This year has been a tough year for the Wind and Solar industries both in terms of the policy environment and the price action. In Solar, the Guggenheim Solar ETF (TAN) closed on Friday at 7.57, off its recent 6.85 lows but still down 33% from its early January 2010 high of 11.30. Meanwhile, the First Trust Global Wind Energy ETF (FAN) closed at 10.07, up from its end of November low of 9.47 but still down 41% from its January high close of 16.02.
Both markets have been looking at the changing environment for government support for renewables with clear concern and have concluded that the recent rapid growth in the years up to 2009 may not be repeated. This concern has been reflected in declining company valuations.
The main themes have been clear:
First, on a global scale, policy-making has been a fiasco. Copenhagen was close to a disaster and now Cancun threatens to leave the UN process close to irrelevant. It is difficult to argue that here is any clear global leadership on climate change in place.
Secondly, particularly in Europe, the need for fiscal tightening has taken its toll on the policy and subsidy environment. The message is clear. Initially the global recession actually aided the impetus towards investment in renewable energy as governments sought to offer subsidies and incentives as part of a campaign to support growth and jobs their respective economies. As fiscal deficits widened dramatically, however, the policy agenda was soon forced to focus on cutting government spending. The debt crisis in Europe obviously forced the march.
Third, in the US, investment in renewables this year has been held back by the combined effect of two factors. The first relates to concern over whether or not the ‘1603’ Treasury grant program for renewables would be extended from the end of this year. And the second relates to the difficulty renewables face in trying to compete against low-cost electricity produced with very cheap natural gas. The result has been particularly difficult for the Wind Turbine industry. New wind turbine generation capacity grew heavily in 2008 and 2009, aided by the Treasury grant program – with 10GW of new capacity installed in 2009 alone, making the US the largest single market for Wind in terms of installed capacity. Total installed capacity in the US stood at 34.86 GW at the end of 2009 – representing 22.3% of the global market. The first half of 2010, however, saw a 70% decline in new installations in the States.
The affect that all of this has had on sentiment and valuations is clear.
However, there is now a reasonable argument that the worst is priced in and that the market could now start to see that the negativity has been overdone. Three points offer some room for optimism that we have seen the bottom –
Most of the negative news in terms of the European subsidy environment has now been announced. Spain for example, which had heavily supported Solar in particular, started cutting back its subsidies at the end of 2009 and also put a volume cap on subsidized new installations at 500 MW. Finally, in the last ten days, the government announced a new austerity plan which also involved cuts to wind turbine subsidies. Though disappointing of course, that announcement could perhaps be the final thrust of the bad news – with so much negative sentiment now being priced in.
Secondly, the Chinese market remains a solid growth factor and leaves plenty of room for joint ventures, as GE has shown.
Most importantly, however, sentiment in the US could be about to turn. The potential loss of the Treasury grant program has been viewed as representing something close to an impending disaster. However, it now looks as though this negative sentiment may have been misplaced.
At time of writing, the precise outcome remains unclear. However, the current Tax negotiations in Washington could well provide a boon for renewables. President Obama has agreed a deal on extending the Bush-era personal tax cuts for a couple of years. In return he has secured a 13 month extension for unemployment benefits, a 2% payroll tax holiday for workers and some other tax benefits for middle-income Americans.
However, the Democrats in the House are yet to agree all this. And the indications are that an inclusion of an extension to the Treasury grant program for renewables may well be part of the final deal. In order to bring the House Democrats on board Obama may be in a position to persuade the Republicans to agree to some further stimulus. And it would make sense that Obama would try to achieve something in an area of policy where singularly nothing has been achieved – climate change. An extension of the grant program would at least offer something.
This suggests that Wind and Solar stocks have been beaten down enough and are now a buy. Valuations now encompass the effects of the bad news – and there is now some chance of give-back should Obama manage to extend the Treasury grant program. Moreover, if this does transpire, I believe it will be an indication that next year Obama may be able to negotiate some similarly supportive concessions – most notably a Renewable Energy Standard. This would require utilities to invest in renewable generation in order to meet a future target of some 15% of generation from renewables. A deal allowing this alongside greater use of Nuclear is entirely possible.
The best way to play these prospects is not straight-forward in the current circumstances. Clearly, it would be best to focus more on exposure to the US and less on Europe. Additional exposure to China would be helpful. These factors suggest that the use of the ETFs currently available may not be the best approach – they all have a broad, global focus. So what are the alternatives?
First, in terms of the Wind turbine market, although the US is the largest single market in terms of installed capacity, it has no clear pure play turbine manufacturer. The world’s top ten manufacturers are given below.
Top 10 wind turbine manufacturers by market share in 2009:
Vestas (Denmark) (OTCPK:VWDRY) 12.5%
GE Wind Energy (United States) (GE) 12.4%
Sinovel (China) 9.2%
Enercon (Germany) 8.5%
Goldwind (China) 7.2%
Gamesa (Spain) (OTCPK:GCTAF) 6.7%
Dongfang (China) 6.5%
Suzlon (India) 6.4%
Siemens Wind Power (Denmark / Germany) (SI) 5.9%
REpower (Germany) 3.4%
The only US player is GE and is not a pure play. In terms of who is most likely to benefit from a better environment in the US Wind market, the following is probably helpful – the DoE has a Memo of Understanding on collaboration with the top players – GE Energy and Siemens Power Generation alongside the foreign pure plays Vestas Wind Systems, Clipper Windpower, Suzlan Energy and Gamesa. Of these, the UK turbine manufacturer Clipper Windpower is almost solely exposed to the US and Mexican markets.
Meanwhile, the Chinese player Xinjiang Goldwind Science & Technology Co looks interesting. Early this year they installed the first Chinese wind turbine on American soil, via their subsidiary Goldwind USA. However, for those who like to trade in their own time zones, there is currently no US-traded ADR available for Goldwind and the shares are traded on the Shenzhen or Hong Kong exchanges.
In Solar, Chinese companies are the clear leaders in terms of costs in the traditional PhotoVoltaic market and many of these stocks have come off as we have approached year end. It seems a reasonable approach to combine some exposure to these players with US player First Solar (FSLR), which is the leader in the newer thin film technology. This is both cheaper than traditional solar and offer designers additional flexibility. It will quite possibly be the major beneficiary from renewed growth in the US solar market.
As we await the outcome of the negotiations ahead, I am happy holding First Solar (FSLR) and Chinese player Trina Solar (TSL), alongside Vestas (OTCPK:VWDRY) for exposure to Wind. I am also looking at taking a position in Goldwind (2208.HK).