Wind Energy: Now Is the Time to Invest

Just this month the largest wind farm in the world went into production in West Texas, featuring 627 turbines producing over 780 megawatts at full capacity, enough to power 230,000 homes. The Roscoe Wind Complex cost over $1 billion to develop and is owned by E.ON Climate & Renewables North America Inc., a subsidiary of the German energy company E.ON AG (EONGY.PK). This news highlights two critical issues for would-be wind energy investors:

• There is precious little amount of coverage and information for the wind sector from the media in general and the financial press in particular. Compared to the solar market, which is broadly followed and reported on, wind gets short shrift. To make matters worse, what little news there has been lately was rather negative
• The vast majority of wind energy pure plays or significant industry players are foreign companies whose stocks are listed on foreign stock exchanges

Yes, in the first approximation most people equate wind energy with wind turbines, and here in the United States the name that comes immediately to mind for wind turbines is General Electric Co. (GE). The reason we will not consider GE for our green investments is twofold: 1) while large in the U.S., GE is a relatively small player in world wind turbine markets, and 2) wind turbines are only a tiny part of GE. Looking at the wind energy supply chain we find many companies ranging from materials to components, turbines, wind farm project developers to independent power producers and utilities which allow the investor to fully participate, but this will be the topic for a follow-up article.

Just as we did with geothermal energy (Geothermal Is Getting Red Hot, Part I and Part II) and for solar photovoltaic energy (Picking Solar Energy Winners), we feel that before thinking of which wind energy companies to invest in we need to set the stage with a short overview of the technology and market opportunity. Maybe most important is to identify the sector trend and go over the reasons why we believe wind energy will experience strong growth over the next few years, but also why we believe that now is a perfect time to invest.

Classes of wind power
Wind energy can generally be divided into 3 categories: land and offshore wind turbine farms which utilize towers that range in height from some 90 to 350 feet, personal and light commercial rooftop and guy-wired wind turbines meant to provide supplementary power to a single structure or usage point, and mobile inflatable and high altitude turbines that are tethered to the ground. At this point, from a personal investment perspective, land and offshore wind power is very attractive while other modes of wind power generation are either too limited in their potential investment options or too speculative at this time (high altitude wind power, while having high theoretical potential, has not yet turned into a revenue generating endeavor).

Global capacity and growth
Wind power in recent years has become incredibly attractive and total global wind farm capacity has increased rapidly over the past 5 years, growing at over 27% annually according to BTM Consult, an independent renewable energy consulting and market research firm based in Denmark. BTM forecasts that global wind farm capacity will continue to grow at over 15% annually from 2009 to 2013 from 122,000 MW (Megawatts) to over 343,000 MW.

In the U.S., total wind power capacity grew by a staggering 50% in 2008 as over 8,300 MW of capacity was added according to the American Wind Energy Association (AWEA). And while the total capacity in China is slightly less than half that of the U.S. at 12,000 MW, Chinese domestic wind power capacity grew 100% from 2007 to 2008 and continues to increase at the highest rate of any major country. We would be remiss if we did not point out that Denmark is already producing 20% of their stationary electricity power with wind turbines, followed by Spain and Portugal at 11% while the U.S. is at 1.5%.

Offshore wind power, which is viewed by many as one of the most promising sources of renewable energy, is vastly underdeveloped with less than 2,000 MW of installed global capacity, none of which is in the U.S. Clearly, there exists an enormous growth opportunity in the U.S. and in China, two of the largest global energy consumers where wind power generation has relatively low penetration. Also, unlike many other industries, leadership in wind energy production resides in countries that are not traditionally the first that come to mind when individual investors consider energy investments.

Cost
The cost of electricity from utility-scale wind systems has dropped by more than 80% over the last 20 years according to the AWEA. The so-called levelized cost which includes all the costs of producing the energy over the plant lifetime (initial investment, operations and maintenance, cost of fuel, cost of capital and tax credits) is estimated in the range of $44 - $91 ($/MWh) for wind, comparing favorably with conventional generation technologies like coal and gas. Another big plus for wind is that the initial capital costs are the lowest of any alternative energy technologies.

