Advanced Energy TrendWatch – Q1 2016

Welcome to New Subscribers… and Existing Ones

Over the last decade, it’s become increasingly obvious to just about everyone in the energy sector that “peak oil” and “peak natural gas” aren’t going to happen anytime soon. In fact, we have just the opposite situation right now.

New technology in the form of hydraulic fracking and horizontal drilling has put so much oil and natural gas at our disposal that prices are the lowest they’ve been in nearly a decade.

We no longer import natural gas, at least not in liquid form. In fact, we now have so much of it, the U.S. is going to start exporting it by the end of this year.

My home state of Pennsylvania has undergone a huge transformation. It now supplies nearly 25% of all the natural gas produced in the United States.

The gas comes from the Marcellus and Utica shale formations. It’s all unconventional gas, produced with the new technologies mentioned above.

Solar and wind energy are becoming increasingly important as we talk about energy generated on the distribution side of America’s electrical network. It’s happening largely as a result of the application of new and advanced technologies.

And just look at what Elon Musk is doing in the automotive world. He’s turning it upside down. It’s all happening with new and advanced energy technology.

The name Advanced Energy Strategist is descriptive, not only of my service, but also of the sources and types of companies I’ll be profiling and adding to the portfolio in the coming months and years. So I’d like to welcome my new subscribers to Advanced Energy Strategist.

Every Monday, you’ll receive Advanced Energy Weekly, a quick summary of the market’s performance over the previous week followed by a more detailed summary of the oil and gas markets over the last week. Every weekly issue may also contain details and charts on the top performers of the previous week.

Advanced Energy Weekly also delivers updates on my current positions… and periodic “sneak peeks” into what I’m researching for the next quarterly report.

If necessary, I may introduce a new company to our portfolio in the weekly update, especially if timing is critical. And special “Sell” recommendations may also be issued from time to time.

As part of your Advanced Energy Strategist subscription, you’ll also have access to our portfolio: This is the master portfolio that contains all my current “Buy,” “Sell” and “Hold” recommendations…

The Advanced Energy Strategist portfolio is always available on The Oxford Club’s website. Updated every evening after the trading day closes, it’s a great way to see how your investments are performing.

Every quarter, you’ll receive my Advanced Energy TrendWatchreport, just like the one you’re reading now. I use these reports to profile and introduce new companies that I’ll be tracking in the Advanced Energy Strategist portfolio.

While oil and natural gas companies are a big part of the portfolio, they’re not the only ones I focus on. Solar, wind, geothermal and other groundbreaking companies that are upsetting the traditional energy models are right on my radar screen.

There’s no question that challenges and concerns litter the path to global energy resource-sustainability. The socio-economic implications are unprecedented.

However, here’s the good news: so are the investment opportunities.

The new companies we profile inside this Advanced Energy TrendWatch report have the very real potential to chalk up gains of historic proportions… They’re the kinds of companies we want in our portfolio.

Advanced Energy TrendWatch highlights the world’s hottest energy and infrastructure trends… and provides precise recommendations for playing them for double- and triple-digit gains.

Every blockbuster report features institutional-quality research. You’ll hear about the latest news and exciting advances in alternative energy, fossil-fueled energy and infrastructure, as well as the energy technology companies that pull it all together.

But while my research team and I dig deep, I always keep it simple – so you know exactly what you’re investing in and why.

One important note: Advanced Energy Strategist isn’t a trading service, so I don’t provide options plays on any of the stocks I recommend.

I also don’t short stocks. After all, the long-term trend for energy usage and infrastructure spending is up, not down.

I pick companies that my research identifies as ones that stand to reap huge rewards. More importantly, I screen for companies that are poised to score potentially huge gains for shareholders.

We’re in the early stages of what I expect will be an exciting, fascinating, and – most importantly – extremely profitable adventure. Welcome to Advanced Energy Strategist.

A Review of Our Stock Selection System

Before I get to the recommendations profiled in this quarter’s report, I want to give new subscribers a quick rundown of my stock selection system.

To identify opportunities, I use my own proprietary screening algorithms. The screens I’ve developed crunch huge quantities of data.

They give me the likely future trajectories of individual stocks. This helps me essentially predict where they might be going next.

I’m a 40-year veteran of the markets – and the engineering and energy world. I apply my screening algorithms to the entire energy, energy infrastructure, and technology sectors.

