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Wind & solar: An investable future

Solar and wind energy have become mainstream energy sources.

They require much less direct government support, but still benefit from the highly ambitious COP-21 climate goals the world has set. Economics continue to improve drastically and wind and solar are now the cheapest energy source in most emerging markets. Being careful not to generalize, we think renewables will become competitive in many mature markets, too. Concluding first that both technologies will take share from coal, in this report we compare and contrast wind and solar across several dimensions including technological characteristics, cost paths, market sizes and competitive landscapes. We conclude that both offer interesting investment opportunities: In solar, we like FSLR. Our Top Pick in wind is Vestas (DKK590).

A realistic future: We model wind and solar to become a c$200bn p.a. capital goods market globally by 2020. In our view, wind is maturing but should still show a 7% CAGR (ex-China) for a 70GW 2020E market. Over the period, we estimate solar reaches late Scurve growth of 14% and annual installations of 91GW. Falling equipment costs and rising load factors should continue to drive down cost of generation (LCOE). We forecast wind LCOE to decline by 26% to $43/MWh, while solar’s LCOE should decline even faster at 39%, to $54/MWh by 2020.

Risks and rewards: It’s not only about declining costs, however, as the universally dispersed nature of solar resources make it the most intrinsically appealing source of energy. Nevertheless, complementarity of technologies means neither will “win”, but rather displace coal together, while cheap natural gas remains the main threat to both.
High renewable penetration could lead to diseconomies of scale in certain markets, at least until battery storage economics enable the next leg of growth.

Profitability follows industry structure: The industry structure for wind provides better opportunity for profitability, in our view. The wind industry is broadly consolidated with the top three competitors largely stable. The solar industry, on the other hand, continues to be marked by a boom-bust cycle and revolving leadership with eight different firms having held a top-3 module market share position since 2010. As competition intensifies, we forecast our solar coverage margins to decline from 10.4% in 2015 to 8.5% in 2020E. Given a more favorable competitive situation, wind coverage margins should expand from 8.9% to 11.1% in 2020E, for EBIT growth of c80%. Within wind, we favor Vestas, which benefits from growth, quality and a strong balance sheet, as well as the best service business. In solar, given the expected 2017 weakness in profitability, we favor names with limited leverage, e.g., First Solar.


Barclays Equity Research

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