In the previous article, I discussed some of the highlights from the newly-released BP Statistical Review of World Energy 2017. To recap, in 2016 petroleum and natural gas both set new demand records, while coal consumption continues to decline. Global energy demand also set a new record high, and most of that new demand was satisfied by oil and natural gas.  

Today I want to cover the other segments that helped satisfy the new demand in 2016 — nuclear power and renewables.

Nuclear Power

Nuclear power has suffered a pair of major disasters in the past 30 years that forever changed its outlook. Nuclear power was growing exponentially until the Chernobyl accident took place in 1986, and then the growth rate slowed substantially. Japan’s Fukushima Daiichi nuclear disaster in 2011 caused global nuclear power consumption to decline sharply for two straight years as some countries completely abandoned nuclear power.

Nevertheless, in the past three years, the growth rate has rebounded to nearly the rate in the years before Fukushima: 

Although there are operating nuclear power plants in 31 countries, six countries account for three-quarters of the world’s consumption of nuclear energy: U.S., China, Russia, South Korea, Canada and France.  

The U.S. remains the world’s top consumer of nuclear energy, with 32% of global consumption in 2016. Sweden slightly edges out France for the most nuclear power per capita, but France has the largest share of electricity from nuclear power (~75%) of any country. Electricity in France is among the cheapest in Europe, and this has enabled France to become a major exporter of electricity. France is surrounded by countries that rely heavily on renewables, but France’s nuclear power is often called upon when those countries need more baseload power.

China’s nuclear energy consumption grew on average by 12.4% per year over the past decade — the only country to have experienced double-digit growth rates over that period. India’s growth rate was second at 8.0% per year. China’s consumption increased by 24.5% from 2015 to 2016, which was the largest overall consumption growth of any country. Given the relative size of its nuclear industry, and recent growth rates, it seems likely that China will be the primary driver of global nuclear power in the years ahead, and will pass the U.S. in about a decade to become the world’s leading nuclear country.

Nuclear power is the only major energy source that saw a decline over the past decade, and that was a result of the Fukushima disaster. The ensuing slowdown caused an excess of inventories and a uranium price crash, which hit uranium mining companies hard.

Canada’s Cameco (NYSE: CCJ) is the largest publicly traded uranium miner in the world, but since Fukushima, its stock has dropped nearly 80%. Another Canadian supplier, Denison Mines (NYSE: DNN) is down almost 90% since Fukushima. While these may look like bargains after the massive sell-off, nuclear power’s future remains cloudy. I recommend that investors avoid this sector unless and until nuclear becomes a growth story outside of China and India.  

Renewables

Growth rates for renewables, driven by a combination of government incentives aimed at reducing carbon dioxide emissions, and falling costs, remain the strongest in the energy sector. Today I want to focus on two of the most important members of the modern (i.e., excludes hydropower) renewables club, wind and solar power. 

However, a rising tide doesn’t necessarily lift all boats, as many companies struggled due to stiff competition in the space. I have noted this previously with the corn ethanol boom from 2005 (when ethanol was first mandated with the Renewable Fuel Standard) to 2015. Ethanol production grew exponentially during those years, but there was lots of competition, and low margins drove many producers to bankruptcy. 

Solar Power

Such has been the case with other renewables. Global consumption of solar power, for example, has increased by a factor of 80 since 2005. Companies within the solar sector, however, have been extremely volatile over that period.

Consider portfolio holding First Solar (NASDAQ: FSLR), and its performance over the past decade. Fundamentally, this is a solid company that should benefit long-term from the growth in solar power. Between 2006 and mid-2008, First Solar’s shares soared from $28 a share to more than $300 a share. Then, the financial crisis of 2008-2009 brought a correction, and shares fell back to a range that hovered around $120 from 2008 to 2011. For three years, shares went nowhere. Worse, when they finally broke out of that range, the price went down. By mid-2012, shares had fallen to $12, and investors who had held since 2006 were now sitting on a loss of nearly 60%. Meanwhile, consumption of solar power was soaring. 

