Which Way Will the Wind Blow?

I received a press release on Thursday about a new Emerging Energy Research [EER] study on wind power installations in the US for 2009 and beyond.

EER argues that US installations could be down as much as 24% in 2009 from a record 8.55 GW in 2008. While utility-led projects remain mostly on track, smaller IPPs and developers that rely on project finance or other forms of external financing are finding the current market environment challenging.

However, record growth could return as early as 2010 with 9 GW installed, driven in large part by the stimulus package. EER sees the following encouraging signs:

• Near-term growth could be helped by fiscal incentives, most notably the 30% Investment Tax Credit [ITC]. Unlike a Production Tax Credit [PTC], an ITC does not require the existence of a tax liability and should lessen the industry's reliance on tax equity investors - there are far fewer of those kicking around these days
• The possible enactment of a Federal renewable portfolio standard would provide a substantial long-term boost for the industry, and momentum is building in this direction
• New interstate transmission lines aimed at unlocking high-potential wind resources are being built or at the very least discussed
• Investments in manufacturing capacity by OEMs remain on track, indicating that the industry sees the crisis as only temporary
• Regulated utilities - with the ability to finance wind projects on-balance sheet - are making a growing commitment to wind (recently exemplified by Berkshire Hathaway's (BRK.A) MidAmerican Energy)

Although the wind power sector is decidedly more 'global' than most other forms of renewable energy - meaning there is greater geographical diversity to the industry's aggregate revenue base - the US remains, according to Ernst & Young, the top-ranked market in the long and near terms. In the near-term, defined as the next two years, the US and China are far ahead of the pack.

The health of the global wind power sector has, in the space of a few short years, become very much tied to the health of the US wind power sector, with traditionally strong European markets such as Germany and Denmark gradually losing their influence. What happens in the US over the next two years will thus be consequential for how wind power stocks perform.

It seems as though investors are already looking past the difficult year 2009 will almost certainly prove to be for the industry, having pushed both wind power ETFs, FAN and PWND, for beyond the rest of the market over the course of the latest bull run.

But investors beware! Just as the market was pricing in Armageddon for the clean technology / alt energy sectors just a few months ago, now might be a bit premature to get over-excited:

• Although credit conditions are normalizing, no one yet knows for certain what the future will look like, but many people agree that the financing environment will almost certainly remain challenging for a long time. Should inflation kick in as a result of fiscal and monetary incentives, interest rates could shoot right up in response, which would prove disastrous for any sector using large amounts of leverage.
• The Federal RPS portion of the Waxman-Markey bill remains controversial and the bill will most certainly continue to undergo changes on its way to becoming law. Unless and until this happens - the bill becoming law with a Federal-level RPS in it - I am inclined to discount this entirely as a potential factor in future growth.
• Transmission has certainly been on the agenda to a greater extent than at any other time in the past few decades, but we are still far - very far, in fact - from the investment levels required to truly unlock wind's potential in America. Governance systems around grid investments remain complex, with key areas of decision-making split between various actors whose incentives are not always aligned. I would venture to say that many people still see this as a major barrier to wind development, not as an enabler.
• The latest run in wind stock has been very impressive, with the ETFs outperforming the S&P 500 by 25-30%. Last fall, their relative decline was equally formidable. As pointed out earlier this week by Tom, the magnitude of gains we've experienced over the past three months should probably be be viewed with some caution. I'm not sure whether we're headed for an imminent decline and, if so, how pronounced it will be (I'm a lousy market timer). But if we are, you can certainly expect wind stocks to fall further than the market as a whole. Any risk-averse investor should probably stay away at this point, or consider taking some profit

Wind continues to be among my favorite alt energy technologies and there are several years of strong growth left; the sector's expansion is not about to normalize. However, these are uncertain times and caution is of essence. Just as an onslaught of negative sentiment pushed wind stocks further south than they should have gone a few months ago, the current onslaught on positive sentiment - which is not justified, in my view - is doing the opposite.

DISCLOSURE: None

Comments

[Ferdinand E...:]

Interesting, but before you heap more praise on wind in Germany and Denmark, brush up your German and Danish. I don't read the newspapers in those countries very much any more, but the enthusiasm for wind was definitely declining both there and in Spain too I have been told. Why? Because they have had more experience with it than than most other coutries, and now they understand its disadvantages.

Jun 07 10:32 AM

[Troy Jensen:]

"CleanTech" - all things Green, from n opportunity that has clearly evolved as the largest opportunity since the Industrial Revolution - add up the oncoming capital infrastructure investment already allotted over the next 20 years, the lightening-fast cultural shift towards all things "Green" (California always leads America's macro cultural - ergo consumer - trends), and the flow of private investment funds and amazing startup activity in CleanTech, and all of us Internet technology pioneers are seeing something many times larger than we saw in the 90's. I personally strongly lean towards solar rather than wind leading the way, for reasons detailed below, but absolutely am heavily involved in Wind Power as well...the future is bright for both, and a ton of ancillary technologies, companies and component OEMs that will naturally stem from the oncoming "Clean Energy Revolution".