When all the number crunching is complete, I end up with a group of stocks I investigate even further. The algorithms also give me an easy-to-read road map of where these stocks will likely be 24 hours from now… seven days from now… or even seven years from now.

I can’t tell you the specifics of my screening algorithms. Suffice it to say I look at things like long-term growth trends in energy and sectors most likely to benefit, as well as why and – of most interest to us as investors – when they will occur.

I’m constantly refining my algorithms, too. Let’s face it: The investment landscape is a dynamic, changing one. And nowhere is that truer than in the energy space – which is why I have to be able to adapt quickly.

I look for those companies that represent value (bargains) relative to their peers. In addition, I look at both past and future predicted growth rates.

Perhaps most importantly, I look beyond Wall Street… at things Wall Street analysts may have overlooked in their traditional cookie-cutter company analysis.

However, after I run the numbers, I like to take my research one step further: I personally interview CEOs, COOs and CFOs, and I ask them about their companies.

Few – if any – analysts (other than some of my peers at The Oxford Club) have the high-level access or are willing to take the time to call these people.

However, here’s the thing: These guys are the real brains behind every company. I’ve spent more than 40 years of my professional life talking to them.

In that time – and with the hundreds of conversations I’ve had – one thing has become obvious: I always learn something by talking with company executives. They all love to “spout off” about their companies.

Okay, enough about how I do my research. Now let’s get on to the nuts and bolts of energy investing.

The Disruption Triangle: Say Farewell to Fossil Fuels

At the beginning of every year, in my monthly newsletter Oxford Resource Explorer, I’m asked to give my predictions of what I think will happen in the energy sector. I’ve decided I’d like to include those same predictions for my Advanced Energy Strategist subscribers.

I want to make sure you understand where the focus of my investing strategies will be this year and why.

I’ve been associated with the energy markets for 40 years. During the last four decades, there haven’t been any changes in energy as big as the ones I see coming in the next four years.

I’m about to rock your perceptions on energy. There’s a huge disruption coming.

The tipping point is less than five years away. What is it?

It’s actually the coming together of three separate events. Take each one by itself, and the disruption doesn’t occur.

Put them together, and you have a classic “black swan event.” What are these three events?

They are the rapid price declines of solar systems and storage batteries, coupled with the rapid increase in electric vehicle (EV) sales.

Look at them together in a holistic fashion. When I do, I see a disruptive change coming that’s going to completely reshape electric power generation.

Imagine being able to generate your own electricity. By 2025, according to a study published by UBS, nearly every household will be able to do just that.

More importantly, households will be able to store the excess power produced.That reduces the need to buy it from electric utilities.

What’s more, homeowner-produced power is “green,” since it’s primarily solar. Even better, it will be far cheaper than buying power from utilities.

Now, imagine a scenario in which the payback for the unsubsidized purchase of EVs, solar power and battery storage of electricity is just six to eight years. This disruption triangle is about to initiate the biggest change in global power generation since its creation.

During our lifetimes, centralized generation of electricity by fossil fuel-powered plants will become extinct.Sound impossible? Read on to see why it’s going to happen a lot faster than most folks realize.

How the Disruption Begins

The disruption starts with increasingly lower storage battery costs. Today, batteries are primarily lithium-ion in nature.

Look at the graph below. You can see just how fast lithium-ion battery prices are dropping. They are expected to decline by more than 50% by 2020.

Cost estimates shown here are for an entire battery pack. Right now, battery costs are declining by more than 8% per year according to Tesla and Umicore, the largest makers of battery packs for EVs and energy storage.

Remember my favorite saying, “Technology marches on”? This is it in action.

The current battery technology is based on the movement of lithium ions. However, there are other methods in both the research and early commercial application phases.

Five years from now, one of these technologies could end up being far cheaper than lithium-ion technology – and, more importantly, have a much greater power density.

That means you can store more power without taking up additional space or adding more weight. For batteries, that is the constant quest, especially if it’s achievable at a lower cost.

The rapid decline in the cost of lithium-ion batteries is obviously going to be fabulous for EV companies. Right now, Tesla Motors(Nasdaq: TSLA) and BMW (FRA: BMW) are leading the plug-in EV race.

