Assuming that GDP growth is slightly negative for the next 3 to 4 quarters while the credit markets gradually strengthen, let's consider the outlook and opportunities for the Alternative Energy industry over the next 6 to 12 months. Many companies engaged in the solar power market offer profitability with strong average long-term annual earnings growth expectations of approximately 40%, stock price valuations significantly discounted from their recent historic highs, and a favorable political environment.
Industry Outlook for Alternative Energy Stocks: Speculative - Bullish
The electric power industry is one of the world's largest industrial segments. With a global market share of approximately 25%, the United States is the leading producer of electricity, followed by China, Japan and Russia. Total global electricity consumption volume grew at a CAGR [compound annual growth rate] of 3.1% from 1980 to 2006, the most recently available information, according to the Energy Information Administration of the United States Department of Energy.
Meanwhile, over the same period, total global installed electricity capacity increased at a slower rate of only 2.8%. Given industry forecasts of continuous increases in demand, this supply shortfall must be met by additional energy sources. Worldwide demand for electricity is expected to increase from 14.8 trillion kilowatt hours in 2003 to 27.1 trillion kilowatt-hours by 2025, according to the United States Department of Energy's International Energy Outlook. (Source: Energy Information Administration, US Department of Energy)
Investment in electric generation, transmission and distribution to meet growth in demand (excluding investment in fuel supply) is expected to be approximately $11 trillion by 2030, according to the International Energy Agency. However, the desire for energy independence, fossil fuel supply constraints, infrastructure limitations and environmental concerns all pose challenges to meeting this growing worldwide demand for electricity.
Electricity generated by burning fossil fuels such as coal, natural gas and petroleum accounts for approximately 80% of commercial power production, nuclear reactors produce approximately 9% of commercial power, 6% is contributed by conventional hydroelectric conversion, while renewable resources such as solar, wind, biomass, geothermal, and hydroelectric power generation supply the remaining 5% of commercial power.
In recent years, however, the use of renewable resources in the U.S. has been increasing in response to the growing concerns over reliance on fossil fuels. As opposed to fossil fuels, which draw on finite resources and may eventually become too expensive to retrieve, renewable resources are generally unlimited in availability. Legislation in several states seek to require power production from renewable sources to be approximately 15% of commercial electric power. Bipartisan support for weaning the U.S. off its dependency on foreign oil is led by President-elect Barack Obama's pledge to create five million new jobs by heavily investing in renewable alternative energy sources. (Sources of Electricity in the US  - Energy Information Administration, US Department of Energy)
The alternative energy industry includes solar panel manufacturers and wind farm operators, as well as software designers working on "smart" power grids and electric utilities with solar, wind, hydro and/or geothermal assets. While hydroelectric power generation currently has the largest installed base, solar and wind power generation have emerged as the most rapidly growing renewable energy sources.
While wind power has a promising long-term future with frequent proposals for new wind farms, there are very few publicly traded wind power companies. In the case of ethanol, high and rising corn prices have brought ethanol stocks out of favor with investors.
Solar energy can be used to convert sunlight into heat, called solar thermal energy, or directly into electricity, known as photovoltaic (PV) energy. Solar thermal applications can be distributed, such as roof-mounted systems for heating swimming pools, or can be centralized where sunlight is concentrated to heat a medium that drives a turbine to generate electricity in large scale plants.
Electricity generated from solar thermal electric power plants requires large concentrators and turbines, which are not suitable for residential locations. We refer to solar power as the use of interconnected solar cells, as opposed to solar thermal technology, to generate electricity from sunlight. The interconnected cells are packaged into solar panels, which are mounted in areas with direct exposure to the sun, such as rooftops.
Solar power technology has been used to generate electricity in space program applications for several decades and in commercial applications over the last 30 years. Increasingly, government incentive programs are accelerating the adoption of solar power. Since 2001, the global market for solar power installed capacity has grown at a compound annual growth rate of approximately 40%, driven by strong growth in Germany, Spain, and the U.S.
According to SolarBuzz (a research and consulting firm), the global solar power market, as defined by solar power system installations, generated $17.2 billion in revenue in 2007 (the most recently available information), up 56% over 2006 global revenue. Such total global solar market installation revenue is expected to be within a range of $18.7 billion to $31.4 billion by 2011. On a generation output basis, 2007 global solar cell production also increased 56% year-over-year to 3,436 megawatts (NYSE:MW); meanwhile, worldwide installations grew 62% to a record high of 2,826 MW. Germany is the global leader for PV installations (1,328 MW in 2007), followed by Spain (640 MW), Japan (230 MW) and the United States (220 MW).
Compared to other renewable energy technologies, solar power's benefits include:
- Environmental Advantage: Solar power is one of the most benign electric generation 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 over the day, season and year, a properly sized and configured system can be designed to be highly reliable while providing a long-term, fixed price electric supply.
- Location Advantage: Unlike other renewable resources such as hydroelectric and wind power, solar power is generally located at a customer site due to the universal availability of sunlight. As a result, solar power limits the expense of, and energy losses associated with, transmission and distribution from large-scale electric plants to the end users. For most residential consumers seeking an environmentally friendly power alternative, solar power is the only viable choice because it can be located in urban and suburban environments.
- Retail Rate Benchmark Advantage: Unlike biomass, geothermal, hydroelectric and wind power generation, which are location-dependent and sell primarily to the wholesale market, solar power competes with retail electric rates as it is customer-sited and supplements a customer's electricity purchased at retail rates from the utility network.
- Peak Energy Generation Advantage: Solar power is well-suited to match peak energy needs as maximum sunlight hours generally correspond to typical peak demand periods when electricity prices are at their highest. These characteristics increase the value of solar power as compared to other renewable resources that do not align with peak demand periods.
- Modularity: Solar power products can be deployed in many sizes and configurations to meet the specific needs of the customer.
- Reliability: With no moving parts or regular required maintenance, solar power systems are among the most reliable forms of electricity generation.
We favor companies offering photovoltaics (PV) and large-scale concentrated solar power (CSP) and nuclear systems over other forms alternative energy such as biofuels, geothermal or hydropower. Alternative energies plays such as Entergy (NYSE:ETR), FPL Group (FPL-OLD), Energy Conversion Devices (NASDAQ:ENER), Evergreen Solar (ESLR), SunPower (SPWRA), Verasun Energy (OTC:VSUNQ), Canadian Solar (NASDAQ:CSIQ), First Solar (NASDAQ:FSLR), and JA Solar (NASDAQ:JASO) appear favorable to Hoku Scientific (HOKU), Aventine Renewable (AVR) and Raser Technologies (RZ).
- The global economic crises will temper alternative energy sales and earnings growth.
- The immediate concerns over economic weakness likely takes the short-term focus off progress toward a new energy policy.
- Continued weakness in the debt and equity markets, for as long as it lasts, will raise costs of capital for firms in this emerging sector, and may prevent project financing, working capital requirements, and new research and development. Federal funding for a new energy policy will largely dry up.
- 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 also present an opportunity, it also increases volatility in the sector.