A seismic shift in the power generation landscape is starting to sink in. It has been two weeks since the EPA announced its new proposed carbon rules, one of the flagship efforts of the Obama Administration to address climate change. This shift is meant to move the country in the direction of inevitable changes coming to the energy economy. It is important for investors to know which companies and sectors stand to benefit from the new rule.
Greenhouse Gas Emissions by Economic Sector
What the rule says
The basics of the proposed rule are this: States need to come up with ways to reduce power plant emissions. The goal is to allow flexibility to States so that they can implement innovative strategies to reduce the "pollution-to-power ratio" of fossil-fuel fired power plants. The EPA believes that by doing so, U.S. power plants should emit 30% less carbon in 2030 than they did in 2005. The EPA is framing the effort with four "building blocks" in order to reach carbon reduction goals. These are:
1. Improved operations at power plants. This means building more efficient plants, or retrofitting existing ones to become more efficient.
2. Substituting high carbon generating plants with lower carbon generation. In effect, replace coal-fired plants with natural gas.
3. Substituting fossil fuel plants with low and zero carbon generation. This is a call to enhance deployment of renewables.
4. Increase demand side efficiency. Lower the energy use of homeowners, businesses, etc.
All four of these building blocks have strong implications for alternative energy investors. They are listed below in order of relevance to the companies we track here at the Roen Financial Report.
Substituting fossil fuel plants with low and zero carbon generation
This building block is at the heart of the mission of the Roen Financial Report, moving beyond fossil fuels and into the realm of renewables. These two very different companies are among my top picks to benefit in this category.
SolarCity Corp (NASDAQ:SCTY) is an innovative, full service solar installation company that has had more digital ink spilled about it than most any other alternative energy company (including my own analysis). SolarCity takes the residential and commercial customers through design, installation and financing of solar systems. In addition to solar installs, SolarCity does home energy evaluation, energy efficiency upgrades, electric vehicle charging and energy storage. Growth has been outstanding for this company, and though it is a speculative investment, I have no doubt it will become profitable in the new two to three years.
Trina Solar Limited (ADR) (NYSE:TSL) is a China-based integrated photovoltaic module manufacturer. It has a large production capacity and a global distribution network covering Europe, North America and Asia. Its sales have picked up since 2012, and Trina has posted positive earnings in its three most recent quarters. Trina Solar recently closed on $150 million of convertible senior notes and over $90 million of American Depositary shares. I see the fact that the company is looking to western capital and away from Chinese government loans as a positive sign.
Increase demand side efficiency
Efficiency is one of our favorite investment themes. This is low hanging fruit - it benefits end homes and businesses by saving money, it benefits utilities by reducing the need to build more capacity, and it benefits the environment. The three companies below are well positioned leaders in this category
EnerNOC, Inc (NASDAQ:ENOC) helps commercial and industrial users reduce electricity use during peak demand, which can significantly reduce a company's energy consumption. EnerNOC's services include demand response, energy efficiency, energy procurement, emissions tracking and trading support. This Boston-based company recently won an auction for over $185 million in capacity payment in the PJM Interconnection capacity market for 2017/2018, which should bode well for its bottom line. ENOC is up 41% for the year, and over 220% from its lows in 2012.
Tetra Tech, Inc (NASDAQ:TTEK) is a diversified company that provides environmental services, energy efficiency consulting, carbon management and other services. This large California-based company works on projects world-wide and brings in almost $2 billion in revenues annually. TTEK has been a component of the Paradigm Portfolio since its inception. We consider Tetra Tech to be trading below fair value at current levels in the mid-$20 range.
Ameresco Inc (NYSE:AMRC) is a small Massachusetts-based company that provides a variety of measures to improve the efficiency of major building systems. These include heating, ventilation, air conditioning and lighting. Ameresco also installs small-scale renewable energy plants. AMRC had a solid vote of confidence by management, as CEO George P. Sakellaris recently purchased 85,000 shares in a month worth over half a million dollars. This positive insider trading activity brings his direct ownership to over $18 million.
Substituting high carbon generating plants with lower carbon generation
The case is now clearer than ever that coal will be phased out in favor of natural gas. Though substituting one fossil fuel for another may not be the ultimate solution to solving our climate problems, it is undoubtedly a critical short-term step to addressing base-load needs while reducing carbon emissions. Three companies have been selected which stand to benefit from this trend.
NextEra Energy, Inc (NYSE:NEE) is a large, profitable Florida-based power company that generates more than half its power from natural gas. NextEra is in the process of completing a major development cycle where it is modernizing older, less-efficient fossil generation facilities and building more efficient, cleaner natural gas-fueled plants. For example, its Port Everglades plant was demolished in 2013 to be replaced with plant that should have half the emissions. Also, NextEra is developing a new natural gas pipeline to Florida targeted for completion in 2017. In addition, NEE generates 8,000 megawatts of electricity from renewable resources.
As a utility NextEra offers steady stock price growth with an attractive yield. With over 4.5 million customer accounts, NextEra Energy is well over the industry average in assets and earnings growth. We consider NEE to be above fair value at current levels, but it remains a good long-term investment.
Sempra Energy (NYSE:SRE) Sempra Energy is a holding company that owns two southern California utilities, as well as energy assets in other parts of the United States, Mexico, and South America. This San Diego based company has over 17,000 employees and provides products and services to more than 31 million consumers worldwide. Sempra has a strong portfolio of natural gas pipelines, storage and generation facilities. As with NextEra, Sempra also has an array of solar and wind facilities that it manages. Sempra has had steady sales and strong earnings, but has a relatively high PE. It is deemed to be just above fair value, so is a good buy in the $85-$90 price range.
GreenHunter Energy, Inc (NYSEMKT:GRH) provides water management solutions for shale gas focusing on serving companies in the Marcellus, Eagle Ford and Bakken shale plays. Its services are essential to address environmental issues concerning hydraulic fracturing, or fracking, utilized in shale gas production. Though this microcap penny stock had a sketchy beginning, it has enjoyed a recent jump in its stock price due to increasing revenues leading to decreasing losses. Its earnings are still negative, though, so we consider this micro-cap to be a speculative investment.
Improved operations at power plants Though many people may not consider it a renewable energy company, General Electric (NYSE:GE) is a key player in many aspects of the energy industry. As a leader in power plant design and turbine development, GE will surely benefit from planned power plant retrofits and reconfigurations.
Sales and earnings for GE have been flat since the beginning of the decade, but it has had climbing dividends every year since 2010. Though we see GE as overvalued at current levels, this company can be a stable large-cap component of a balance portfolio. We estimate fair value to be in the low 20's, so accumulate on the dips.
The Obama Administration made a bold move to address climate change by issuing these carbon rules through the EPA. While the proposed regulations are still in a draft phase, there is no doubt that the changes already occurring in the utility business will continue. Savvy investors well positioned in the proper companies and industries will be sure to benefit from this continued energy transformation.
Disclosure: The author is long NEE, TSL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.