For Immediate Release
Chicago, IL – April 16, 2018 – Today, Zacks Equity Research discusses the Industry: Alternative Energy, Part 2, including AES Corp. AES, NextEra Energy NEE, JinkoSolar Holding JKS and First Solar FSLR.
Industry: Alternative Energy, Part 2
The broad consensus on the man-made nature of climate change notwithstanding, policies of the current U.S. administration run counter to it and favorable to the coal industry. But not all is lost – as a big part of the corporate sector and many local governments remain committed to taking steps to ensure a cleaner energy environment.
In keeping with this, the RE100 collaborative global initiative has brought together some of the biggest U.S. companies from different sectors, with a target to source 100% of their electricity from renewable sources. As such, the demand for electricity generated from renewable sources is no longer restricted to a few companies.
On the supply side, technological improvements have been helping bring down solar and wind power prices and the cost of energy storage, which have been acting in favor of the alternative energy industry.
Here we take a look at the alternative energy space in an attempt to identify its strengths.
Supply Growth: The underlying driver for the alternative energy industry is significantly high demand outlook for renewables. According to the Renewable Energy: United States report of December 2017, U.S. demand for renewable energy is forecast to reach 12.6 quadrillion British thermal units (Btu) by 2021. While demand for solar energy is projected to rise 20% annually, the same for wind energy is likely to rise 7.2%. Currently, the primary advantage of using solar or wind energy is their abundant supply. This allows renewables to score higher than fossil fuel, which is exhaustible. Therefore, we expect the renewable space to continue to innovate to offer consumers clean and affordable energy. This should help stocks in this space maintain strong momentum in the days ahead.
Declining Costs: There’s no denying the fact that a steep drop in the cost of wind and solar energy has been helping the demand outlook for alternative energy. Per a report by International Renewable Energy Agency (IRENA), solar photovoltaic (PV) modules prices had dropped more than 80% in 2017 from 2009. The cost of electricity from solar PV fell almost three-quarters in 2010-2017 and continues to decline. The drop in electricity costs from utility-scale solar PV projects since 2010 has been remarkable as well. The global weighted average cost of electricity (LCOE) of utility-scale solar PV has fallen 73% since 2010 for new projects commissioned in 2017.
Meanwhile, the cost of wind turbines is the single largest component which makes up for 70% or more of the entire cost of a land-based wind project. Notably, wind turbine prices have fallen by around half over a similar period, leading to cheaper wind power globally. Onshore wind electricity costs dropped almost a quarter in 2017 from 2010.
Moreover, hydropower is one of the cheapest and also the largest source of renewable electricity. The global weighted average LCOE of large-scale hydro projects in 2016 was $0.053/kWh, which had dropped to $0.047/kWh in 2017. The report by IRENA projects that, electricity from renewables will soon be consistently cheaper than from fossil fuels. By 2020, current power generation technologies from renewables under commercial use will become cost effective compared to cost of fossil fuels. This will give rise to higher preference of renewable energy.
Solid Growth Prospects: In EIA’s 2017 International Energy Outlook’s (IEO) Reference case, worldwide net electricity generation is projected to increase 45% in 2015 to 34 trillion kWh in 2040. Notably, electricity is the world’s fastest-growing form of end-use energy and renewables are likely to become a major source for electricity generation, with average increase of 2.8% per year from 2015 to 2040.
Being a major forerunner in renewables, no doubt these growth prospects will boost the United States’ alternative energy industry over the long run, even if we consider Trump’s latest moves against clean energy revolution. In this context, EIA earlier stated that even if the Clean Power Plan is abolished, the U.S. renewable space will continue to grow albeit at a slower rate. EIA projected U.S. renewable generation capacity growth by an average of 1.9% per year between 2017 and 2050. So, long-term global prospects continue to improve for the U.S. alternative energy industry.
Role of the Private Sector: Plummeting costs of wind and solar power along with grid developments have prompted global corporations to consider the clean energy space for their business strategies. In fact, after realizing the opportunities in the renewable energy space, many big corporate houses have joined the RE100 initiative. To make the most of this opportunity, U.S. majors have enrolled themselves in this program to minimize their carbon footprint and deploy more renewable energy. For instance, Google and Wells Fargo announced that they had reached 100% renewable electricity consumption in late 2017.
