Alternative Energy Industry Outlook - Jan. 2011 - Industry Outlook

OUTLOOK
 
Like everyone else, the Alternative Energy industry was hit hard by the Great Recession and essentially remains in recovery mode. And while the economy is in recovery mode, so is our hope for the industry. The growth outlook of alternative energy companies is closely tied to the fortunes of the economy.

Despite some lingering concerns, the global economic expansion remains on track. Per the Energy Information Administration (EIA), in its latest release U.S. electricity consumption is expected to rise year-over-year by 4.7% in 2010.

Going forward, in fiscal 2011 we expect the U.S. Gross Domestic Product (GDP) to grow 3.7% year-over-year. Along with this, a faster decline in the unemployment rate will jack up electricity demand, funneling investor interest in the sector. Also, the outlook for the major emerging market economies remains positive. And while stock prices of alternative energy companies have recovered from their lows, valuations still remain quite attractive by historical standards.

A number of traditional utility companies have growing alternative energy operations. But the fortunes of some of these companies, particularly those with significant fossil-fuel exposures, are less attractive than their peers.

In the utilities space, we are less optimistic about the prospects of Allegheny Energy Inc. (AYE), American Electric Power Co. Inc. (AEP), DPL Inc. (DPL) and DTE Energy Company (DTE). Conversely, favorable rate cases and stable sales growth in the respective service areas make companies like Brookfield Infrastructure Partners L.P. (BIP), ALLETE Inc. (ALE), Consolidated Edison Inc. (ED) and OGE Energy Corporation (OGE) attractive in the near-term.

A major growth area in this space is Solar Energy. The U.S. has a lot of catching up to do, despite enormous potential, to get anywhere close to the global leaders. According to the Solar Energy Industries Association (SEIA) -- the U.S. trade association of close to 500 companies in the solar energy industry -- Germany ranked first followed by Spain, Japan and then the U.S. in terms of cumulative installed solar electric power capacity, as of year-end 2009.

In fiscal 2009, Germany (3.8 GW) was far ahead of the pack in terms of new installations, with Italy (700 MW) coming a distant second. However, the gap is closing fast as SEIA estimates the U.S. saw more than 1 GW of new solar installations in 2010 alone.

According to the European Photovoltaic Industry Association (EPIA) -- the world industry association for solar photovoltaic electricity market -- the cumulative global installed PV capacity stood at almost 22 GW at the of 2009, compared to only 9 GW at the end of 2007.

Here we take a look at the Solar Energy space and attempt to identify this nascent industry's strengths and weaknesses.

OPPORTUNITIES

Environmental Advantage: Solar power is one of the most benign electricity resources. Solar cells generate electricity without air or water emissions, noise, vibration, habitat impact or waste generation.

Fuel Risk Advantage: Unlike fossil and nuclear fuels, solar energy has no risk of fuel price volatility or delivery risk. Although there is variability in the amount and timing of sunlight in the day, season and year, a properly sized and configured system can be designed to insure high reliability while providing a long-term, fixed-price electricity supply.

Location Advantage: Unlike other renewable resources such as hydroelectric and wind power, solar power is generally located at a customer's site due to the universal availability of sunlight. As a result, solar power limits the expense and energy losses associated with the transmission and distribution from large-scale electric plants to the end-users. For most residential consumers seeking an environment-friendly power alternative, solar power is currently the only viable choice being a ubiquitous source.

Environmental Legislations: Alternative energy companies are increasingly benefiting from new legislation in the U.S. stipulating installation of renewable sources of electricity generation as mandated by Renewal Energy Standards (RES). At the federal level, Congress has extended the 30% federal investment tax credit (ITC) to both residential and commercial solar installations until December 31, 2016.

Also, under the American Reinvestment and Recovery Act (ARRA) passed in February 2009, the U.S. Treasury Department implemented a program to issue cash grants in lieu of investment tax credit for renewable energy projects.

Subsidy Programs: Governments, most notably China, Japan, Canada, U.K., Australia, India and the Middle East, have increased their financial support for solar projects. China is aiming at increasing its installed solar power capacity to 20 GW by 2020 from 305 MW capacity at the end of 2009. Specific solar energy stocks under our coverage that stand to benefit from this environment with a Zacks #1 Rank (short-term Strong Buy rating) include China Sunergy Co. Ltd. (CSUN), LDK Solar Co. Ltd. (LDK) and JA Solar Holdings Co. Ltd. (JASO).

WEAKNESSES

Recent Start-ups: A large number of these companies are recent start-ups with limited resources. As such, quite a few depend on their customers' ability to finance solar projects and remain exposed to continuing near-term losses due to start-up costs. Companies such as Evergreen Solar Inc. (ESLRD) and Ascent Solar Technologies Inc. (ASTI) would fall in this category.
 
Subsidy Roll-back: Budgetary constraints have caused prime solar markets in Europe like Germany , Italy, Spain and U.K. to roll back a portion of its grants. This may affect companies such as First Solar Inc. (FSLR) and SunPower Corporation (SPWRA), which generate a substantial portion of their sales from markets like Germany.
 
Fortunes Tied to Crude: Alternative energy stock prices generally rise and fall in direct proportion to the price of crude oil. While in times of high oil prices this may present an opportunity, it also increases volatility in the sector. The improving economic scene, both here in the U.S. as well as worldwide, had been the main driver of the oil rally that saw the commodity zoom past the $91 per barrel level at year-end 2010.
 
However, in recent days, concerns about the European debt crisis and China's growth outlook have renewed apprehensions about the global growth and energy demand. As a result, oil prices have slumped to below $90 per barrel. Also, the Paris-based International Energy Agency (IEA), the energy-monitoring body of 28 industrialized countries, is asking Organisation of the Petroleum Exporting Countries (OPEC) to raise production. This will add further tailwinds to oil prices.
 
New technologies are emerging: The alternative energy industry remains an emerging sector with a consistent focus on the lowest cost technology to be cost competitive with traditional means of electricity generation. This may prove disastrous for existing companies ruling the solar roost should a cheaper alternative emerge.
 
AMER ELEC PWR (AEP): Free Stock Analysis Report
 
ALLETE INC (ALE): Free Stock Analysis Report
 
ASCENT SOLAR TE (ASTI): Free Stock Analysis Report
 
ALLEGHENY ENGY (AYE): Free Stock Analysis Report
 
BROOKFIELD INFR (BIP): Free Stock Analysis Report
 
CHINA SUNERGY (CSUN): Free Stock Analysis Report
 
DPL INC (DPL): Free Stock Analysis Report
 
DTE ENERGY CO (DTE): Free Stock Analysis Report
 
CONSOL EDISON (ED): Free Stock Analysis Report
 
FIRST SOLAR INC (FSLR): Free Stock Analysis Report
 
JA SOLAR HOLDGS (JASO): Free Stock Analysis Report
 
LDK SOLAR CO (LDK): Free Stock Analysis Report
 
OGE ENERGY CORP (OGE): Free Stock Analysis Report
 
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