The demand for alternative energy is growing rapidly for electricity generation in the U.S. accounting for nearly 40% of all new domestic power capacity installed last year. Driven primarily by the growth in wind and solar photovoltaics (PV), alternative energy will likely become the world’s second most important source of electricity apart from coal by the next five years.

Countries such as China suffer from a scarcity of fossil fuel resources. A number of developed countries like Japan also face such a situation and have increasingly turned toward alternative energy to deal with the rising demand.

Established Options

Solar: A major growth area in the renewable space is solar energy. With the increasing need for developing renewable energy in response to stringent environmental regulations, countries worldwide are relying on solar energy for electricity generation. The solar industry rallied in 2013 after a tough spell from 2011. For 2014, the EIA projects that U.S. solar energy consumption will boom by roughly 35%.

Wind: The American Wind Energy Association (AWEA) reported that the wind industry grew radically during the first half 2014. The U.S. industry installed 815 MW during the first half of 2014, up significantly from what the industry installed during the first three quarters of 2013. EIA expects wind capacity to expand 9.2% in 2014 and 16.2% at the end of 2015. Electricity generation from wind is expected to contribute 4.6% to the total electricity generation basket by the end of 2015 in the U.S.

Hydro: Hydropower is considered the leading renewable energy source in the U.S. EIA projects that conventional hydropower generation will decline by 4.2%, while non-hydropower renewables used for electricity and heat generation will grow by approximately 5.5% in 2014. In 2015, growth in renewables consumption for electric power and heat generation is projected to continue at a rate of 4.4%, as a 4.5% increase in hydropower is combined with a 4.4% increase in non-hydropower renewables.

Newer Options

The relatively older and established options in this domain are solar, hydro, wind, biomass and waste-based power. Now, new and promising options have emerged. For example solar energy has traditionally been produced using photovoltaic panels. But concentrated solar power has now emerged as an increasingly viable option.

Similarly, geothermal power is now a particularly viable alternative. But the most promising among the new options is power derived from the sea. A number of ocean power technologies may soon become commercially viable options. 

Opportunities in the Sector

Unlike fossil and nuclear fuels, alternative energy has no risk of fuel price volatility or delivery risk. Although there is variability in the amount and timing of sunlight in the day, season and year, a properly sized and configured system can be designed to ensure high reliability while providing a long-term, fixed-price electricity supply.

Residential solar in the U.S. is now a sizzling story. This market even outpaced the commercial and utility segments last year and has already started to attract more conventional electric power companies that produce power mostly from coal and natural gas. As per SEIA, residential PV installation grew 45% year over year and 2% sequentially in the second quarter of 2014.

Alternative energy companies are increasingly benefiting from new legislation in the U.S. stipulating installation of renewable sources of electricity generation as mandated by Renewable Energy Standards (RES). As of now there are 29 states, the District of Columbia and two territories that have RES legislation in place. Another eight states and two territories also have goals for adopting renewable energy standards.

3 Funds to Buy

The boom in the alternative energy sector is likely to outpace the mounting shale oil and gas business in the years to come. The depletion of fossil fuel reserves, higher oil and gas prices, new and advanced technologies, accompanied with more competent alternative energy applications have made green power more feasible.

Here we will suggest 3 funds that invest in alternative energy sector. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy)  as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds have decent returns and low expense ratios. They do not carry any sales load.

Waddell & Reed Advisor Energy Y (WEGYX) seeks long-term capital gains. It invests a lion’s share of its assets in energy companies engaged in exploration, discovery and production or distribution of energy or alternative energy sources. The fund invests in blend and growth companies across the globe.

WEGYX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) and has returned 11.9% and 17.7% over the last one and three-year periods.

The fund has an expense ratio of 1.09% as compared to category average of 1.47%. The fund carries no sales load.

Guinness Atkinson Global Energy (GAGEX) invests most of its assets in domestic as well as foreign energy companies irrespective of their market capitalizations. These companies are involved in exploration, production and distribution of energy, which also includes the research and development of alternative energy sources.

GAGEX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) and has returned 11.7% and 14.9% over the last one and three-year periods.

The fund has an expense ratio of 1.34% as compared to category average of 1.47%. The fund carries no sales load.

Putnam Global Energy A (PGEAX) seeks growth of capital. The fund invests in mid to large-cap growth, value or blend stocks. It invests in companies involved in exploration, production and refinement of both conventional and alternative energy sources. The fund may involve in short sales of securities.

PGEAX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy) and has returned 8.7% and 12.8% over the last one and three-year periods.

The fund has an expense ratio of 1.35% as compared to category average of 1.47%. The fund carries no sales load.

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