Moreover, with solar being an attractive investment target within renewable, companies from other domains have started to invest in solar stocks. In March 2018, Microsoft announced the single largest corporate purchase of solar power in the United States by signing an agreement with sPower — a subsidiary of AES Corp.— to add 315 MW of electricity via two solar projects in Virginia.
Extension of Tax Credits: 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 of December 2015, wherein Congress passed an extension and modification of federal tax credits for new wind and solar generators. The new environmental tax credit extension allowed 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.
Moreover, the wind power industry 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. In December 2017, a Republican tax bill was released that preserved key tax credits that were feared of being abolished by the Trump administration.
The final tax bill retained the production and investment tax credits for wind and solar energy that have spurred investment in the fast-growth industries. It also eliminated the alternative minimum tax, which would have reduced the value of those credits. This surely came as a relief for those in the renewable energy industry, which according to SEIA employs 260,000 workers.
China’s Solar Plans: While we have already discussed the growth prospects of the U.S. solar market in our Alternative Energy Stock Outlook, China continues to hold the leading position in solar-power installations across the globe. As per Institute for Energy Economics and Financial Analysis (IEEFA), Chinese overseas investment in clean energy projects was a record $44 billion in 2017, compared to 2016’s investment of $32 billion. For certain, a bulk of that investment went to the United States as it is a major solar market.
With China being its largest importer for solar panels and modules, the U.S. renewable energy industry largely depends on Chinese manufacturers. Although the latest imposition of import tax on solar modules have created possibilities of trade war between China and America, Chinese companies are maintaining their offshore investments in the United Sates to tap in on the bountiful opportunities.
In March 2018, NextEra Energy announced an agreement to purchase solar panel from Chinese solar module manufacturer — JinkoSolar Holding. Over the next four years, JinkoSolar will supply approximately 2,750 MW of high-efficiency solar modules to NextEra Energy. Production of the solar panels will start in the second half of 2018.
India’s Solar Initiatives: While China and the United States have led the Solar industry in recent years, Asia's third-largest economy, India, has lately joined the list of solar power markets with a target of adding 175 GW of solar, wind and other renewable energy by 2022.
India is striving to bump up 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. According to a new report from Bloomberg New Energy Finance, the country added 715 megawatts in rooftop PV power in 2017, reflecting a compound annual growth rate of 117% since 2013. This has kindled the interest of U.S. solar players in India’s market.
Company-wise, First Solar has ample businesses in India and together with local firms is investing considerably in the country. During 2017, the company executed definitive sales agreements for two projects totaling 155 MWAC and commissioned two additional projects totalling 40 MWAC in Karnataka. It continues to maintain a strong presence in India with over 1.8 GW DC of installed modules.
Boom in Offshore Wind Projects: The United States is one of the largest and fastest-growing wind markets in the world. The U.S. wind industry is an important component of the U.S. Department of Energy’s (DOE) strategy to cut carbon pollution, diversify the nation’s energy economy and bring the next generation of American-made clean energy technologies to market.
Several key factors are driving the long-awaited take-off of U.S. offshore wind. These factors include innovations of sophisticated turbine technologies and economies of scale that are driving down costs. Surprisingly, the Trump administration, which had aggressively promoted the development of fossil fuels over renewable energy, seems to be supporting the offshore wind energy sector. According to the DOE, more than 25 offshore wind projects with a generating capacity of 24 GW are now being planned, mainly off the U.S. Northeast and mid-Atlantic coasts.
In December 2017, U.S. Secretary of Energy Rick Perry announced the creation of a consortium to develop innovative offshore wind technologies. Notably, 90% of the announced $18.5 million in federal funding for the consortium will go to research and development, largely to cut down turbine costs and improve turbine efficiency. Although the offshore wind industry is currently at a nascent stage and the cost of installation in sea is high, with technological advancements prices are projected to decline eventually thereby improving the industry’s competitive position. With almost 80% of U.S. electricity demand coming from coastal states, offshore wind energy has the potential to contribute significantly to a cleaner energy environment.
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