The Decline of the Would-Be Sun Gods
Once-promising solar companies are starting to flame out. Both SunEdison Inc. (NYSE: SUNE) and the Spain-based sponsor of Abenoga Yield (NYSE: ABY) appear headed for bankruptcy, though the latter has taken steps to shield itself from its parent’s fall-out.
This confirms our view that many of these renewable pure-plays are still too risky for income investors.
Instead, Utility Forecaster has long advised that the best way to play the clean-energy trend is by investing in diversified utilities that are well positioned to commercialize renewables within the safe confines of their regulated rate base.
At the same time, the latest clean-tech failures hardly mean that utilities can rest easy. Indeed, we remain concerned about the potential threat newer technologies pose to the century-old utility business model.
Interestingly, the aforementioned companies’ financial straits actually mark a major milestone: In contrast to prior failures in this space, management error is to blame rather than the technology itself.
Indeed, solar is becoming increasingly competitive with fossil fuels. That’s a great leap forward from the days of not knowing when renewables would ever be competitive with other energy technologies, even with subsidies.
Back in the early 2000s, when the clean-tech industry was still in its infancy, I covered the space as an equity research analyst at an investment bank. At the time, my biggest criticism of newly minted solar companies such as Evergreen Solar and AstroPower—firms that ultimately went bankrupt—was that they had attempted to commercialize too soon as their products couldn’t compete with fossil fuel-based technologies.
No matter how great management was, they simply couldn’t will the technology to perform any better than other energy technologies. Consequently, these firms were perennially handicapped from meeting investor expectations.
Today, the failures of SunEdison and Abengoa have been attributed to management teams who decided to expand too quickly, executed poorly on projects, and took on too much debt. In other words, these are the same mistakes many other businesses make.
Of course, it should also be noted that the recent crash in energy prices has weighed on the economics of renewables vs. fossil fuels.
But over the long term, solar will become more competitive with oil and gas, especially given the rise in subsidies for the former and the decline in government support for the latter.
Over the period from 2010 through 2013, for example, federal subsidies for renewables jumped 54%, to $13.2 billion, while subsidies for fossil fuels declined 15%, to $3.4 billion, according to the U.S. Energy Information Administration.
Thanks to advances in technology coupled with the increase in subsidies, the EIA forecasts that the cost of generating solar and wind power will fall to $114 per megawatt hour (MWh) and $74 per MWh, respectively, by 2020.
By then, coal-fired generation is projected to spike to $95 per MWh, though natural gas will still be one of the cheaper fuel sources, at $75 per MWh.
The Sun Will Come Out Tomorrow
Take a look at any forecast and the prospects for solar are bright. My colleague Robert Rapier, who helms our sister publication The Energy Strategist, recently detailed the opportunity.
“Solar power still has plenty of room to grow. Installed global capacity at the end of 2014 was almost 180 gigawatts (GW), but the 185.9 terawatt hours consumed in 2014 still amounted to only 0.79% of global electricity consumption, up from a 0.034% share in 2007,” Rapier noted.
Until recently, the U.S. outlook for solar growth had been clouded by the sunset of the solar investment tax credit (ITC), a 30% federal tax credit for the capital cost of solar systems on residential and commercial properties.
But as we wrote in the February issue’s “Utility Beat” section, Congress decided to extend the full subsidy through 2018. Thereafter, the credit falls incrementally to 10% in 2022, and then remains at that level for commercial installations, but is eliminated for residential ones. This has huge implications for the continued growth of the solar power industry.
The Solar Energy Industries Association projects that that extension of the ITC will lead to more than $125 billion in new private investment in solar projects. IHS called the extension “one of the most significant stimulus policies for the renewable sector in the past 10 years.”
And the trade group now forecasts that global solar capacity additions will increase from about 59 GW in 2015 to 70 GW to 73 GW by 2017.
These federal subsidies are scheduled to end just before the first set of state compliance deadlines for the EPA’s Clean Power Plan (CPP) in 2022. The CPP, which has been put on hold by the U.S. Supreme Court while lower courts adjudicate a legal challenge, would require a 32% cut in utility-sector carbon emissions by 2030.
Put all of that together, and we see a big opportunity for solar in the years ahead. So we’ll continue to watch for the rare solar company that combines good management with good technology.
For subscribers, we highlight the utility best positioned to take advantage of the growth in renewables in the U.S.
Our Super-Secret Stock Pick
In May, we’re holding our annual Wealth Summit–this year in Las Vegas. It’s a great way for us to meet you, our subscribers, one-on-one, and there are still spaces open if you’re interested.
Also this year, we’ll be making a special recommendation to those who attend the Summit, and to those who are part of our Wealth Society, whose members receive all the Investing Daily newsletters and other premium services.
It’s a fun exercise for us because there are no rules. We don’t have to pick a utility stock. In fact, our pick doesn’t even need to be a stock: It could be an alternative investment that isn’t traded on a public market.
Our publisher says we can’t reveal the pick in Utility Forecaster, or even to him before the Summit. But in the weeks ahead, we’ll let you in on some of the research we’re doing to identify this exclusive pick.