The victory of Donald Trump has raised uncertainties in the alternative energy industry. Far from supporting the renewable sector with any kind of incentives, the President-elect has promised to revive coal. The industry was under pressure even prior to the election, but the outlook has clearly taken a beating since then.
Stocks in the Zacks Alternative Energy industry, part of the Zacks Oil/Energy sector, were down -28.2% in the last one year vs. +43.8% gain for the Oil/Energy sector and +19.6% gain for the S&P 500 index. Since November 8th, the Zacks Alt-Energy industry is up +1.1% vs. +9.1 gain for the Oil/Energy sector and +5.9% gain for the S&P 500.
This shows that the industry’s woes aren’t entirely related to the Trump presidency. The uncertain global economic backdrop and continued weakness oil prices relative to historical levels remain even bigger headwinds for the space.
While the long-term potential of the space is undeniable, the industry is faced with a number of near-term challenges that will likely keep these stocks under pressure. We discuss some of these below.
The Trump Effect: The incoming administration’s overall policy posture is unfriendly to the space. There is nothing concrete in policy terms, but ideas like closing down the EPA, discarding the Clean Power Plan, and pulling out of the Paris Agreement have been talked about in the past. We will see how the policy landscape evolves, but the focus will likely be on incentivizing the coal and natural gas industries.
Since 2014, as utilities closed a large number of aging coal-fired generators, wind and solar have been the two biggest sources of electricity in the U.S. The aforementioned policy changes will likely reverse this trend in the coming years.
China Factor: China’s solar industry is not immune to the ongoing slowdown in the country’s economy. The country’s economic situation has sparked apprehensions that the government could shift asset resources away from investments in renewable energy in order to fuel its stock market. One of the most prominent effects of the economic slowdown in China has been relatively weak demand for electricity.
At the end of 2015, China announced that it had set a target of installing 150 GW of solar energy by 2020. But in 2016, the figure was cut by 20% to 110 GW. Though the Asia Europe Clean Energy Advisory (AECEA) raised optimism by stating that the figure could exceed the revised target, uncertainties continue to persist.
Trina Solar Ltd. (TSL), the largest Chinese manufacturer, derives about two-thirds of its revenues from China. In 2016, its share price dropped 15.6%, while Yingli Green Energy Holding Co. Ltd. (YGE) saw its shares plummet about 42.6%. Again, shares of JinkoSolar Holding Co., Ltd. (JKS) tumbled 45% over the same period.
Fed Rate Hike: In Dec 16, the Federal Open Market Committee announced that it will raise the target federal funds rate by a quarter of a percentage point from the range of 0.25–0.5% to a range of 0.5–0.75%.
The federal funds rate is a benchmark interest rate that determines the rate for financial institutions to lend to each other. A rise in this rate translates to higher borrowing costs for banks who pass on these raised costs to consumers in the form of higher interest rates on loans, mortgages and other financial products. Since financing is an inherent requirement of the Alternate Energy sector, rising interest rates are a major growth deterrent for this space.
While these companies have been benefiting from a low interest rate environment so far, rate hike makes this sector far less appealing. This is because the resulting increase in cost of capital will increase cost of operations of the alternate energy companies, thereby reducing their profitability.
Subsidy Rollback: While the U.S. government provides the Investment Tax Credit and Production Tax Credit to support growth of alternate energy, several other large nations are planning to lower subsidies provided to renewable energy operators.
Per recent media reports, China’s National Development and Reform Commission has hinted at a cut in Feed-in Tariffs (FiT) from the present rates. Though the changes in tariffs are yet to be official, the extent of the proposed cuts is considerably higher than previous market estimates of 13%.
In Aug 2015, the UK government had hinted at a 87% reduction in support for domestic solar and an up to 82% cut in FiTs for commercial rooftops. Similarly, in Feb 2016, Japan’s Ministry of Economy, Trade and Industry (METI) proposed an 11% cut in the solar FiT. Again, Germany is expected to cap subsidy payments after the generation capacity reaches a certain target.
Rolling back subsidies will lead to an increase in the cost of energy produced by renewable sources. This is hurting the prospects of renewable energy across the globe.
Anti-Dumping Duties: The move from the U.S. Department of Commerce (“DOC”) to impose import duties on solar panels and other related products from China and Taiwan could escalate the U.S.-China trade conflict.
The decision addresses one of the main charges in a petition brought by SolarWorld Industries America, a German solar manufacturer with major operations in the U.S. A complaint lodged by SolarWorld brought to the fore a loophole that the Chinese solar product makers were exploiting to evade duties imposed by the Department of Justice in 2012.
The higher tariffs came at a time when the solar industry was on the whole recovering after a two-year supply glut.
The Commerce Department 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.
Imposing of these anti-dumping duties has benefited many U.S. alternate energy companies like Vivint Solar, Inc. (VSLR), Enphase Energy, Inc. (ENPH) and Canadian Solar Inc. (CSIQ). Each of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
New Emerging Technologies: The alternative energy industry remains an emerging sector with a steady focus on the lowest-cost technology. This may prove disastrous for existing companies riding the solar boom should a cheaper alternative emerge. The industry also has to deal with cost-competitiveness from traditional means of electricity generation.
Globally, China leads the world in total electricity generation from renewable sources, helped by its increased allegiance in recent times to the alternative path. It is followed closely by the U.S., Brazil and Canada.
All leading solar cell manufacturers are looking for opportunities in the emerging markets. These markets primarily comprise the Asia-Pacific region with China, India and Japan being the key destination for the global solar giants. The long-term outlook on the whole looks bright. This is especially true as global warming and high fuel emission issues have proven how inevitable clean energy sources will be for the future.
However, the global economic turmoil, China's slowdown and the consequent subsidy rollback in the prime global solar markets are appearing to be a major headwind for the renewable energy industry on the whole.
Also, Trump’s focus on reviving coal industry instead of encouraging alternate energy is a serious concern for all renewable energy companies.
Again, if we are to expand renewable manufacturing infrastructure worldwide to fight the climate crisis, the U.S. as well as the Chinese manufacturers should try to settle their dispute before the industry is hurt at large. Measures to reduce the inflow of Chinese solar panels may hamper the battle against climate change.
Any increase in interest rates is detrimental for the alternative energy space. The recent rate hike thus indicates that the future of this space is quite uncertain.
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Yingli Green Energy Holding Company Limited (YGE): Free Stock Analysis Report
Vivint Solar, Inc. (VSLR): Free Stock Analysis Report
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JinkoSolar Holding Company Limited (JKS): Free Stock Analysis Report
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Canadian Solar Inc. (CSIQ): Free Stock Analysis Report
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