The sustainable, alternative energy sector is experiencing a growth spurt as the world tries to go green in response to rising pollution levels. However, the shift to clean energy could threaten utility stocks and exchange traded funds.
Since 2004, renewable energy sources have increased by 50% in the U.S., accounting for 13% of all energy produced in the country, reports Bryan Borzykowski for CNBC.
The National Renewable Energy Lab projects that renewables could make up 80% of all energy sources by 2050.
Sonia Aggarwal, director of strategy at Energy Innovation, expects that renewable-focused operations, such as solar, could make inroads in the power generation area of the electricity model. Solar companies would bolster electricity generation and sell it to utilities that would then deliver to consumers.
Looking ahead, Aggarwal believes that falling solar prices will help create more competition. The price per kilowatt hour for solar is 11 cents for utility-scale solar operations, down from 21 cents per kWh, compared to natural gas at 6 cents per kWh. Wind and hydroelectric power cost about 8 cents per kWh, but it is harder to deploy these types of projects have greater limitations.
For instance, with solar panels, retail consumers can deploy panels on roofs and could eventually cut ties from the power grid all together. Elon Musk, founder of both Tesla Motors (NasdaqGS: TSLA) and SolarCity (NasdaqGS: SCTY), is working on lithium-ion battery units to store solar power, which could allow homeowners to act as utilities themselves, Aggarwal said.
“As you move to solar, the traditional utilities model is breaking down,” Paul Coster, an alternative energy analyst with JPMorgan, said in the article. “There’s potential for one or more of these companies to emerge as a national utility.”
Investors will have to be wary of utility companies that have been slow to adapt in the changing energy sector.
“There’s something inevitable about renewables,” Coster added. “They’re going to be huge, and they are challenging the traditional business models, and those models have to change in advance.”
Solar ETFs have generated impressive growth, but that have experienced a small setback after the recent sell-off in growth stocks. The Guggenheim Solar ETF (NYSEArca: TAN) and Market Vectors Solar Energy ETF (NYSEArca: KWT) have both surged over 60% over the past year. [FSLR, Solar ETFs Dim As Investors Ditch Momentum Stocks]
Utility ETFs that provide exposure to stable dividend payers have strengthened this year after increased demand from the unusually frigid winter and the dip in interest rates. The Utilities Select Sector SPDR (NYSEArca: XLU) and iShares U.S. Utilities ETF (NYSEArca: IDU) are both up around 13% year-to-date. [The Suspicious Decline of Utilities ETFs]
For more information on the energy sector, visit our energy category.
Max Chen contributed to this article.