Environmental and visual impact
Wind power is now positioned as one of the least harmful current and future energy sources globally. The total carbon footprint of wind energy production is accounted for in the manufacturing and installation of wind turbines and the energy required to manufacture and install wind farms is paid back in the form of electricity generation in less than 6 months of operation. Ongoing energy production results in zero greenhouse gas emissions and requires no fuel or water.

There are legitimate concerns about the impact on bird and bat populations and the impact, though thought to be small, has yet to be quantified. Any impact on wildlife needs to be weighed against the potential negative impacts of other power generation sources and, by this standard, wind is almost always viewed as more attractive.

The aesthetic qualities of wind farms are provoking a lot of discussion in the U.S., specifically the proposed offshore coastal wind farms in Massachusetts and Florida where wind farms would be in view of high value residential and vacation real estate. How this issue impacts the installation of future U.S. wind farms is unclear. In Europe, wind farms, even those in view of densely populated coastal areas, are overwhelmingly viewed as modern, progressive and environmentally friendly.

Financing
Acquiring financing was a major challenge early in the life of the wind power industry. However, in recent years the combined effects of (1) a rapid decrease in equipment costs in terms of $/MWh, (2) escalating costs for construction and operation of coal, natural gas, and nuclear power plants, and (3) increases in government subsidies have made wind farms an attractive investment for traditional utility companies and upstarts alike. Looking forward, and even in light of the global recession and the near collapse of the financial markets, we do not expect the current tight financing environment to linger on into 2010 and expect lending rates and payback hurdles to come in line with those of other utility operated power plants that utilize coal, natural gas, or nuclear fuel.

Why invest in wind now?
The wind energy sector has been hurt badly by the recession and wind investments have not come back from the lows as strongly as other sectors like solar, but they had not plunged as severely either. Still, many wind energy stocks have been flat or down for the last few months while the rest of the market advanced. The reasons for the relative underperformance are multiple, but a slew of negative news is mostly to blame.

The slowdown in government funding for new wind projects in the previously largest market in the world (Germany) allowed the U.S. to leapfrog and boast the largest wind generation capacity in 2008 (25,000 MW). This positive development has been overshadowed by forecasters estimating the amount of new wind power to be installed this year in the U.S. will be down some 30% from last year and China is now poised to overtake the U.S. for the #1 spot. The shortage of transmission capacity has also hurt the wind industry and was directly blamed for the much publicized cancellation of T. Boone Pickens’ Mesa Energy project to build the largest wind farm in the world.

We believe that the negative news has been largely overblown and that valuations in the wind sector have been beaten down about as far as they are going to go. It will not be long before the analyst community realizes why wind energy is still one of the most untapped and cost effective forms of renewable energy. We also expect the offshore segment to open up in a big way for new projects in the U.S. and anticipate positive news on that front in the near future.

Disclosure: No positions. Seeking Alpha author Garrett Beauvais contributed to this article.

Comments

[captainccs:]

>>>Looking at the wind energy supply chain we find many companies ranging from materials to components, turbines, wind farm project developers to independent power producers and utilities which allow the investor to fully participate, but this will be the topic for a follow-up article. <<<

That's the picks and shovels of wind farming! That's where I'm looking for aeolian investments.

Oct 21 09:28 AM

[User 357267:]

The comments about 'carbon' in this story are so bogus as to raise question to the facts in the rest of the story.

The wind energy people in Wyoming have testified that it will take about 20 years for a tower to be carbon neutral. The carbon use in the manufacture, assembly, haul, construct and operation is huge.

These towers only caputre about 40% of the energy of the wind. They only operate on subsidies and tax breaks.

Oct 21 09:36 AM

[Johnbbq:]

The statement about "carbon" in this story is so bogus as to raise a question about any of the facts in the story.

The wind energy people in Wyoming have testified that a wind tower will be 'carbon nuetral' in 20 years. The amount of carbon used to manufacture, aseembly, haul, build and operate the turbines are huge. The brushes in the genrator give off carbon for the life of the unit.

There will be more 'carbon cost' involved in decomissioning worn out and obsolete towers. These towers, at best, only convert about 40% of the actual energy and are only cost effective with subsidies and tax credits.

