Clean Energy Puts the Squeeze on Natural Gas

While oil prices have rebounded, natural gas and related exchange traded funds (ETFs) remained mired. Year-to-date, the United States Natural Gas Fund (UNG), a futures-based product, is down 3.2%. Natural gas stocks are even worse offenders. The First Trust ISE-Revere Natural Gas Index Fund (FCG) is down 6.2%.

Natural gas, seen as a cheap, clean-burning alternative to coal, is the top fuel source in the U.S. and in some other major developed economies.

However, improved cost efficiencies have prompted some power providers to move away from abundant natural gas for other clean energy sources. Year-to-date, clean energy investments have outperformed their natural gas counterparts. The Invesco WilderHill Clean Energy Portfolio (PBW) and the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) are down an average of 1.8% year-to-date. 

The trend towards cleaner power may be most evident when it comes to solar. Solar installations worldwide will reach 104 gigawatts this year and will likely continue to top 100 gigawatts per year for the next several years. The Invesco Solar ETF (TAN) is down slightly year-to-date, but has returned more than 41% over the past 12 months, dispelling the notion that solar stocks are vulnerable to a Donald Trump White House administration.

“Some utility companies have scrapped plans for new natural-gas plants in favor of wind and solar sources that have become cheaper and easier to install,” reports The New York Times. “Existing gas plants are being shut because their economics are no longer attractive. And regulators are increasingly challenging the plans of companies determined to move forward with new natural-gas plants.”

Favorable Costs

Alternative energy providers' ability to drive down costs is helping to boost their standing in the global energy landscape.

“Global costs of generating electricity from alternative energy technologies continue to decline. For example, the levelized cost of energy for both utility-scale solar photovoltaic (PV) and onshore wind technologies are down approximately 6% from last year,” according to a Lazard note published in November 2017.

Lazard data indicate the price per kilowatt hour of solar power is about 4 cents, even with that of natural gas, while wind power is less expensive at 3 cents per kilowatt hour. Still, power providers view the likes of solar and wind as complements to, not replacements, for traditional fuel sources.

“Although alternative energy is increasingly cost-competitive and storage technology holds great promise, alternative energy systems alone will not be capable of meeting the base-load generation needs of a developed economy for the foreseeable future,” said Lazard. “Therefore, the optimal solution for many regions of the world is to use complementary conventional and alternative energy resources in a diversified generation fleet.”

What Investors Say

While alternative energy occupies an increasingly important part of the broader energy space, many investors have been reluctant to embrace it completely. The largest alternative energy ETF, Inveso Solar ETF, has $630 million in assets under management as of July 2020.  Comparatively, the largest traditional energy ETF, the Energy Select Sector SPDR (XLE), has $10.4 billion in assets as of July 2020.

Investor skittishness may be partly attributed to alternative energy stocks' relative size. Most stocks in this category are not large-caps. First Solar, Inc. (FSLR), the largest U.S. solar company, has a market capitalization of $7.46 billion, putting it firmly in mid-cap territory.

As Lazard's analysts write, it's unlikely that alternative energy will replace natural gas any time soon. "The optimal solution for many regions is to use Alternative Energy technologies as a compliment to existing conventional generation technologies."  However, as solar and other alternative energy platforms continue to gain traction, they will continue to exert pressure on natural gas and other traditional providers in the energy space.

Article Sources
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  2. Yahoo Finance. "First Trust Natural Gas ETF (FCG)."

  3. Yahoo Finance. "First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)."

  4. Yahoo Finance. "Invesco WilderHill Clean Energy ETF (PBW)."

  5. Yahoo Finance. "Invesco Solar ETF (TAN)."

  6. Lazard. "Lazard's Levelized Cost of Energy Analysis."

  7. Yahoo Finance. "Energy Select Sector SPDR Fund (XLE)."

  8. Yahoo Finance. "First Solar, Inc. (FSLR)."

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