Alternative
energy is currently one of the fastest growing areas in energy. There are also a variety of
factors driving the industry's pursuit of alternatives to traditional oil,
natural gas, coal, and nuclear energy. Climate change in impacting how we look
at fossil fuels, and Inexpensive oil is becoming more and more scarce, but the
biggest driver may be the economics of alternatives to fossil fuels.
Over the next decade, it's
improving costs that will drive the adoption of wind, solar, electric vehicles,
and biofuels. That opens up a world of potential for investors.
What is the alternative energy industry?
Alternative energy consists of
energy sources that are different from traditional energy sources like oil,
natural gas, nuclear, and coal energy. They may be renewable and they may be
clean but those aren't requirements to be an alternative.
On the electricity generating
side of energy, alternative energy is dominated by hydro, wind, and solar
energy. Hydroelectric energy has long been a contributor to the electric grid
but wind and solar energy are growing in popularity as costs fall and concern
about climate change increases. These are the two major growth markets in
electricity generation in alternative energy.
Alternative energy is also of
growing interest as an alternative to gasoline or diesel to fuel our vehicles.
In recent years, electric cars have been produced in growing numbers as have
natural gas trucks and even hydrogen vehicles. While these aren't a large part
of the current energy industry, they do have long-term potential to replace oil
as a primary fuel energy. But today, the energy industry is still dominated by
fossil fuels.
How big is the alternative energy industry?
According to the U.S. Energy
Information Administration, 9.3 trillion BTUs of alternative energy from
hydroelectric, geothermal, solar, wind, and biofuels were consumed in 2013. The
largest contributors were hydroelectric power (2.56 trillion BTUs), followed by
wood energy (2.1 trillion BTUs), and biofuels (2.0 trillion BTUs). Wind and
solar energy are the fastest growing among the renewable group.
While these are big figures in
energy, they pale in comparison to the energy industry as a whole. Alternative
energy accounts for just 11.4% of all energy consumed in the U.S. last year, so
the upside for alternative energy is very large.
How does alternative energy work?
Alternative energy is sold
into two primary markets: electricity and fuel. In the electric market, sources
like wind, solar, and hydroelectric energy are sold to utilities through power
purchase agreements or sometimes through the spot electricity market.
Occasionally, utilities will own these generating assets themselves.
In the fuel market,
alternative energy is often mandated by the government but is increasingly
becoming a choice for consumers. For example, an ethanol mix into gasoline is
mandated by the government, creating demand for the alternative energy. Tax
breaks are also given to hydrogen and electric vehicles and both are growing in
availability and popularity, opening up a new market for energy companies. In
fuel, natural gas is also considered an alternative energy because it is
competing with oil and provides a cleaner and cheaper alternative.
The EIA says that in 2011 (the
most recent data available) the consumption of alternative transportation fuels
increased 13% as more ethanol and natural gas were consumed by consumers.
Expect electricity and
hydrogen to be a larger piece of the pie above in the future as the technology
improves and costs come down.
What are the drivers of alternative energy?
There are two main drivers of
alternative energy: cost and government mandates.
Falling costs for wind, solar,
biofuels, and other alternatives to traditional energy sources will keep
driving adoption further. To give an example of this progress, according to GTM
Research the cost to install a utility scale solar-power system fell 61% from
the first quarter of 2010 to the second quarter of 2014. These kinds of cost
reductions will drive demand long-term, and are making alternative energy more
economically attractive than fossil fuels.
Government mandates will also
drive demand for products like ethanol and other biofuels. Incentives like tax
breaks and renewable energy standards also drive demand for alternative energy,
although these incentives are declining around the world as the cost of
alternative energy falls.
For investors, it's important
to understand the dynamics between cost and government mandates or incentives.
Government incentives can come and go quickly, leading to an unsustainable
market for some alternative energy sources. Investors should focus on energy
sources that are becoming economically viable without these incentives because
in the long-term, that's what will make alternative energy a winner over fossil
fuels and other traditional energy sources.
More related article here: Westward
Group Alternatives
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