In some European countries, the cost of EV ownership is already on parity with internal combustion engine (ICE) cars. The following graph shows how a Tesla Model S with a 60 kilowatt-hour (kWh) battery compares favorably with an ICE Audi Model A7 3.0 TFSI.
By 2020, an amazing thing is going to happen. Battery costs will reach a tipping point that makes EVs less expensive than ICE vehicles globally. This will cause a rapid ramp-up in EV adoption rates.

That in turn will bring even more economies of scale to battery production, reducing battery costs even further.

Are you beginning to see where this is going? No? Don’t believe it? Read on.

Here’s the thing: The rapid decline in battery cost doesn’t just make EVs a better buy than ICE vehicles. It provides the electric power industry with something that hasn’t been cost-effective until now.

And utilities desperately need this capability. What is it?

It’s the ability to store electricity cheaply. Up until now, it’s just been too expensive to store it on a large scale. However, that won’t be the case in just five years’ time (or even sooner).

Tesla already has a scalable energy storage unit called the Powerwall. Now, combine the Powerwall (or future less-expensive versions) with solar.

What do you end up with? The ability of the average electric consumer to produce and store electric power.

Between increasingly rapid, inexpensive EV adoption and cheap home energy storage, battery demand could grow exponentially. Why is cheap battery storage of electricity in such demand by utilities?

Why Stored Power Is Important

Right now, the U.S. gets 67% of its electricity from large, central fossil fuel-powered generating plants. In 2014, about 19% of U.S. power generation came from nuclear power plants.

These large, centralized generation plants require expensive transmission lines and other equipment to get the electricity produced to the end customer. When a plant goes offline or a transmission line is interrupted, thousands or even millions of customers are affected.

At 4:10 p.m. on August 14, 2003, untrimmed foliage hit overloaded transmission lines in Ohio. A bug in the local utility’s control software caused a “race condition.”Â

This, in turn, caused the local alarm to cascade through nearly every utility control room in the northeast U.S. and Ontario. This knocked out power to an estimated 45 million customers in eight U.S. states and another 10 million in Ontario.

Some customers didn’t get power back for two days. A more decentralized system of power generation, referred to as distributed power, eliminates this type of blackout.

More importantly, distributed power makes a power grid far less vulnerable to physical damage from a terrorist bomb. Over time, centralized power generation plants will become less important and there will be fewer of them.

A generation from now, big fossil-fueled power plants will nearly be a thing of the past. (Just remember where you first read this.)

Even though this energy disruption is just getting started, we are already beginning to see the mix of power generation changing. Coal-fired power plants are disappearing quickly.

The bulk of the earth’s remaining coal reserves will stay right where they are: in the ground. Don’t believe me?

Take a look at the following 10-year price chart of America’s two largest coal producers, Arch Coal Inc. and Peabody Energy Corporation.
As you can see, they’re not doing very well. Over the last 10 years, their prices have declined almost 100%. I don’t expect them to ever recover.

The Changing of the Grid

So, how is our nation’s power grid migrating to a distributed one? It’s primarily happening with the adoption of residential, commercial and utility-scale solar.

Wal-Mart is installing solar systems on all of its store rooftops. However, from an electricity user’s view, there are a few problems with solar and wind.

By nature, they are sporadic. Therefore, by themselves, solar and wind are unusable as baseload sources.

The problem with solar is darkness, or even the puffy clouds moving across a solar array on a sunny day. The problem with wind is that in some places, it doesn’t always blow.

Utilities have to account for the up-and-down nature of these sources. If they could, solar and wind could be used as alternative energy baseload sources.

This would eliminate the need for any other type of baseload energy plant. Imagine a 100% renewable, reliable power grid.

Well, you won’t have to imagine much longer. Solar and wind can now be used as alternative energy baseload sources of power.

What’s changed to make this possible? Cheap battery storage. It’s quickly becoming cost-effective for utilities and small home solar systems.

A large bank of battery storage looks like baseload power to a utility. That is, it’s available instantly.

It’s the instant availability that solves the utilities’ problem with solar’s and wind’s intermittent natures. Over the next several years, utilities will begin to deploy large banks of battery storage in service areas with high concentrations of solar systems.

When a cloud drifts by and reduces the power output of the solar array, the battery storage system comes to the rescue. Its “instant on” capability enables a utility to even out the power output of the solar and wind sources.

Say Farewell to Fossil Fuels

The disruption I’ve been describing is going to have a profound effect on both the demand and the price of fossil fuels. Let me explain.

As the demand for EVs increases, the demand for gasoline and diesel decreases. Producers will have no choice but to drastically cut back on production.

