By Harris
Roen
Alternative energy became a serious market player after the turn
of the millennium. Since that time, solar, wind, smart grid and
other alternative energy stocks have experienced both strong up
and down trends. The forces at work driving these markets are
complex, counterintuitive, and sometimes mysterious. This article
looks at what has been driving the price of alternative energy
markets, and as a result, alternative energy company stocks.
Looking ahead, we will also consider what should affect the
direction of alternative energy stock prices.
Past trends in Alternative Energy Stocks
The Wilder Hill New Global Index (NEX) is a fitting proxy to
track overall alternative energy markets. This index contains
companies that “focus on generation and use of cleaner
energy, conservation and efficiency, and advancing renewable
energy generally.” The chart at right shows some of the
clear trends the alternative energy sector has had in the recent
past.
The first down channel on the chart coincides with a general
stock market slump. This drop started during the eight month
recession which began in March 2001.
By 2003, alternative energy stocks started to turn around. This
marked the beginning of a fantastic five year run, as investors
started noticing wind power and photovoltaics were becoming
economically viable alternatives to traditional electric
generation. Annualized returns in this five year period averaged a
remarkable 38%!
The Great Recession then hit in December 2007, just as
alternative energy stocks appeared to be ascending into nosebleed
territory. As a result, prices came crashing down a painful 71% in
about a year. This outstripped the distressing declines the stock
market in general had at that time.
After this crash, no clear trend emerged until the end of 2012,
when the next up-channel started. At that time, investors felt
that alternative energy stock prices better reflected the economic
realities of the underlying business, and started buying again.
There is likely another reason, though, that it took five years
for alternative energy markets to recover. Psychologically, after
getting severely burned in the crash of 2008, it took a long time
for investors to feel comfortable dipping their toes back in the
water.
Following the uptrend that went from 2012 to the beginning of
2014, there was a noteworthy giveback. The NEX fell 21% in about
nine and a half months. Much of that giveback has been regained.
It remains to be seen if the current trend will continue to be
positive, or if we have entered into a sideways market.
Do Fossil Fuel Prices Drive Alternative Energy Markets?
Are fossil fuel prices the main driver of failure or success of
green energy companies? Though this seems like a reasonable
theory, the answer, in my analysis, is that it depends.
Alternative Energy versus Oil
Most of the larger alternative energy stocks
are multinational corporations that are part of an international
economy. As a comparison, crude oil prices are good indicator of
global fossil fuel values. Oil is a worldwide commodity that can
more easily flow to markets than coal or natural gas. The latter
two fossil fuels are subject to local supplies and disruptions, so
prices can range widely by region.
The chart at right shows crude oil (Cushing
OK spot) as compared to the NEX over two time periods. From
2001 to 2009, oil and alternative energy prices were very strongly
linked. For you math wonks, the two had a correlation coefficient
of 0.87, which is extremely significant. This makes sense, since a
rise in oil prices would mean that other energy alternatives
become more attractive. From 2010 to the present, the NEX had a
slight negative correlation to oil prices. The two markets did not
exactly go in opposite directions, but they had virtually no
corresponding movement.
A further reason for the 2002-2009 correlation
is that the economy was humming along very well at that time. This
helped fuel investor optimism that the market would continue to
grow for solar, wind, and the like. Similarly, oil became a strong
proxy for the stock market at that time, as speculators started
investing heavily in oil. They believed that as the global economy
expanded, there would be more demand for oil, thus raising the
prospects for oil prices. In essence, oil became a proxy for the
stock market.
The correlation between oil and the stock market remained strong
for a decade, but finally started to diverge at the end of 2013.
Since then there has been a strong negative correlation.
Oil prices are now being affected
more by supply and demand. Much of this has to do with the North
American oil and natural gas boom, which is injecting an abundance
of supply right where it is being used. This not only tips the
supply/demand equation by reducing
U.S. oil imports, but also mitigates the fear that oil
prices will skyrocket when a crisis crops up in the Middle East.
For this reason, I expect any rise in oil prices going forward
will positively affect alternative energy stocks.Alternative Energy versus Natural Gas
Often, the decline in alternative energy electricity generators
such as wind and solar has
been attributed a drop in natural gas prices. There is a
correlation between the two, though it is not as strong as one
might think.
The charts at right show natural gas (Henry Hub
LA spot) compared to the NEX. There is a clearly a
correlation between the two, though it is somewhat weak. It is
also interesting to note that at starting around 2015, there was a
divergence between natural gas prices and the NEX.
Prospects for Alternative Energy Stocks
Though no one can tell with certainty where alternative energy
stocks will head in the future, there are factors that can shed
some light on the long-term prospects for this sector. These
include increased manufacturing efficiencies, financial
innovations and energy policy.
Efficiencies
Much of what many alternative energy companies do is similar to
tech sector stocks. As product design and production engineering
keeps improving, manufacturing efficiency can greatly help a
company’s bottom line. Whether its photovoltaics,
LED lighting
or wind
arrays, the cost of production continues to drop for green
economy companies. This trend shows no signs of abating, which
bodes well for alternative energy investors.
Financial Innovations
The alternative energy sector has profited greatly from new and
innovative financial models. Companies like SolarCity
(SCTY)
and SunPower
(SPWR)
have benefited from various financial arrangements that allow
consumers to install solar with no upfront costs. These include
lease arrangements, power buyback agreements, and securitization
of tax benefits.
Another innovative financial model to benefit alternative energy
is the advent of renewable
YieldCo’s. These are companies that bundle solar and wind
generating assets into predictable cash flows that are paid out in
dividends. This innovation allows green investors can choose
from several companies with strong yield attributes.
Investors love dividends, especially in this low interest rate
environment. Any added yield an investor can put in their
portfolios is of great value. YieldCo’s should continue to attract
investors and lead to higher stock prices.
These types of financial innovation reflect a maturing of the
alternative energy sector, which I see as a good sign. As long as
these products have strong
fiscal underpinnings, the prospects for long-term growth
remain healthy.
Energy Policy
Because of the public good that results from reduced fossil fuel
use, alternative energy has benefitted from government policies
supporting the industry. Indeed, targets and incentives remain
strong internationally, particularly in Europe
and Asia.
These regions and others continue to be serious in their
commitment to solar, wind, energy storage, efficiency and other
alternative energy strategies. Domestically, there are two
important policy developments to watch, one a carrot and one a
stick.
The first important domestic incentive is the Business
Energy Investment Tax Credit (ITC). The ITC rebates up to
30% for solar, fuel cells, wind, combined heat and power (CHP) and
geothermal. This incentive is scheduled to sunset at the end of
2016. Whether it gets renewed or not will affect the rate at which
renewable projects go forward. This will cause concern for
investors.
The second policy development is the Clean
Power Plan. These proposed rules from the EPA target
pollution reduction from power plants, and will have a vast affect
on how energy gets produced and consumed in the country.
Essentially each state has an emission target, which will force it
to find ways to reduce carbon emissions. There has been some
strong pushback from many states, especially those heavily reliant
on coal for production electricity. The rule making process will
likely take a few
years and several court cases to resolve, but if the Clean
Power Plan remains mostly intact, it will accelerate renewable
energy projects in a big way.
Conclusion
By keeping an eye to the ground on fossil fuel prices, energy
policies and other factors, investors can go far to understanding
prospects for alternative energy stocks. There will undoubtedly be
up and down swings ahead, but there are enough positives
underlying the sector that we remain bullish for the long-term.
http://www.altenergystocks.com/archives/2015/04/alternative_energy_stock_returns_past_and _future.html
No comments:
Post a Comment