Analyst Interviews: Alternative Energy Stock Review

OUTLOOK

The Alternative Energy industry is going through a recovery after emerging from the global recession and the cascading fall in global crude oil prices. Last year, quite a few alternative energy companies were in the trough. And although these companies have recovered from their lows, their valuations are still significantly lower than their 52-week highs.

The growth of alternative energy companies is closely tied to the fortunes of the economy. In its latest release, the Energy Information Administration (EIA) predicted that total U.S. electricity consumption would increase by 1.9% in fiscal 2010. The upside is expected to come from higher residential and commercial consumption.

Also the gradual economic recovery will lead to higher industrial consumption compared to the last two fiscal years. Industrial consumption of electricity is expected to grow by 0.9% in 2010 and 2% in 2011. In 2010 U.S. average electricity generation is also expected to grow to about 11 billion kWh per day, 0.22 billion kWh more than the average electricity generation in 2009.

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 the U.S. in terms of cumulative installed solar electric power capacity as of year-end 2008. However in fiscal 2008, Spain (2.46GW in 2008) beat Germany (1.86GW) in terms of new installations. World solar PV installations reached a record high of 5.95GW in 2008, representing a growth of 110% over 2007.

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 15GW, compared to only 9GW in 2007.

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 as it can be sourced in urban and rural environments.

Fortune 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. As per EIA, oil prices hit the bottom in the middle of fiscal 2009. Subsequent recovery is expected to continue in 2010. Also, the International Energy Agency (IEA), the Paris-based energy-monitoring body of 28 industrialized countries, predicted that oil demand will average 86.3 million barrels a day in 2010, or 1.4 million barrels a day more than in 2009.

Subsidy Programs: Governments most notably that of China have increased their financial support for solar projects. China is aiming at increasing its installed solar power capacity to 2GW by 2011 from 140MW capacity at the end of fiscal 2008. To fulfill this objective, the Chinese government offers 50% of the cost of investment of solar power projects. For solar projects in remote areas, the government subsidizes 70% of the project cost. Companies under our coverage benefiting from this move include JA Solar Holdings Co Ltd. (JASO: 5.37 -0.11 -2.01%) and Trina Solar Ltd. (TSL: 25.83 -0.22 -0.84%).

Under the American Reinvestment and Recovery Act (ARRA) passed in February 2009, the U.S. Treasury Department has implemented a program to issue cash grants in lieu of investment tax credit for renewable energy projects. Recent focus on renewable sources will greatly benefit green crusader companies like Rentech Inc. (RTK: 1.10 -0.01 -0.90%). Also, the Department of Energy (DOE) in the U.S. has implemented a loan guarantee program to help developers obtain financing for solar power projects.

WEAKNESSES

Recent Start-ups: A large number of alternative energy companies are recent start-ups with limited resources. As such, quite a few depend on their customers’ ability to finance solar projects.

Global Recession: The global economic crisis has affected alternative energy sales and earnings growth. 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 hinder project financing, working capital requirements and new research and development.

German Roll-back: Germany, one of the prime solar markets with a lucrative subsidy program, is moving aggressively to roll-back a portion of its grants. The proposed roll-back is set to be implemented around April 2010. This would result in prices of electricity generated with photovoltaic panels to cascade to half their current prices by 2011. This will affect companies such as First Solar Inc. (FSLR: 124.22 +2.86 +2.36%) and SunPower Corporation (SPWRA: 20.15 -0.12 -0.59%), who generate a substantial portion of their sales from Germany.