This will enable rapid reduction in greenhouse gas emissions. Let me show you where the bulk of U.S. greenhouse gas emissions come from.

Look at the graph below, courtesy of the Environmental Protection Agency (EPA). It shows the total U.S. greenhouse gas emissions for 2013 (latest data available).
In 2013, total U.S. greenhouse gas emissions amounted to 6,673 million metric tons of carbon dioxide equivalents. The production of electricity is responsible for 31% of greenhouse gas emissions.

Roughly two-thirds of our electricity comes from fossil fuel-fired plants. These are mostly coal and natural gas.

With even stricter greenhouse gas emissions regulations coming from the EPA, many of the coal-burning plants will be retired. The current thinking is that natural gas-fired plants, which produce a smaller amount of greenhouse gases, will replace them.

However, the coming disruption will mean many of the out-of-date coal-fired plants won’t need to be replaced at all. Why? It’s all due to the rapid rise of solar power, EVs and the coming cheap storage battery systems.

Large utility-owned, centralized generating plants have produced electric power for more than a century. Over the next 10 to 20 years, that value chain will turn upside down.

Rewriting the Electricity Value Chain

The disruption I’ve been writing about drastically reduces greenhouse gas byproducts. Solar, battery storage and EVs all emit zero greenhouse gases.

As the disruption progresses, the U.S. and, indeed, the rest of the world will begin to see a marked reduction in greenhouse gas emissions.

That’s great, especially in light of the recent United Nations Conference on Climate Change held in Paris. I suspect no one at the conference spoke about the disruption I’m writing about here.

If they had, it would have certainly been front-page, climate-changing news. However, all we saw was a group photo with 150 heads of state promising to meet various greenhouse gas emissions levels.

There were no specifics. But I have specifics for you. Let me show you how the new value chain is going to work.

It’s all going to be driven by batteries and solar.Producing and storing power where the customer will use it is by far the most efficient, cost-effective method.

There are few big generating plants, substations, transmission lines and distribution networks needed. In addition, there are no transmission losses, because the consumer uses the power very close to where the solar power system produces it.

Presently, we consume most electric power in a “dumb” fashion.

The power company generates the power and the consumer uses it instantly. However, grids, homes and the electrical loads within them are becoming smarter with each new product generation.

Loads will be more closely balanced with supply. This will create demand and supply profiles that closely align.

Let me show you a daily demand profile. It turns out that EVs are an important part of the new scenario.
Now let’s look at a daily supply profile.
Notice that the integration of solar plus EVs plus battery storage is nearly a perfect fit. The net supply line is the demand superimposed on the available supplies.

EVs, which generally are charging during the night, smooth out the early morning demand. Our battery storage system stores solar energy during the day, making it available in the evening hours.

Electricity from the grid (large, baseload power plants) fills the remaining supply gaps. Not surprisingly, the utility has to manage all of these supplies and loads.

How will it do that? That brings us to the final link in the new electric power value chain.

The Role of the New Utility

Remember, as our disruption progresses, there will be less need for many utilities’ legacy power plants and transmission lines. There will always be a few, since the utilities need to maintain some amount of baseload power on the grid.

So, what will be the role of the new utility? In a word, control.

All of the sources and loads need to be under centralized control in order to match demand with supply. When is battery storage needed? How much? These are some of the problems the utility must address thousands, or even millions, of times per day.

How will it do this? The answer is sophisticated software. This is the “smart” in smart grid.

Every computer in the world has an Internet Protocol, or IP address for short. Every one is unique.

This allows any computer to access any other. Many pieces of electronic equipment have IP addresses too.

This enables computers to control virtually anything in the world that has an IP address associated with it.

A good example is the solar power system at my farm. It has its own IP address.

This enables me to access the system and see how much power it makes on any given day. It can also notify my dealer if something isn’t working correctly.

The utilities will have a central computer that has control over many small power stations. Examples include solar and wind farms, small hydro plants and biogas-powered generators.

The generation systems could also be as small as my solar power installation. Large storage batteries like those found in EVs are power sources, too.

The first job the utility has is to control all of its available power sources. Its control software will regulate them to provide a constant, reliable supply.

The central computer also has control over the loads that use the power. This is just as important as controlling the sources.