The Solar Energy Breakthrough Will Change the Energy Business Landscape - the cost of solar modules (and to a slower extent, wind technology that can be deployed in micro-systems, like residential or urban commercial building executions) has fallen substantially over the past six months and is expected to fall still further. Photovoltaic solar energy is nearing its breakthrough point. This will happen once the cost of solar electricity equals the cost of electricity from the grid ("Grid Parity").

Once grid parity has been reached, consumers will be presented with a choice: (1) to buy all their electricity from traditional energy utilities or (2) to pay the same price and (partly) generate green renewable solar energy from their own roofs. Not only will the growing focus on green and sustainable development make solar power a preferential alternative, but even more important will be price stability. Following its installation, a solar energy power system will generate solar electricity at fixed cost for at least 25 years. Operation and maintenance costs are negligible. The cost of solar electricity will be determined by the depreciation schedule and the interest rate. Both of these can be forecast over a long period of time. Compare this to the annually changing cost of grid electricity. Is it likely that fossil fuel-based electricity prices will be stable over the next 25 years? This would seem to be an unlikely scenario when looking at growing concerns about climate change, Asia’s rapidly increasing energy demands, international political instability, and anticipated uncertainties about the easy exploration of oil reserves. Based on most of the very detailed high-level and "boots-on-the-ground" data I am seeing, a 10%+ annual utility cost increase could easily be expected over the next 20 years, which will absolutely help fuel even further the Green Cultural Shift.

The grid parity situation will open up opportunities for new business models, such as the leasing of solar energy systems. This could remove the hurdle facing private households of making an initial solar system investment. A new type of energy company could emerge from this: one that owns the PV system on the customer’s roof and sells the solar electricity generated per kWh to the homeowner. Many new entrepreneurs could launch into this market and start competing with existing energy utilities. The scenario envisaged is one of unprecedented growth potential and industry growth. Such a situation involving the distribution of generated energy is completely at odds with what is currently happening in the energy sector. In that sector, the trend is to grow ever larger based on a firm belief in centralized power generation and short-term profitability. The big utilities are trying to increase their profits by reducing costs at a time when fossil fuels are set to become only more expensive. In order to fight these price increases, they will attempt to cut costs, reduce their workforce, and merge with other big utilities. This is sure to be a never-ending battle, as fossil fuels will only become more expensive, while concern about climate change will only grow. The utilities may grow bigger and bigger, but it will make them less focused on the radical changes needed for long-term innovation, entrepreneurship, and profitability.

In only a few years from then, these existing utilities will have to compete with new entrepreneurs able to sell solar electricity more cheaply than the polluting electricity. This will change the business landscape drastically. It will not be the solar entrepreneurs having to compete with the existing utilities but rather the reverse situation. All of this will happen at the very time when these super-utilities are busy merging and cutting costs and jobs.

History has a way of repeating itself, as the example of what occurred in the IT business world not so long ago makes clear. Traditional telecom companies had a hard time changing the way they did business and adapting to the new cell phone era. Indeed, IBM almost crashed, as it did not believe in 'distributed' computing with laptops and PCs.

Successful new solar energy utilities will grow quickly, because their global market potential will be unlimited. Ultimately, some of them will be taken over by the large, established energy utilities. Solar entrepreneurs will cash in their success, and these utilities will buy up the entrepreneurial power and green image that they were unable to create for themselves. However, vice versa, one of these new entrepreneurs may also be capable of taking over an existing energy utility.

Nowadays, the business landscape is changing fast. One has only to look at how internet businesses appeared ten years ago. Google had just been set up, and nobody would have believed that its two founders were about to become the world's most successful entrepreneurs. If you had claimed during the same period that industry giant Chrysler would be bankrupt in ten years, you would have been met with incredulity. The fact is that in only a few years’ time, the solar industry will be producing cheap solar modules that can generate electricity costing less than its fossil-based counterpart. And this will be without any need for financial support from government. The energy industry is perhaps the world’s most important business segment, and its landscape is on the verge of change. Solar energy will be a key player in this refashioned energy landscape. And, sooner or later, anyone failing to recognize this will be in for a rude awakening. If you aren’t careful you might miss out on the new solar equivalent of Google!

Jun 07 11:14 PM

[TCK:]

While the goal of the US government is move to wind and solar, the rest of the world accelerates the use of nuclear, oil, and coal.

Hmmm, I hope I get that promotion at McDonalds. Otherwise, my other option is Amway sales.

Jun 08 12:18 PM