The S&P Global Clean Energy Index (INDEXSP:SPGTCLED) includes 30 companies involved in energy production and technology. Solar is one area of the clean energy market that is of interest to those wishing to diversify away from fossil fuels. President Obama has been a keen advocate of wind and solar power with the introduction of new policies designed to make solar affordable for the average American. Whether Trump will continue with such an agenda, however, is up for debate given that based on some of his comments he appears to be a climate change skeptic.
That said, and while still early days, we believe the key 30% Investment Tax Credit for solar energy that was extended until 2021 under the Obama Administration is likely to remain in place. The Clean Power Plant rule, however, that sets emission standards for the states and increases demand for clean energy, is unlikely to be upheld in our view.
Today, renewables only account for a tiny proportion of U.S. energy consumption, and supplied just 0.6% of total electricity generation in 2015, according to U.S. Energy Information Administration estimates. With advancements in technology, energy storage and lower initial capital expenditure costs for solar energy combined with growing concerns about climate change, pollution and the impact to the environment that ‘dirty’ coal plants or disposal of nuclear bi-product create, Neuberger Berman undertook a ‘deep dive’ into the solar industry.
During August 2015, the Neuberger Berman team hosted a series of ‘deep dive’ meetings to:
- Debate the fundamentals of solar photovoltaics (“PV”)
- Examine the implications for the broader energy markets
- Draw on the knowledge of “expert” guest speakers including: Tony Seba (Disruption expert, Lecturer at Stanford University), Jeff Osborne (Solar PV expert and analyst with Cowen and Company), Michael Parker and Hugh Wynne (storage expert and utility analyst, respectively, from AllianceBernstein)
- Leverage diverse and specialist opinions from portfolio managers and analysts focused on energy and autos (given the potential impact of electricity consumption driven by the electrification of autos)
- Identify investment opportunities and views
The results from the ‘deep dive’ series were reassuring from both an environmental and an investment perspective, and presented a number of select investment opportunities over the long term:
- Solar PV adoption is likely to continue at high growth rates, driven by expected cost declines in excess of 40% by 2020 and by financial innovation such as leasing models which effectively remove the need for high investments from households.
- Energy storage, the “holy grail” of the energy industry, could become a game changer relatively soon, as costs are expected to decline considerably over the next few years. This would in turn boost solar PV adoption, especially in warmer climates such as Brazil, Australia, Spain, and Japan.
- Distributed solar PV generation (rooftop) is not expected to displace the grid, but to grow “on the grid” in most developed markets.
- Solar off-grid is most likely to occur in developing countries with good solar resource and less developed infrastructure (e.g., India).
- The jury is still out on whether solar rooftop or utility-scale solar will prevail. The outcome partly depends on how the regulation (e.g.. “net metering”) changes and what strategies utility companies adopt to “deal” with solar. This may be different by region / country.
- Challenges ahead in the U.S. market as of December 2016: any change from the new Administration to the existing 30% Investment Tax Credit (not our base case), and changes to regulations at the Federal or State level especially with respect to “net metering” (i.e., selling electricity back to the utility provider).
Global Equity Research Department views:
- High conviction about the elevated growth rate for solar PV installations globally, but the industry is still young and undergoing lots of changes. As a result, stocks are often volatile and sentiment-driven.
- Favors avoiding companies that are likely to be vulnerable to interest rate rises and changes in regulation.
- Caution warranted on those companies that have set overly aggressive growth targets.
- Preference for stocks that have both accelerated growth combined with a cost advantage driven by technology, allowing for margin expansion potential.