Examples of loads could be the temperature controller or the interior lighting of large industrial and commercial buildings. They could also be as small as my electric hot water heater or the recharging station for my all-electric Nissan Leaf automobile.

Remember, a battery is a source when it’s providing power and a load when it’s in recharge mode. As I’ve noted previously, batteries are an important part of matching supply with demand because they can instantly supply power.

Every utility’s grid will be different from the next. However, each will contain a command center that houses its smart grid control computer.

Its job is to balance the supply of power. However, it also tries to reduce demand whenever possible.

Ideally, the utility would have a constant supply of power that it provides to a constant load. In reality, both are constantly changing.

At night, generation from solar isn’t available. However, the power load from a large office building drops considerably at night.

At the same time, the demand for power increases in homes as people return from work. They plug in their EVs for recharging, and turn on lights, TVs, computers and dishwashers.

These are typical problems utility smart grid control software has to manage. In doing so, it allows the utility to reduce its peak load.

Reducing peak loads is important to a utility. It has to provide enough power to meet its highest expected load (with room to spare) at any given time.

By utilizing smart grid software technology, a utility can manage its electrical loads and sources in a dynamic fashion. This effectively “creates power” where there was none before.

It allows utilities to easily handle dynamic sources, such as wind and solar, by calling on batteries to provide stored power. At the same time, it can control and reduce large loads (switching off lights and reducing the temperature in office buildings at night), thereby “shedding” or reducing demand.

Our First Disruption Play

The first stock we’re adding is one that some of my readers may be familiar with. We’ve owned SolarEdge Technologies Inc. (Nasdaq: SEDG) before.

It’s the newest publicly held inverter company. SolarEdge had its IPO on March 26, 2015.

Back in July of last year, we stopped out of it at $30.72 for a handsome 31.8% gain. Shares of SolarEdge have now traded back down to $26.71 as of this writing.

For the benefit of my new subscribers and those of you who may have forgotten what SolarEdge Technologies does, let me show you why now is the time to revisit this solar pick-and-shovel play.

Solar Energy on the Rise

The solar energy industry is currently on fire, primarily due to its role in the energy disruption triangle.

A few months ago, a federal study from the Energy Information Administration (EIA) confirmed solar’s growing role in powering up the U.S. energy grid. In 2014, solar power led the U.S. in all forms of new power growth as well as in new overall share of electrical supply.

Solar’s total growth for 2015 hasn’t been compiled yet. But we do know this: All of the new power added in November 2015 was renewable energy.

In 2014, according to the EIA, solar photovoltaic (PV) systems generated 15,874 gigawatt-hours of power. That’s up from 8,121 gigawatt-hours in 2013.

That’s a year-over-year increase of 95%. However, solar’s real growth is likely much higher.

It turns out the EIA doesn’t keep track of generating systems smaller than 1 megawatt in size. That means that many small commercial and residential systems weren’t counted.

GTM Research published data showing the majority of new solar systems installed in 2014 were in fact residential and commercial PV systems. The reality of solar power is this: It’s the fastest-growing form of new power installations in the U.S.

The growth prospects for solar are nearly endless. Even with its rampant growth, solar still makes up less than 0.5% of the overall electricity supply in the U.S.

But the growth trends are in place for solar, with states like Hawaii and California leading the charge. According to the Solar Energy Industries Association (SEIA), 36% of all new electric capacity in the first three quarters of 2014 came from solar.

As you can see from the graph below, solar’s growth is nearly parabolic at this point. The graph is courtesy of GTM Research and the SEIA.
According to the SEIA, there are currently more than 600,000 individual solar installations in the U.S. The industry will likely install its millionth system this year.

Every Solar Installation Needs at Least One of These

Every PV solar energy system, regardless of the number of panels, generates direct current (DC) power. Check out the graphic below, courtesy of aladdinsolar.com.
Every solar installation needs at least one unit called an inverter. An inverter takes the DC current and changes it into alternating current (AC). This is the same power that your electric utility supplies to your house.

Things like refrigerators, air conditioners and virtually anything else with a motor use AC power directly. Without an inverter, the DC power coming from the panels would be useless and excess power wouldn’t be able to be fed back into the electric grid.Â

Inverters also “synchronize” the AC power they produce with that produced by the electric utility. This is necessary in order to feed excess power back into the grid.

The last thing inverters do is automatically disconnect the system from the house and the grid. This is a safety feature that protects utility personnel from electrical shock. This can happen if power is fed from the system back into the grid.

