Can These Companies Solve the Renewable Energy Problem?

Solar and wind energy are making great strides. Every day we hear about a new plant going up or a solar company breaking records. In order to understand where the energy markets are heading, it is dreadfully important to not overemphasize these recent trends and fall prey to the availability heuristic. There are a number of ways to invest in clean energy, but only a number of these companies have a strong foundation. 

US Wind Energy Production Chart

US Wind Energy Production data by YCharts

The Challenges
Wind turbines and solar panels eat up large amounts of space and are commonly placed far away from the end user. One way to deal with this issue is to distribute the devices closer to the end consumer, decreasing the need for costly transmission systems.

Another problem with the wide scale adoption of renewables is the lack of an effective storage solution. Japan is experimenting with a grid scale battery, but it is far from mass commercialization. 

To help give renewables a leg up, governments throughout the world are giving various subsidies. These subsidies have the long term goal of supporting R&D budgets until solar and wind prices fall enough that they can compete on equal footing with other fuels. 

The Solutions
SunPower  (NASDAQ: SPWR  ) has had a great amount of success placing solar panels closer to the end user in the U.S. In the second quarter of 2013 it signed over 2,200 leases and around $100 million in commercial sales. With a little help from Japan's thriving rooftop market and its U.S. operations, the company was able to decrease inventory by $46 million and increase cash and investments to $720 million from Q1 2013 to Q2 2013.

Solar installers like SolarCity  (NASDAQ: SCTY  ) are highly dependent on fickle government subsidies. A decrease in the feed in tariff will decrease the amount of money the average solar panel makes, thus decreasing demand for new systems.

SolarCity is helping to make the economy greener, but it is difficult to get excited about the company as an investor. The firm has no real barrier to entry. Finding an electrician to install a solar system is not exactly a high value added service. Net metering allows consumers to sell extra power produced by their solar panels back into the grid, and these policies are under heavy attack.

MLP Parity Act would allow tax-efficient Master Limited Partnerships to invest in renewable energy, creating an influx of cheap capital. MLPs pass earnings directly on to investors, allowing yield seeking investors to avoid the double taxation. 

There is strong support to pass the MLP Parity act and limit or drop traditional renewable tariffs, as it would allow fossil fuels and renewable energy to compete on more equal footing. If it does pass, there is the possibility that SolarCity would reorganize itself as an MLP to lower its capital costs. The scaling back of traditional tariffs would hurt SolarCity's growth. On the other hand, lowering its cost of capital would allow it to be more competitive and return more cash to investors in the form of distributions; thus making the company an interesting income investment. 

Denmark shows that it is possible to generate 40% of a nation's power from renewable energy sources. A study of the Danish grid found that the biggest variation in power comes from storms causing wind turbines to shut down. By integrating America's regional grids, a storm front could cause a reduction in renewable output in one part of the nation, but other grids with clear blue skies would help balance total power production.  Trading power does not solve the intermittent issue. It helps move excess power but does not solve it. To make America's grid more flexible, American Superconductor (NASDAQ: AMSC  ) is helping to construct the Tres Amigas facility. It will trade large amounts of power between Texas, the Southwest Power Pool and the Western Electricity Coordinating Council.

Superconductors are very difficult to build, and American Superconductor has a strong history fabricating high-temperature superconductors. The company is also involved with wind turbine manufacturing, but it has a small customer base and a recent fight with the Chinese wind giant Sinovel has crippled the company.  For the foreseeable future American Superconductor will have to resort to share dilution to stay afloat.  

Conclusion

The renewable market is growing by leaps and bounds. SunPower is a strong investment in the growing solar market with highly efficient panels. American Superconductor's technology plays a critical role in making the grid better suited to transport energy, but for now the company unprofitable and best to watch from the sidelines. SolarCity is a solar installer with looming political instabilities, as entrenched utilities start to fight back against renewable subsidies. Given the ambiguity surrounding renewable tariffs in the U.S. SolarCity might not be the company for the long term. 

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Read/Post Comments (9) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 27, 2013, at 11:49 AM, delm31 wrote:

    Who cares about Denmark? We have so many options: fossil fuels (which powered our Industrial Revolution and prosperous society), nuclear, hydro-electric, biomass, hydrogen fuel cells, wind, solar, fusion power, and who knows what else. All I ever hear about is wind and solar. It's become a fetish with to many. Time to reopen the American Mind to quote the author Allen Bloom.

  • Report this Comment On August 27, 2013, at 11:57 AM, delm31 wrote:

    I think it's time to treat fossil fuels with respect They have powered The Industrial Revolution, modern transportation, electrification, and built our Middle Class. We would a poor, illiterate, agrarian, rural, half-starved, backward, Third World nation if not for the widespread use of fossil fuels, modern transport, urbanization, modern mechanized agriculture, and the Middle Class. Pound for pound fossil fuels have the energy our economy and society needs. Global warming? Climate change? Polar bears? Eskimos in igloos? Who the H cares? Don't sacrifice our prosperous way of life that took generations of hard work and sacrifice to build to satisfy a pagan environmentalist religion.

  • Report this Comment On August 27, 2013, at 12:00 PM, delm31 wrote:

    Denmark is a bitsy, insignificant, homogenous, tiny nation. Their situation and geography is very different from ours. Tell Europe to go back to the Stone Age, live in caves, scratch themselves and walk like ape men, carry clubs and wear bearskins, and grunt.

  • Report this Comment On August 27, 2013, at 12:01 PM, delm31 wrote:

    Keep it up, and we will be a Stone Age, Third World nation.

  • Report this Comment On August 27, 2013, at 12:04 PM, cwon14 wrote:

    It's all a sham of government subside and political hype. Carbon has gained market share in the past 20 years in terms of actual production of energy.

  • Report this Comment On August 27, 2013, at 12:45 PM, kitdes wrote:

    Our wind generated turbines are working only a small percentage of the time, they are highly subsidized, and require lots of maintenance. In winter we are in the dark from about 5:00 PM to 7:00 AM from October to March. So, where do we get our renewable energy?

  • Report this Comment On August 27, 2013, at 1:40 PM, ronwiserinvestor wrote:

    As consumers begin to realize the value of the financial incentives that they are forfeiting (especially the 30% federal tax credit) to the leasing and PPA companies, and the leasing and PPA company's much higher pricing is exposed. and the availability of $0 down solar loans, offering no fees, no collateral requirements and interest rates as low as 4.99%, solar leasing and PPA companies will quickly fade from the picture. $0 down solar loans and full system ownership at today's much lower pricing is the new norm for the solar industry.

  • Report this Comment On August 28, 2013, at 6:20 PM, dheatguy wrote:

    Joshua,

    You obviously do not understand the business of Solar City... Yes, you can go get an electrician to install solar electrical system, but your'e also going to need someone to design, purchase, and install the solar panels. And, you're going to have to figure out how to pay for the system -- with or without the government incentives...

    Solar City is a fully integrated, design, procurement, finance, install and support operation. A far cry from 'hire an electrician'...

    And BTW, your system for Solar City will cost you zero dollars out of pocket through a power purchase agreement and you get to save on your electric bills... Hmmm.

    Yes, anyone can make a hamburger, but McDonalds figured out how to do it a lot better and cheaper than the average burger flipper...

    All the very best,

    Don

  • Report this Comment On August 30, 2013, at 4:41 PM, damilkman wrote:

    Solar City will not work for me because they are no in my state. As an investment I would not touch Solar City with a ten foot pole. A single breakthrough kills them because now they are stuck with the obsolete CAPEX not the end customer.

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