Oct 21 09:41 AM

[wind4me:]

since I cover nothing but WIND ENERGY and WIND STOCKS, let me weigh in on two wind stocks to purchase TODAY for future gains down the road APWR and VWDRY. APWR is partnered with GE for a gearbox factory in China and also has the Chinese government backing (APWR) with the Shenyang Power Alliance. Vestas (VWDRY) is a pure play global player in wind power and is currently approaching my buy back in price of $22

Oct 21 10:36 AM

[jerrydd:]

Oct 21 09:41 AM Johnbbq wrote:

> The statement about "carbon" in this story is so bogus as to raise
> a question about any of the facts in the story.
>
> The wind energy people in Wyoming have testified that a wind tower
> will be 'carbon nuetral' in 20 years. The amount of carbon used
> to manufacture, aseembly, haul, build and operate the turbines are
> huge. The brushes in the genrator give off carbon for the life of
> the unit.
>
> There will be more 'carbon cost' involved in decomissioning worn
> out and obsolete towers. These towers, at best, only convert about
> 40% of the actual energy and are only cost effective with subsidies
> and tax credits.

What are you, a coal company flack? Why do 2 posts of different name say about the same thing?

For instance since the tower is likely to be made from steel, it will be recycled at little energy cost. Next windgenerators don't have brushes in the generator!! Nor would if they had be carbon but metal instead.

At $1.3k/kw they are cost effective even if only putting out 33% continuously even without subsidies.

You completely leave out the subsidies of coal which is about $63B/yr not including GHG from pollution, land destruction, health care costs. Just because they are socialized doesn't mean the are not there. If these cost were in coal as the should be, Wind, most RE would by far be more cost effective.

While true WG's only make 40% of the winds power into electricity, the wind is free unlike coal which is not even that eff.

And learn how to at least use spell check.

Good article Garrett!

Oct 21 11:55 AM

[Troy Jensen:]

Nice retort jerrydd - I love SA, but I wish (and I have a long Internet background, so I know how hard it is) they could police some of the offensive, promotional and spam posts. But that said, they do a fair job, and obviously this guy has it out for Wind. I just want to add to both a well-written and thought-out article (props, Garrett) and jerrydd's comments, which again, are spot-on. Totally discounted are next-generation technology in "whoever's" post, which include both new advancements in the actual turbines, as well as the near-term breakthroughs in Green technologies critical many clean-energy generation sources - the Smart Grid, and BATTERY technology advancement (absolutely essential for both wind and solar, to be sure).

OK, to talk some turkey, to have a discussion about different types of energy and their actual pros and cons, thermodynamics must be employed. To keep this very simple, building energy generation capacity requires an expenditure of energy - so our boy makes some sort of point in that yes, indeed there are carbon offset issues in production of wind fields, or for that matter solar, coal, nuclear, etc etc. There is nothing revolutionary in that - for example, I am not a big backer of ethanol as the cure-all solution for replacing crude simply because, from a thermodynamic standpoint, it requires so much more energy to produce one gallon of the end refined product (auto fuel, for instance) than the crude oil we import and produce domestically today (a topic for another day). Being involved in the industry, his data (I use "he" and "his" and "whoever's", since there are two posts with two different names - here is my one post, my name is Troy Jensen, haha...) from "the wind energy people in Wyoming" are pulled right out of the clear blue sky. Who are the "wind energy people?" What type of wind turbines exactly are we talking about? Where, geographically-speaking, are the turbines located exactly? Where is a citation of the source of the information stated (the "wind people," I guess)? Until that is clear, just ignore those comments - I can just quote anything from anywhere (I heard it on Rush! I read it on Huffington or Drudge!), but that does not make it factual.