Depending on how large a solar array is, it may require more than one inverter. The 10-kilowatt array at our farm uses two inverters to do the conversion.

Many utility-scale systems have hundreds of inverters as part of their systems. Most of today’s inverters are able to communicate via the Internet.

This allows homeowners to see how much power their systems are producing. More importantly, installers are notified of any problems with the solar array.

Although SolarEdge has been public for only 10 months, it’s been manufacturing and shipping inverters since 2010. In fiscal year 2015, SolarEdge shipped 920 megawatts of inverters.

That equates to 150,428 units. In 2014, it sold 61,999. Now you can see why I’m so excited about the future prospects for this company.

Its inverters have been installed in solar PV systems in more than 73 countries. The company’s mission? Here it is right from SolarEdge’s SEC filing: “To become the leading provider of intelligent inverter solutions across all market segments, enabling the availability of cost-effective, clean, renewable solar energy worldwide.”

SolarEdge is a leader in intelligent solar inverter systems. One of the features of SolarEdge’s inverters is something called module-level power electronics.

This feature allows for constraint-free installation of panels. What does that really mean? Many competitive inverters constrain the number of panels to multiples of two or four.

SolarEdge inverters are constraint-free. That is, any number of panels up to the power limit of the inverter can be installed on the rooftop.

In many cases, this allows more panels per installation and constraint-free design of the panel layout. You can see an example of this in the picture below, courtesy of SolarEdge.
SolarEdge inverters have no power loss due to module mismatches. Mismatches can happen when modules with different power optimizations are part of the same installation.

SolarEdge inverters can handle panels with different power outputs in one array. The bottom line for customers is it converts more solar energy into usable power.

SolarEdge inverters allow systems to be more easily maintained. Inverters can report (via the Internet) any panels that aren’t working properly.

Inverters can be as far as 1,300 feet from the nearest wireless network. This allows ground-mounted systems to be located remotely, away from buildings and trees.

One of the most exciting developments at SolarEdge is its announcement of picking up SolarCity Corp. (Nasdaq: SCTY) and Tesla Motors (Nasdaq: TSLA) as major new customers. This is a huge development and will be a big part of SolarEdge’s business moving forward.

According to SEC filings, SolarEdge currently has 42% of the inverter market. Its next-largest competitor is Enphase Energy Inc. (Nasdaq: ENPH) with 32% of the market.

For Q4 2015 (ending September 30, 2015), SolarEdge had record revenues of $98.4 million. This was a 13.9% quarter-over-quarter increase and a 120.8% year-over-year increase.

For fiscal year 2015, SolarEdge had annual revenues of $325.1 million, a year-over-year growth rate of 144%.

I expect great things from SolarEdge moving forward. Its unique inverter technologies have garnered significant market share in the short period of time the company has been in business.

So, we’re going to jump back in, as I believe this company has a lot more room to run. Besides SolarEdge’s technology, there’s another big reason I believe this company and the solar sector are just starting to launch.

Congress recently extended the federal 30% renewable energy tax credit. This was due to expire at the end of 2016.

It has now been extended through the end of 2019. It then drops to 20% in 2020, and 10% in 2021 and beyond. So that’s why I’ve decided to once again add SolarEdge Technologies to the Advanced Energy Strategist portfolio.

Action to Take: Buy SolarEdge Technologies Inc. (Nasdaq: SEDG) at market. Because of increased market volatility, I suggest you use a 30% trailing stop to protect your position and your profits.

Another Sunny Stock for Our Portfolio

Now, on to my new recommendation. Nearly every renewable energy investor has heard of SolarCity Corp., a residential and commercial installer of solar energy systems.

However, while it’s currently the largest U.S. installer, it has a big competitor. Right on its heels is a company called Sunrun Inc. (Nasdaq: RUN).

Sunrun has been around since 2007. Its headquarters are in San Francisco, California.

Sunrun pioneered the residential solar installation model that SolarCity uses. As of the end of Q3 2015, Sunrun had deployed 528.2 megawatts of home solar systems.

The company operates in 15 states as well as the District of Columbia. It recently announced that it has opened new offices in Denver, Colorado; Hartford, Connecticut; and Linthicum, Maryland.

It plans to hire up to 800 workers over the next several years in its Denver office. Sunrun boasts it has saved its Colorado customers more than $4.3 million on their electric bills since 2007.

