We expect high investment in renewable energy through 2020, but the path forward will be rockier than that of the past decade as policymakers turn to more discipline to protect the public purse. Renewable energy capacity has doubled during the past 10 years to roughly 1,800 GW in operation by year-end 2014, a 7% annualized growth rate. With a boom year in 2015—more than 130 GW of new capacity, according to IEA estimates—the global market seems frothy as ever. But while the sun still shines and the wind still blows, we see a rockier path ahead. More companies are chasing lower returns, and policymakers are second-guessing incentives that have propped up returns.

While this may paint a tough picture for investors, we see pockets of opportunity and support for economic moats. We think investors should focus on companies with renewable energy exposure through distribution and transmission investment; technology leadership in moaty asset classes; and extensive experience in renewable financing, development, and operations to support a competitive edge. We also think the renewable energy boom supports most regulated utilities’ growth outlooks, particularly in regions with strong regulatory support and low renewable energy penetration.

Renewable-energy-focused utilities are on balance fairly valued, but we highlight Best Idea ITC Holdings ITC, Ormat Technologies ORA, Edison International EIX, and NextEra Energy NEE as the primary winners from the long boom in global renewable energy investment.

Key takeaways – Why the renewable energy boom has legs

• The drive to green power is the well-understood and destructive impact of fossil fuel consumption: Investment in renewable energy is driven by the reality that the current consumption of fossil fuels, and related air pollution, water pollution, and public health costs, are unsustainable. As hundreds of millions of people push for higher living standards—and thus increased consumption of polluting resources— governments around the world are acting. With the recently adjourned COP21, stronger commitments are possible. We do not expect legally binding agreements on all parties to emerge from the talks.
• With policy support, high investment is set to continue: Though some governments have throttled back support following inefficient overbuild, the trend points upward in the largest markets, primarily the United States and China, and key new markets in emerging economies like India, Mexico, South Africa, Turkey, and others. With more players chasing development, and lower absolute subsidies in many cases, we think renewable energy investment returns may fall.
• Ormat is our favorite way to play renewable energy generation capacity: Even though we think the stock is currently modestly overvalued, Ormat Technologies—a narrow-moat pure-play geothermal developer—is the only independent power producer with an economic moat. It has a long and impressive growth runway well beyond our five-year explicit forecast, and its baseload geothermal generation has a major operational advantage over intermittent solar and wind.
• Renewable-energy growth was one factor in our recent midcycle power price cuts: We recently cut our midcycle outlook for Texas power markets by 20%, primarily because of the state’s huge pipeline of renewable energy projects that we expect to go into service during the next three to five years. There are more than 24.5 GW of active generation requests under review for new-build wind generation through 2020, including 11 GW in the next two years, with the state’s primary grid operator, ERCOT, or the Electric Reliability Council of Texas.

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“The 2014 Renewable Energy Data Book displays renewable energy trends for the United States and the world,” NREL Energy Analyst Philipp Beiter said. “The Data Book’s findings provide useful insights for policymakers, analysts, and investors.”

Key finding from the data book include:

• The United States’ overall energy consumption grew to 98.3 quadrillion British thermal units (Btu) in 2014, a 1% increase from 2013. Energy consumption from renewables (+3.1%), natural gas (+2.6%), nuclear (+1%), and petroleum (+0.5%) increased compared to 2013, while consumption from coal declined by 0.8%.
• The United States’ electric power sector energy consumption grew to 38.6 quadrillion Btu in 2014, a 0.5% increase from 2013.
• In 2014, U.S. renewable electricity grew to 15.5% of total installed capacity and 13.5% of total electricity generation. Installed renewable electricity capacity exceeded 179 gigawatts (GW) in 2014, generating 554 terawatt-hours (TWh).
• In 2014, U.S. hydropower produced nearly half of total renewable electricity generation, wind produced 33%, biomass produced 12%, solar photovoltaics (PV) and concentrating solar power (CSP) produced 6%, and geothermal produced 3%.
• In 2014, renewable electricity accounted for more than 50% of U.S. electricity capacity additions.

Wind summary

In the United States, wind installed capacity grew 7.8% in 2014 compared to 1.8% in 2013. Nearly 4.8 GW of additional wind capacity was installed in 2014, leading to a total cumulative capacity of nearly 66 GW.

• Some states with the highest cumulative wind installed capacity also experienced the most growth in capacity in 2014, including Texas (1.8 GW), Oklahoma (0.6 GW), and Iowa (0.5 GW).
• In 2014, China continued to lead the world in cumulative installed wind capacity with over 114 GW.
• Global cumulative installed offshore wind capacity reached nearly 8.8 GW in 2014, largely driven by projects in Europe. A total of 21 U.S. offshore wind projects, comprising more than 15.6 GW, are at various stages of development.

Solar and other sources summary

In 2014, solar electricity installed capacity increased by more than 54% (5.5 GW), accounting for more than 48% of U.S. renewable electricity capacity installed in 2014.

• U.S. wind electricity generation increased by 8.3% in 2014. Wind electricity capacity grew by 7.8% (4.8 GW).
• U.S. electricity capacities of biomass, geothermal, and hydropower have remained relatively stable from 2000 to 2014.
• Installed global renewable electricity capacity continued to increase and represents 28.5% of total electricity capacity globally in 2014.
• Worldwide, solar PV and CSP are among the fastest growing renewable electricity technologies—in 2014 alone, combined capacity increased by more than 28% globally. • In 2014, the United States led the world in biodiesel production, followed by Germany, Brazil, Argentina, France, and Indonesia.
• Globally, new investments in renewables in 2014 grew by 16% from 2013 to $310 billion.

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Amy L Pierce

Get ready wind, solar, biomass, and geothermal energy and transportation electrification contractors!  On October 7, 2015, California Governor Jerry Brown signed into law the “Clean Energy and Pollution Reduction Act of 2015.”  The objectives of the Act are: (1) to increase from 33% to 50% (by December 31, 2030), the procurement of our electricity from renewable sources; and (2) to double the energy efficiency savings in electricity and natural gas final end uses of retail customers through energy efficiency and conservation.

These lofty goals are to be achieved by implementation of the California Renewables Portfolio Standard (RPS) Program, a program established in 2003.  Notably, the Act includes a legislative finding that “a principal goal of electric and natural gas utilities’ resource planning and investment shall be… to encourage the diversity of energy sources through improvements in energy efficiency, development of renewable energy resources, such as wind, solar, biomass, and geothermal energy, and widespread transportation electrification.”  This bill reflects California’s persistence in its efforts to turn to reliance on renewable energy.  In effect, this should mean the continued growth in opportunities for contractors working in renewable energy areas.

Beware, however, the California Contractors State License Board has confirmed that only certain contractor classifications are authorized to perform solar projects.  In addition to general engineering contractors and general building contractors,
C-4 Boiler, Hot-Water Heating and Steam Fitting Contractors “are authorized to perform projects including solar heating equipment associated with systems authorized by this classification;
C-10 Electrical Contractors “are authorized to perform any solar projects which generate, transmit, transform or utilize electrical energy in any form for any purpose;”
C-36 Plumbing Contractors “are authorized to perform any project using solar equipment to heat water or fluids to a suitable temperature;”
C-46 Solar Contractors are authorized to “install, modify, maintain, and repair thermal and photovoltaic solar energy systems; and
C-53 Swimming Pool Contractors “are authorized to include the installation of solar heating in swimming pool projects.”  Otherwise, before negotiating or engaging in work, it’s a good practice to confirm that your license classification covers the proposed scope of work

Pillsbury Winthrop Shaw Pittman LLP

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