Back to thermodynamics. The Energy Industry is ruthlessly ruled by the immutable laws of thermodynamics. It's a reality even the Greenest of the Green must address. The very first law of thermodynamics says that energy is neither created or destroyed. It gets redistributed. The chemical energy that is stored in the jet fuel inside a Virgin America airliner in San Francisco is, during a flight to JFK, turned into heat in the atmosphere or heat on the tarmac, or perhaps into air-conditioning that keeps the passenger in seat 2B comfortable (I love Virgin America, BTW!!). Thus, the energy in the jet's fuel tank doesn't disappear - it gets redistributed. And that redistribution of concentrated energy to a more random form leads us to the second primary law of thermodynamics - which says energy tends to become more random and less available. Heat always dissipates, from hotter to colder, never the other way around. An air-conditioned room during the summer in Phoenix or a heated room in Boston during the winter will quickly become uncomfortable unless more conditioned air is pumped into it. And creating that conditioned air, whether it is cooled or heated, takes a steady flow of energy, or what is called "base load." Taken together, the first two laws of thermodynamics provide the key to understanding why fossil fuels are so dominant in today's economy, and why technology advancements are SO critical in our inevitable move to cleaner forms of energy. Turning diffused forms of energy - whether that energy is stored in the starch found in inside corn kernels, the photons in sunlight, or the kinetic energy available from the strong breezes blowing off of Cape Code - into more concentrated forms of energy is always an uphill battle. And the more diffused the energy source, the more difficult it is to concentrate it into a form that can provide usable work, whether that's lighting a house, powering a jetliner, or firing a furnace.

All that boring science is needed to understand some simple facts that give wind, in my view, three pivotal limitations that are being addressed and overcome quickly through technology advancements and breakthroughs:

1. Like solar, wind power is intermittent. While the fact is obvious, critics claim that solar and wind cannot replace the need for base load electric generating capacity from traditional sources like coal, natural gas, and nuclear. So a technology solution is needed to address turning intermittent generating capacity into base-load generating capacity for wind.

2. Few people want to live near wind turbines (the "Not In My Backyard" argument, which kills me here in California - the Malibu set who argue all things Green to the point of cult-like behavior, yet cringe and argue over exposed solar panels and wind turbines anywhere near their views - can't have it both way folks!!). The same goes for the new electric power transmission lines so critically needed for our nation's electric infrastructure, NO MATTER the source of the energy. Factor in the environmental effect of turbines on birds and other wildlife (I am in no way making a political stand on saving birds - again, living in California, I know what a barrier birds and minnows and all sorts of other environmental issues can create) and imminent domain issues, and we have the second limitation to wind that will need to be overcome.

3. The discussion of wind energy CAPACITY versus production - so many in GreenTech will boast of the wind generation capacity of a certain new project or field, but, back to it's intermittent nature, it's production is key. These terms have to be kept in mind whenever discussing clean energy sources like wind and solar. This is a slippery issue - I personally have worked on projects (primarily in solar, but also in wind) where, because of all sorts of issues too lengthy to list, actual production ranged anywhere from 11% - 62% of actual electric generation capacity. This third issue is very critical - too many wind fields that wildly under-perform installed capacity will hurt the industry, so the wind sector players need to be very accurate and conservative in their estimates for the long-term viability their business.

So, I almost look like I am arguing against wind and solar, two energy generation sources I actual believe passionately in. But that is where my long background in InfoTech has helped me, and many of my peers that have migrated, in GreenTech. Simply, technology advancements (such as jerrydd's comments about brush-less turbines and the steel, which can easily be recycled and perhaps even profited from, if we trend commodity prices and the thirst for steel from Asia...) are in turbo-mode, if you will, to address how to solve the intermittent generation issue with both wind and solar. Let's quickly address the three limitations to wind I cite above:

1. Intermittent Electric Power Generation - This is being actively and aggressively addressed by battery storage technology. There are both short term (2-5 years) and long-term (7-12 years) technologies in the works that will allow for large-scale, efficient storage of the power generated to be distributed much more evenly, providing the important "base-load" generation wind needs to compete head-on with coal. As a technology veteran, costs will compress as critical mass is reached, and the quickening of battery technology, capacity and functionality will begin to see the inevitable acceleration we have seen in other critical technologies Another factor will be the evolution of the Smart Grid, and all it's critical components. I will save a long-winded Smart Grid comment here, but suffice it to say, all indicators point to a vastly more intelligent, efficient national electric grid boosting intermittent energy sources like wind and solar tremendously.