What makes Sunrun different from SolarCity? Sunrun’s only focus is the residential solar market.

Sunrun has a compelling value proposition. The average customer saves 20% to 25% on electricity. There is no upfront cost to the customer.

Maintenance and repairs on the system are free. The 20-year agreement is transferable.

Sunrun has successfully transferred more than 3,000 agreements as part of home sales. Homes with solar sell at a premium and at a faster rate than similar homes without.   Â

When it installs a residential system, Sunrun gets a 20-year customer relationship. More importantly, it gets a reliable cash flow stream.

Homeowners nearly always pay their electric bills (including the part from Sunrun) on time. Plus, Sunrun has the ability to lock its solar systems remotely in the event of nonpayment.

Sunrun collects more than 99% of the payments owed on its systems. This is a number that is looked upon favorably by Sunrun’s bankers.

The company is fueling its growth through capital that’s a combination of both corporate debt and equity. The cumulative value of solar systems funded by tax equity was $4 billion as of November 2015.

Right now, Sunrun is seeing rapid adoption of its systems. Why?

It’s a compelling customer value proposition. Customers are seeing rising utility rates.

Sunrun offers an immediate 20% to 25% off the average customer’s electric bill. If a customer has a south-facing roof, Sunrun can install one of its systems.

Even with SolarCity as a competitor, Sunrun has plenty of room to grow. Right now, less than 1% of homes in the U.S. have solar systems installed.

By 2020, estimates are that market penetration will be about 5%. That means plenty of business coming Sunrun’s way.

One look at the graph below and you’ll get an idea of Sunrun’s growth.
ncreasing growth. That’s just what I want to see with a renewable energy company.

Sunrun’s Differentiators

Sunrun calls itself “technology agnostic.” It uses solar modules and inverters produced by several different companies.

In this way, Sunrun can negotiate volume discounts to get the best price. It produces its own mounting hardware for consistency.

The company generates new leads from both in-house staff and outsourced lead-generation companies. It does the same with sales, installation, monitoring and maintenance.

One of Sunrun’s big advantages over SolarCity is its proprietary pricing software. It looks at each customer’s roof and adjusts its installation costs (including overall system costs) accordingly.

This has resulted in extremely competitive pricing. At $0.61 per watt, Sunrun has the lowest customer acquisition costs of any of its competitors.

During the last two quarters, Sunrun has reduced its cost structure by 14%, or $0.16 per watt. In the future, the company’s biggest area of cost reduction will be on installation costs.

It has plans in the works to partner with several of the nation’s largest homebuilders. In addition, it’s moving toward sophisticated software that allows customers to design and price their own systems.

The software takes into account 18,000 different U.S. building codes. Sunrun’s open platform gives it more than 1,000 distribution points. More importantly, it has several thousand Sunrun-trained sales reps.

So far, Sunrun’s model seems to be working just fine, with more than 100,000 customers as of November 2015.

In Q3 2015, the company booked 94.5 megawatts of new projects. That’s a 115% year-over-year growth rate in bookings.

It’s seen a drop in its creation cost per watt of $0.61 over the last two quarters. Its current creation cost per watt is $3.75.

Its project value per watt is $4.70. Since inception, Sunrun has installed 528.2 megawatts of systems.

Right now, it’s increasing installed systems at an 80% year-over-year rate. It has the second-largest residential fleet of solar systems behind SolarCity.

Sunrun expects to take market share in 2016 from competitors as they have a much slower growth rate. It’s been able to strike a good balance between backup capital needed to fund projects, customer acquisition costs and order fulfillment.

With a fast-track growth rate and a proven residential business model, Sunrun is a company I want in our renewable energy portfolio. I added Sunrun to my portfolio in Oxford Resource Explorer. However, we stopped out of the position when the market tanked.

Now is the perfect time to jump back in, especially in light of the extension of the renewable energy investment tax credits.

Action to Take: Buy Sunrun Inc. (Nasdaq: RUN) at market. Because of increased market volatility, I suggest you use a 30% trailing stop to protect your position and your profits.

Well, there you have it. I hope you enjoyed reading the latest edition of Advanced Energy TrendWatch. The two companies profiled above are poised to add big gains to our portfolio.

We’ll continue to track our new picks as well as the rest of the stocks in the Advanced Energy Strategist portfolio in our regular Advanced Energy Weekly.

Good investing,

David Fessler