A Huge Carve-Out for Solar Energy

 | Nov 19, 2013 | 4:00 PM EST
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The news for oil is great for North America: Oil production is rising as consumption falls. Taken together, America is gaining ground toward energy security and independence.

In other good news, renewable energy is positioned to grow exponentially. According to the Energy Department, 22 states have implemented aggressive plans that require incremental investments in renewable-energy assets, having committed to increase their year-over-year mandate for more renewable energy.

Each state defines "renewable energy" differently. Most require a combination of wind power, solar, biomass, hydroelectric, geothermal, landfill gas, fuel cells and waste-to-energy. Several states have carved out solar power to provide special incentives for investors.

But, no matter how states package their programs, the combined impact will be huge. Under current regulations, year-over-year requirements for additional renewable-energy sources will accelerate -- and it appears other states may join.   

Ten out of the 22 states have a specific requirement for solar-powered energy. For the rest of them, the sources may be solar, wind or any other approved source of renewable energy.

Just for Illinois, Ohio, North Carolina, Maryland, Delaware, Pennsylvania, New Jersey, Massachusetts and New Hampshire, the overall additional capacity is more than 12,000 megawatts. This equates to approximately one new nuclear power plant a year. To see the impact, look at the graph.

Source: Dept. of Energy/Williams

The carve-out for East Coast solar is huge. The 10 East Coast states alone require a minimum of 14 million new solar panels. This is not a guess. This is not hope. It is law.

Keep in mind: These figures do not include California, New York or the 10 other states. Altogether, the national requirements are approximately 2x greater than what is illustrated in the above graph.

The opportunities are clear for solar companies like SunPower (SPWR) and First Solar (FSLR). Unless new competition appears, these firms will continue to see growing revenue. They'll have built-in demand for the next decade.

The demand for more wind power is also strong and growing. In fact, there is even more demand for wind than there is for solar. Allow me to explain.

While most states have a specific carve-out for solar energy, the balance can be sourced from any technology, including more solar. Most sources on states' lists cannot be deployed in sufficient amounts to meet states' regulations. Only wind and solar have the capability and capacity to scale up. Accordingly, most of the 12,000 megawatts of new power capacity for the 10 states will come mostly from wind or solar.

Companies such as Broadwind Energy (BWEN), Siemens (SI), General Electric (GE), Denmark-based Vestas and India-based Suzlon should see extended demand for their wind turbines. However, not all states can accommodate large deployments of wind turbines in the period required by regulations, so it appears solar will likely make up any shortfall.

This trend has not been lost on plain old utility companies, and companies like Southern (SO) and Pinnacle West Capital (PNW) appear to be fighting the trend. Together with the Edison Electric Institute and the Nuclear Energy Institute, these utilities seem threatened and resist renewable energy. Southern is requesting punishing tariffs on owners of solar power panels. Pinnacle West has done the same. EEI has been running advertisements about the fairness of solar power.

Forward-thinking utilities such as NextEra Energy (NEE), Duke Energy (DUK), Consolidated Edison (ED) and Northeast Utilities (NU) see renewable energy mandates not as a threat, but as an opportunity. These insightful companies know their native territories are protected by the state, as they have a cost-plus agreement for revenue and they cannot lose.

On the other hand, the losers include market-facing independent power producers like Exelon (EXC), NRG Energy (NRG) and Calpine (CPN), which could see more capacity entering their power markets. In addition, renewable energy could shave some peaks from some of their high-priced markets. Perhaps this is why they too are investing in renewable-energy sources.

While the numbers seem huge, they represent the absolute minimum. In reality the actual figures are larger and, In all likelihood, more states will join in.

Renewable energy is an easy option for most states, because it resolves several challenges simultaneously. Renewables reduce pollution, lower wholesale power prices, motivate investments in their states and increase the tax base. In some cases, renewable energy even removes piles of waste hazards.

Of course, renewable energy cannot meet base load demand without help from natural gas and nuclear power. However, from the point of view of investors of renewable energy investors, balancing the grid is not relevant. That is the job of the power market managers.

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