It’s Time to Buy SolarCity

By Jeff Siegel

Well, it was a record-breaking day for Texas last week.

On March 26, at 8:48 p.m., nearly 30% of the Lone Star State’s electricity was generated by wind.

Most came from West Texas, and there wasn’t a single issue regarding integration.

Despite the common refrain of “the grid can’t handle all this intermittent power,” Texans had no problem turning on the lights with all those extra wind-powered electrons.

Of course, for those of you who rely on actual data instead of empty rhetoric, this should come as no surprise. In fact, a new study just published by PJM Interconnection indicates that large amounts of integrated solar and wind won’t just be safe for the grid  they also won’t cause energy prices to rise.

The 30% Solution

PJM Interconnection is a regional transmission organization that serves 13 states and the District of Columbia. It’s actually the biggest wholesale electricity market in the world, serving about 60 million people with nearly 60,000 miles of transmission lines across its service area.

So yes, any time we get new data analysis from PJM, we take it very seriously.

According to PJM, wind and solar could generate about 30% of all electricity for its territory by 2026 without any significant issues. This would be the equivalent of about 113,000 megawatts of installed wind and solar resources, powering 23.5 million homes annually.

Now, the entire report is about the size of a small novel, so I’ll just break down a few of the key findings that analyst John Moore recently shared with Greentech Media.

Based on estimates of 30% penetration, we can see the following benefits:

• Lower average energy prices across PJM’s footprint because wind and solar would avoid $15.6 billion coal and natural gas fuel costs.
• Very little additional power (only 1,500 megawatts) needed to support the minute-to-minute variability of the renewable power.
• No additional operating reserves (spinning) needed for backup power.

Moore goes on to write:

“Getting all of this additional clean energy will require more transmission lines, which PJM’s study estimated would cost $8 billion. That is still far less the $15.6 billion in energy savings. But even that’s probably an exaggeration, since PJM’s study looked only at renewable energy expansion inside PJM. It didn’t consider, for example, the savings from importing some of the wind power from the Dakotas, Minnesota, Iowa, or other parts of the wind-rich Midwest and Great Plains. When you factor in those possibilities, the total transmission cost of achieving the 30 percent renewables integration could be lower than PJM’s predictions.

It’s clear that the grid can handle high levels of renewable power without compromising reliability. Of course, we already know this because the Midwest and Texas grids have seen wind energy constitute a significant portion of the power on the grid at a given time. The PJM study affirms that the grid can handle much higher power levels. It also provides a stepping stone to evaluating the impacts and savings of even more renewable power on the grid…”

Of course, folks still need to put this stuff into perspective.

Yes, the continued integration of renewable energy is a lock, but that doesn’t mean it’s going to send fossil fuels packing. In fact, natural gas will continue to provide the lion’s share of our power generation for decades to come. That being said, it’s indicators like the one PJM just provided that further validate our long-term bullish stance on alternative energy.

The question is, if you’re looking to take advantage of this continued integration of renewables, where can you get the most bang for your buck?

Sizing Solar

Based on PJM’s report, here’s how the breakdown looks for its territory:

Although wind makes up a sizable piece of the pie, there are few pure plays in this space. I do like Pattern Energy Group (NASDAQ: PEGI). I actually recommended it back in October when it was trading for $23. Here’s how it’s performed so far…

Pattern Energy Group is an independent power company that owns and operates eight wind power projects in Canada, the United States, and Chile. Total owned capacity is just over one gigawatt.

I particularly like the 4.5% dividend on this one, too.

However, looking at the chart, you can see solar’s offering the biggest growth opportunity. And there are a number of ways to play this…

Personally, since the solar space absolutely crushed it last year, I’m getting a bit pickier about which solar stocks to own in 2014. But a couple of weeks ago, one solar stock in particular got hammered. And it didn’t take long for me to buy a few cheap shares on the dip.

On March 19, SolarCity (NASDAQ: SCTY) took it on the chin after the company reported earnings and investors saw that guidance had fallen below expectations. The stock fell hard, and it is now oversold.

As of April 7th, you can pick up shares of SCTY for less than $55 a share.

The way I see it, this is a $75 stock that’s offering a huge discount to bargain hunters. Even Goldman is maintaining its $85 price target, and Deutsche Bank is holding its $90 price target.

Bottom line: An overreaction to lowered guidance opened up an excellent buying opportunity.

To a new way of life and a new generation of wealth…

To a new way of life and a new generation of wealth…

Jeff Siegel is Editor of Energy and Capital, where this article was first published.