WHITEFISH, MT / ACCESSWIRE / January 13, 2015 / Crude oil prices were cut in half between the middle of 2014 and early 2015. While consumers probably don't mind the savings at the pump, the energy sector has seen a steep decline as companies struggle to remain profitable. The diversified Energy Select Sector ETF (NYSE: XLE) has fallen more than 10% over the past 52 weeks, while many oil exploration and production companies have seen their share prices fall even more.
Renewable energies may become part of the fallout of lower oil prices, since they make solar, wind, and other energy sources more expensive by comparison. In fact, the Guggenheim Solar ETF (NYSE: TAN) has fallen more than 17% over the past 52 weeks, taking an even more severe dive than traditional energy funds, while the First Trust Global Wind Energy ETF (NYSE: FAN) has fallen more than 12% over the same period.
In this article, we'll take a look at how lower oil prices impact renewable energy, as well as some beneficiaries of these trends in the energy sector.
Limited Impact on Renewables
Renewable energy has taken a hit over the past 52 weeks, but these losses aren't necessarily due to lower oil prices. Contrary to popular belief, crude oil and renewable energy do not compete in the same markets. Petroleum-based fuels account for less than 5% of power generation in most countries, while renewables barely compete in transportation fuel markets, with the exception of products from popular companies like Tesla Motors, Inc.'s (NASDAQ: TSLA).
While renewable energy stocks have declined, the issues may stem from weakness in international markets more so than crude oil's impact. The Eurozone's struggling economy has led to concerns that Germany - the world's largest solar consumer - may curb its buying appetite over the coming quarters. At the same time, China's economic slowdown could do the same in the world's most populous country and a key emerging market.
The popularity of gas-fired power plants has contributed to some overcapacity in renewable markets, but many countries are hesitant to invest too much in the technology given geopolitical supply risks and volatile prices. In particular, many European countries import their gas from Russia, which has used the fuel as a bargaining chip in many cases. Renewables benefit from a guaranteed supply from nature and highly stable prices.
In many ways, the volatility in oil prices only underscores just how unstable these commodities are, which further justify the move to renewable energy sources where there are no variable input prices. The road may have been rough so far for renewable equities due to the market's perception, but the real impact on these companies' bottom lines may be limited.
Potential Beneficiaries
Renewable energy companies may not be suffering all that much from lower oil prices, but they may not be benefiting from the trends either. Instead, investors may want to look toward companies that are generating energy with oil and oil derivatives and selling the energy into stable energy markets like national electricity grids. The end user prices in many of these markets have remained roughly even as input costs for the companies have fallen.
American DG Energy Inc. (NYSE MKT: ADGE) provides Combined Heat and Power ("CHP") solutions designed to provide on-site power generation to complement electricity from the grid. Using a variety of fuel sources, CHP delivers two forms of energy from a single source, greatly increasing efficiency, minimizing carbon footprint and reducing costs. The company has already installed more than 120 of these systems around the world.
The company installs and operates these systems on behalf of clients including healthcare facilities, multi-tenant housing, hotels, colleges, athletic facilities, and many other markets. The company generates strong recurring income over time by profiting from the difference between the cost of providing power and what it's charging clients while providing a guaranteed discount to its clients. The income amounts to about $1.9 million in Q3 2014 with an attractive 36.3% gross margin.
Over the coming quarters, the company could benefit from falling natural gas prices that stand to reduce its input costs. Steady electricity prices mean that it may be able to improve its profit margins. At the same time, management has additional flexibility in negotiating long-term contracts given its lower input costs and steady pricing in its end markets.
Key Takeaway Points
Falling oil prices have hurt many companies in the energy industry, especially oil exploration and production companies.
The impact on renewable energy is limited because it doesn't compete in the same markets as oil (e.g. transportation fuel vs. power generation).
The real winners may be combined heat and power providers that have lower input prices (e.g. natural gas) and can sell into steady markets (e.g. power generation).
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SOURCE: Emerging Growth, LLC