We were convinced that there was a disconnect between the share price and First Solar’s outlook, so we added First Solar to the Aggressive Portfolio in August 2013 (see Taking a Shine to First Solar). Seven months later, we recommended investors take some of their 88% gains off the table (see Lightening Up on First Solar). Last year was a bad year for solar stocks, and First Solar was down. This year, it’s one of the best-performing stocks in the portfolio. 

My point is simply this. Solar is an extremely volatile sector, and it’s easy to jump in at a time when the sector has gotten too hot. Had you bought First Solar at $300 a share in 2008, you might not see a positive return for 20 years.

Given the volatility and occasional bankruptcy of companies within the solar sector, it might come as a surprise that consumption of solar power continues to grow exponentially: 

Global consumption of solar energy rose 30% from 2015 to 2016 to reach 333 Terawatt-hours (TWh). But that growth rate is substantially lower than that of the past decade. Solar consumption increased by an average annual rate of 51% from 2005 to 2015. China surpassed the U.S. for the first time to become the world’s largest consumer of both solar and wind power. U.S. consumption slipped to second place globally, followed by Japan, Germany, and Italy.

Since the 2011 Fukushima disaster, solar consumption in Japan has increased by nearly a factor of 10 to reach 50 TWh. For perspective, Japan’s nuclear consumption the year before Fukushima was 292 TWh. 

Solar power is truly a global phenomenon, growing at double-digit rates annually over the past decade in every region of the world (even in the Middle East, but that’s primarily being driven by Israel).  

The Energy Strategist maintains several solar companies in the portfolio, but investors seeking diversification within the sector might consider the Guggenheim Solar ETF (NYSEARCA: TAN). This is a globally diversified fund that offers access to all segments and value chains of the solar industry. I own this ETF, and while it had a down year last year, so far in 2017, it’s up 20%.

Wind Power

While solar energy is the fastest growing renewable, wind power still maintains the lead for the most consumption (excluding hydropower, which is still well in the lead among all renewables). In 2016, the world consumed 960 TWh of wind power, nearly triple the amount of solar power consumed. But wind power’s 10-year average annual growth rate was “only” 23%, less than half that of solar’s. Likewise, wind power’s 15.6% growth rate from 2015 to 2016 was about half that of solar’s. 

China was the world’s top consumer of wind power in 2016, leaping over the U.S. which had long held a dominant lead. Behind the U.S. were Germany, Spain, and India. These five countries were responsible for 67% of global wind power consumption in 2016.

There aren’t as many pure wind power investment options as there are with solar power. For many companies in the sector, wind power constitutes a small fraction of the overall business. Or, the companies trade on small foreign exchanges. The best options for investors may be the various yieldcos that own wind power assets. One of our portfolio holdings, TerraForm Power Inc (NASDAQ: TERP), is one such option that owns both wind and solar assets. TERP has generated a 79% return since being added to the portfolio in February 2016. Another option, Pattern Energy Group Inc (NASDAQ: PEGI) is a pure wind power yieldco with assets in the U.S., Canada, and Chile. PEGI has returned 31% year-to-date and currently yields 6.7%. 

Finally, as with solar, there is a wind power ETF — First Trust Global Wind Energy ETF (NYSEARCA: FAN). This ETF’s investments are “actively engaged in some aspect of the wind energy industry such as the development or management of a wind farm, the production or distribution of electricity generated by wind power, or involvement in the design, manufacture or distribution of machinery or materials designed specifically for the wind energy industry.”

Conclusions

Some of our global energy systems are undergoing a shift. There has been a trend away from coal power toward cleaner energy options like natural gas and renewables. This change has resulted in a flattening of growth in carbon dioxide emissions, which only advanced by 0.1% in 2016 (albeit to a new all-time high). Recent trends seem set to continue.  

A possible exception is nuclear power. Its destiny will likely be determined by countries like China and India, but many developed countries have decided to phase out nuclear power due to the perceived risks. Should China’s nuclear program proceed without incident, the sector will probably grow steadily. If anything goes wrong in China, it could very well be the death knell for the nuclear sector.