(NYSE: ORA) Renewable energy investing could still face headwinds, despite ITC renewal, Morningstar says

(NYSE: ORA) Renewable energy investing could still face headwinds, despite ITC renewal, Morningstar says

Although the extension of renewable energy tax credits helps stabilize the outlook for renewables investment in the United States, global renewable investment in coming years may not be as easy as the past decade, according to Morningstar analysts.

Although public-sector support will continue, some policy makers will be more disciplined with public money, the analysts wrote in a December report. While some governments have scaled back support because of inefficient build out, the analysts expect investment to continue in the United States, China, India, Mexico, South Africa and Turkey. At the same time, there is increasing competition in the space, as utilities and funds not previously involved in renewable investment are getting involved.

“With more players chasing development, and lower absolute subsidies in many cases, we think renewable energy investment returns may fall,” the analysts wrote.

Lower subsidies could prove a headwind for a sector whose growth has been reliant on financial subsidies and government mandates and whose leveled cost of electricity in most regions remains higher than that of traditional generation, the analysts wrote.

Despite financial subsidies facing increasing risks, there are some bright spots in the policy landscape.

This month, Congress extended tax credits for wind (Production Tax Credit) and solar (Investment Tax Credit) projects.

The renewal of the ITC had been a major uncertainty for the industry, Mark Barnett, utilities and power equity analyst with Morningstar and one of the authors of the report, told Entelligent News.

Now that it, and the PTC have been extended, the U.S. investment landscape on the tax treatment side looks more stable over the coming years, he said. But there are still headwinds from more capital chasing projects and many larger players like utilities and infrastructure funds getting involved in renewables, he said.

Another bright spot in the United States, the Clean Power Plan, if it survives legal challenges, could require “aggressive” renewable development in many states, the analysts wrote.

Renewable portfolio standards will be the biggest driver for renewable energy over the next 10 years, requiring renewable energy to grow to 300 gigawatt hours by 2020 and to 360 gigawatt hours, or 10 percent of the nation’s demand, by 2030, the analysts wrote.

In Europe, the European Union is considering changes to currently “toothless” and flawed carbon emission regulations to boost CO2 credits and provide incentives in carbon-free energy investment, the analysts wrote.

However, the analysts caution investors about Europe’s renewable energy development sector because of what they call “schizophrenic policy and cuts to incentives.

“Europe’s multinational utilities are desperate to rebrand themselves, increasing the risk of weak capital allocation chasing development elsewhere and putting pressure on returns for all players,” the analysts said.

Over the coming years, geothermal power developer Ormat Technologies (NYSE:ORA) is the analyst’s top pick for renewable generation. The Nevada-based company is the only power producer with what Morningstar calls an economic moat, or a competitive advantage over other companies in its industry. The company has a growth runway beyond Morningstar’s 5-year forecast, and geothermal has an advantage over intermittent wind and solar.

Despite the headwinds facing public support for the industry, the analysts expect renewable energy capacity to grow and require investment in electric grid distribution and transmission.

Among transmission companies, the analyst favor ITC Holdings (NYSE:ITC) as a way to gain exposure to renewable energy growth without direct renewable investment.

They also point out that Edison International’s (NYSE:EIX) California utility is investing heavily in distribution system upgrades.

For a comprehensive renewable play, the analysts note NextEra Energy (NYSE:NEE), which derives half its cash flow from renewables and half from a Florida utility, has long experience with wind and a growing solar business and is developing a transmission business.

In the northeastern part of the United States, which is targeting a 20 percent reduction in greenhouse gasses by 2025, clean energy requests for proposals in Connecticut, Massachusetts and Rhode Island could benefit Eversource Energy (NYSE:ES), National Grid (LON:NG) and Iberdrola (BME:IBE).

Matt Whittaker is a journalist specializing in natural resources coverage. His work has appeared in The Wall Street Journal, Barron’s and other international publications. He has reported from the Americas, Europe and Asia.

 

Originally published on December 31, 2015