For more than a century, fossil fuels have dominated the energy landscape. Whether you're using energy in your car or from an outlet at home, it's likely coming from fossil fuels in one way or another.
But alternative forms of energy are improving their competitive position, and now wind and solar are competing in electricity markets on cost, not subsidies, and electric vehicles are growing as well. Here are three companies to watch to see where the industry is going:
No company engenders as much debate as Tesla Motors (NASDAQ:TSLA). The company has come to define what an electric car company should be and has made audacious expansion plans into battery storage and low-cost electric vehicles. While bulls will point to Elon Musk's history of innovation, bears will point to the company's lofty valuation and historically poor fundamentals for battery manufacturers and auto startups.
It's that debate that makes this a company worth watching in alternative energy. Either Musk will be successful in creating an electric vehicle revolution and/or an energy storage industry out of thin air or he won't.
There's no doubt that the odds are long for Tesla Motors -- much longer than many people think -- but these are two markets that show a bright future and if they develop as Musk thinks, he could be successful in changing the world.
The latest investment craze in alternative energy is the yieldco, a company structure similar to a master limited partnership that's designed to pay out cash flows to shareholders. TerraForm Power (NASDAQ:TERP) is the largest yieldco around, and it's aggressively buying wind and solar assets in an effort to grow its payouts.
What's worth watching for investors is the price TerraForm Power is paying for projects and how the market is viewing its acquisitions and debt. The company recently bought $2 billion in wind assets that will generate $141 million in unlevered cash available for distribution. That's a yield of just 7.1%, indicating that renewable energy assets aren't generating high returns for shareholders but are fetching high prices for sellers.
If the market continues to allow yieldcos to buy assets for low costs of capital, it will allow alternative energy project builders to win more bids based on cost, which should grow the industry as a whole.
In the residential solar space, there's not a bigger name than SolarCity (NASDAQ:SCTY.DL). The company is the biggest residential solar installer in the country, and it's expanding into commercial as well. But its existing business isn't what makes it a company to watch.
The reason investors should keep an eye on SolarCity is its integration with energy storage and smarter energy consumption in homes and businesses. In the future, it won't be enough just to install solar on your rooftop; customers will have to control how and when they consume that energy and if/when they send energy back to utilities. SolarCity will play a key role in this suite of energy solutions.
Alternative energy is the future
The simple fact is that fossil fuels are losing their competitive edge and alternative energy -- including electric vehicles, solar energy, and wind power -- are increasingly important around the world. Watching these three stocks will tell you a lot about where the industry is heading and who is going to win in the long run.