEA) said that installed renewable power capacity, including wind, hydro, solar and nuclear, will contribute to about 50% of the total electricity generation by 2020.

Under China's 13th Five Year Plan (FYP), the country has set a target of attaining 150GW to 200GW of solar PV capacity by 2020. It also intends to shift focus from grid-scale expansion to quality and efficiency.

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.

Wind

The American Wind Energy Association (“AWEA”) reported that the country’s wind industry has installed 895 MW during the third quarter of 2016, bringing the total installed capacity to 75,716 MW. Wind capacity of over 13,563 MW is currently under construction and another 6,717 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 at the end of 2016 was 76 GW — this is expected to increase to 89.2 GW by 2018. It is expected that wind generation will account for 6% of total generation in 2018.

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 256-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 256+ 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 #63 out of 256. 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 #216 out of 256. This corresponds to the bottom one-third of the list, implying a negative 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) sports a Zacks Rank #1 (Strong Buy), 8point3 Energy Partners LP (CAFD) carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

What’s in Store for Q4

The fourth quarter is over and companies will soon start reporting results. Keeping with the past few years’ trend, estimates for the quarter have come down since the beginning of the quarter. This trend has been continuing for almost three years now. However, the magnitude of negative revisions in fourth-quarter estimates has declined considerably, compared with the other recent quarters.

Overall, earnings for the S&P 500 companies are anticipated to witness a 3.1% increase on 3.9% higher revenues, with 5 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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Trina Solar Limited (TSL): Free Stock Analysis Report
 
Sunrun Inc. (RUN): Free Stock Analysis Report
 
JinkoSolar Holding Company Limited (JKS): Free Stock Analysis Report
 
JA Solar Holdings, Co., Ltd. (JASO): Free Stock Analysis Report
 
Canadian Solar Inc. (CSIQ): Free Stock Analysis Report
 
8point3 Energy Partners LP (CAFD): Free Stock Analysis Report
 
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