Renewables Overtake Nuclear: How to Play This Historic Switch (TAN)
I’m not making this stuff up. Who would have thought? But take a look at the chart (below left) from the Energy Information Administration (EIA). In March of 2011, energy produced from renewable sources pushed past both current and historical levels from that generated by nuclear.
The long-term trend is clear. But what caused the switch? Take a look at the chart on the right. You can clearly see the two main drivers are the growth of wind and bio-fuels.
Interestingly, solar remained relatively constant since 2003. As panel prices continue dropping, there will be a tipping point for the mass adoption of solar-generated power.
That price point is widely viewed by the industry itself as an installed price of $1 per watt. That means panel prices would have to be roughly half that figure.
As renewables continue to increase with no additional capacity coming any time soon from the nuclear sector, renewables will continue to outpace nuclear.
What Caused the Short-Term Switch?
What really led to the current renewable-nuclear flip a few months ago were two coinciding events. The first takes us out West.
Many western states had a winter of record-breaking snowfall. This led to an unprecedented snowpack level, which filled reservoirs to near-maximum capacities. As a result, hydroelectric plants are running full tilt and will continue to for longer than normal.
Hydropower makes up a significant proportion (31 percent in 2010) of renewable energy. It’s highly variable, however, as plant operators depend on high river levels in order to run generators at full capacity.
The second event that contributed to this switch is the seasonal shutdown of nuclear plants for refueling and general maintenance. This typically happens twice every year, once in the spring and once in the fall.
What happens if we take out all the non-electrical uses for renewable energy (bio-fuels like ethanol and biodiesel for transportation)? Let’s just compare electricity generated from both nuclear and renewables. We see a different picture, as seen in the following graph from the EIA.
Renewables remain slightly below that of nuclear, although the long-term trend is still clear: Renewables are destined to pass nuclear in electricity generation in the next few years.
The switch will become even more dramatic as some of the oldest nuclear plants are retired from service, having reached the end of their permitted lives.
What’s the Best Way to Play the Switch?
While I like wind, it’s capital intensive and much of the planned capacity additions will need expensive transmission upgrades to hook wind farms into the nation’s power grids.
I think the current bio-fuel space is more boondoggle than anything else. At least until a viable replacement for corn as an input fuel is developed and grown on a commercial scale.
A lot of the increase in solar, on the other hand (once the tipping point is reached with panel prices), will be installed on the distribution side of the grid. Transmission issues aren’t part of the solar picture.
This will also boost the need for energy grid storage.
The best way to play the switch is with one or two good solar stocks. My two favorites are First Solar, Inc. (Nasdaq:FSLR) and SunPower Corporation (Nasdaq:SPWRA).
With annual sales in the $2 billion range, First Solar sells both panels and entire solar voltaic systems. Its advanced thin-film panels are starting to replace conventional silicon panels. The company has a growing pipeline of utility-scale solar projects, primarily in western states.
SunPower is similar in size to First Solar, and also makes both modules and systems. Last year, it purchased SunRay Renewable Energy. This gives SunPower a project pipeline of over 1,200 megawatts of solar projects around the world.
Both companies have been badly beaten during the current market rout, each down around 20 percent as I write this. First Solar trades with a P/E just above 16, and SunPower’s is just above 10. These are extremely cheap from a valuation standpoint.
I would consider entering either one once markets stabilize. That’s when energy stocks – and everything else – will start trading on fundamentals again. Hope springs eternal…