The prospects for solar and wind energy have never been better. According to the U.S. Energy Information Administration (EIA), new utility-scale solar projects with trackers entering into service in 2022 will have a lower levelized cost of energy (LCOE) than natural-gas-fired power plants (which used to be the cheapest form of power generation). Array Technologies (NASDAQ:ARRY) went public in October of last year and dominates the U.S. solar tracker market.
Like the solar industry, wind energy investments are growing in popularity. Utility-scale wind energy costs have come down by over 70% since 2009. TPI Composites (NASDAQ:TPIC) fills a niche role as the largest independent manufacturer of wind blades. Based on research by Lazard, the LCOE of new wind projects is cheaper than sustaining operations at combined-cycle natural-gas-fired power plants, nuclear plants, and coal plants. According to TPI Composites CEO William Siwek, “utility-scale wind LCOE remains at or below that of utility-scale solar on an unsubsidized basis and, in the best locations, significantly cheaper on a subsidized basis.” Although solar has been growing faster than wind in some regions, wind energy is the largest source of renewable power generation in the U.S. — generating four times more power than solar.
Aside from lower costs, favorable state and federal policies bode well for renewables. By 2030, 70% of New York state's energy and 60% of California's energy are expected to come from renewables. President Biden rejoined the Paris Agreement and has a plan to achieve zero-carbon electricity by 2035. China plans to reach carbon-neutrality by 2060, and India has committed to 40% non-fossil fuel energy by 2030.
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With that, let's break down why Array Technologies and TPI Composites are two top renewable energy stocks right now.
The solar energy play: Array Technologies
If you follow/invest in renewable stocks, chances are you've heard of bigger-name solar companies like Enphase, SolarEdge, Sunrun, and others. Many of these companies could be overvalued since their stocks soared in 2020. Array Technologies is a lesser-known name. There are several reasons why it could be a more reasonably priced alternative for investors looking at the solar industry right now.
Array is an industry leader in single-axis solar tracking systems. These tracking systems rotate solar panels throughout the day to optimize power generation. According to Bloomberg, trackers harness 25% more energy with just a 7% increase in project capital cost. During peak sunlight, trackers offer only slight to no benefits over fixed systems. But in the early morning and the evening hours, trackers help panels generate substantially more energy. According to Array, electricity is the most valuable during the evening, which is when its trackers offer the greatest competitive advantages over fixed systems. Array estimates that utility-scale solar projects with trackers are growing 20% faster than the ground-mounted PV market as a whole. It predicts that trackers will have a 19.4% compound annual growth rate (CAGR) between 2019 and 2023, compared to a CAGR of just 6% for fixed-tilt systems.
Array primarily deals in utility-scale projects. The company notes that the ground mount market is six times the size of the residential market and remains the fastest-growing power generation market in the U.S. Unsurprisingly, U.S. sales comprise 90% of Array's total revenue. And while the U.S. market is strong, Array is expanding internationally to try to gain a foothold in emerging markets like China, Australia, Europe, and South America.
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In its February 2021 investor presentation, Array detailed why its tracker is better than the competition, and ultimately can continue to capture market share at home and abroad. There are a number of factors, but the common denominator is lower costs for its customers. Array's core product, the DuraTrack HZ v3, has fewer components. It's easier to install, easier to maintain, and therefore cheaper in the long run than the competition. Array stock has a much more attractive valuation than other big-name solar stocks and is growing at a faster rate as well, making it an excellent under-the-radar option right now.
The wind energy play: TPI Composites
TPI Composites is the largest independent manufacturer of wind blades and fills a niche role in the wind energy industry. TPI isn't an original equipment manufacturer (OEM) like General Electric and Vestas (which design systems and coordinate massive utility-scale wind projects). Nor is it an operator like NextEra Energy or BP that funds and manages projects once they are built. Rather, TPI is a parts manufacturer that simply sells its blades under long-term service agreements to a variety of OEMs around the world.
TPI Composites' business strategy is simple. It believes in the long-term growth of the wind energy market. It has excellent partnerships with OEMs. And it opens new facilities wherever the demand for wind energy is growing. The company's utilization rate is one of its best efficiency measurements. It represents the percentage of invoiced wind blades compared to the total potential capacity of wind blades that could have been produced.
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After an initial downturn from pandemic-induced market conditions, TPI has picked up its utilization rate to above 90%, which means that it's selling nearly all of the blades it produces. This is all the more impressive when you consider that the company has added a considerable amount of capacity over the past few years. Simply put, TPI is purposefully expanding its business. The new manufacturing lines it adds are quickly contracted under stable long-term agreements. TPI's high growth rate, market-leading position, and low valuation make it an excellent wind energy stock for 2021.
A dynamic duo
Solar and wind both have their benefits. And while there are plenty of excellent companies out there, many of their stock valuations are arguably a little ahead of themselves at this time.
Array Technologies and TPI Composites are relatively smaller companies, with market capitalizations of $5.5 billion and $2.5 billion, respectively. While they're unlikely to grow into huge companies or garner headline acclaim like other leading growth stocks, each is a key role player in their respective fields. Investors should keep an eye on Array's international expansion to see if it can find similar success in other markets. As for TPI Composites, it's worth monitoring its new manufacturing facilities — particularly in India and China — to see if it can secure agreements with OEMs it doesn't already do business with.
Daniel Foelber owns shares of Array Technologies and has the following options: short July 2021 $50 calls on Array Technologies and short July 2021 $60 puts on TPI Composites. The Motley Fool recommends NextEra Energy, SolarEdge Technologies, and TPI Composites. The Motley Fool has a disclosure policy.
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