2. Not In My Backyard (NIMBY) Issue - Get over it. It infuriated me when Robert F. Kennedy Jr., in 2005 as an outspoken environmental lawyer for the Natural Resources Defense Council, complained in a New York Times op-ed about ugly wind turbines off Nantucket Sound. I will let an op-ed response in the San Francisco Chronicle at the time sum it up, calling his opposition to the wind farm as an example of "a worldview born among the privileged patricians of a generation for whom building mansions by the sea was indistinguishable from advocating for the preservation of national parks." Bottom line - these will be issues the sector will have to overcome at the grassroots, local level, with help from Federal Government mandates (similar to the mandate that HOA's cannot outlaw solar panels in residential developments).

3. We in the industry must be very cognizant of communicating INSTALLED CAPACITY versus ACTUAL PRODUCTION estimates. It is critical to be as accurate and conservative in our power generation estimates. Just as critical, as better commercial battery storage solutions come online, it will be critical to factor that in those generation estimates.

This long comment to the article (sorry so long, it's a passion and I had some time on my hands this afternoon!) is meant simply as a overview from 32,000 feet on Wind Energy. I am monitoring and working within the Wind Sector of GreenTech, so as we look at specific investment opportunities, I thought my two cents might be of some worth. I hope it is helpful. So, some final observations:

I mentioned two critical technologies that are receiving not just "billions in government subsidies", but also billions in private funding - battery technology and the Smart Grid. Simply, we are on the verge of some tremendous advancements in battery storage capabilities that will lead to tremendous efficiencies in storing that intermittent wind energy, lending to wind providing a reliable base load electric generation source similar to the fossil fuel sources widely used today. The second is the Smart Grid - companies ranging from Google to IBM to Oracle, as well as dozens and dozens of viable, Silicon Valley-funded start-ups, are devoting billions of dollars in solutions for the intelligent (and hopefully, in my humble opinion, a free market-based) distribution of electric energy. Finally, much-needed infrastructure investments in the construction of new, high-voltage transmission lines, to effectively and efficiently link wind and solar energy generation fields to other parts of the nation are in the process of planning and in some cases (again, California being a leader in GreenTech, I am watching this with my own eyes), has already begun.

This is an exciting time to be in GreenTech. I am one of a very few true Green Capitalists (can I copyright that term?), so I do agree that the quicker technology advancements lower the final, and all-important, levelized cost-per-kWh, the better, to lower and then eliminate sometime in the future government subsidies. I would not be an active participant in this sector of the energy industry if I did not believe 100% that it is possible. I see the same revolution in GreenTech I saw, lived through, and profited from in InfoTech (the rise of digital technology and the Internet). There is the old term on Sand Hill Road in Silicon Valley - "Follow the Flow." And I saw the flow of venture capital and private equity funding begin to flow to GreenTech two years ago, and decided to follow that flow myself. True to form, the largest percentage of VC and PE funding the last few quarters has now surpassed digital. Finally, my technology background coincides with marketing and demographic experience, and there is one last SUBSTANTIAL factor I strongly believe will push the inevitable move to more and more Clean Energy electric generation capacity - societal and cultural influence, both domestic and foreign. In California, all things have been Green for many years - it has deep cultural, societal and political roots, and ranges from the pragmatic to the extremist (and indeed, in some cases "Green" is being misused politically, to be sure). I, and many I work with, have been actively watching this trend from a marketing standpoint for a long time, and as current popular culture is showing, Green has big-time, permanent traction. Combine that with the United States' need to take the leadership role of the global effort of reducing emissions away from Europe and Asia and into our hands, and you have some further powerful trends that point to the long-term viability and profitability of GreenTech.


On Oct 21 11:55 AM jerrydd wrote: > >

Oct 21 09:41 AM Johnbbq wrote:

Oct 21 07:51 PM

[DavidS:]

One quick comment - wind capacity factor is no different than hydro - the cheapest source of electricity in the world. The difference with wind over hydro is it can be intermittent - the best sites though produce like clockwork, e.g. San Gorgonio Pass in SoCal. THis internittent issue can be resolved with progressive regulatory policy that favors lowest carbon sources first access to the grid - King Coal obviously does not like this idea at all.

David Simkins

Oct 22 09:48 AM

[wind4me:]

I like the Picks and shovels players but I am also looking for the '''CHINA MINER'' of Clean Green China power (APWR)

if U like the picks and shovels, (KDN) very profitable company building bearings for the blades


On Oct 21 09:28 AM captainccs wrote:

> >>>Looking at the wind energy supply chain we find many companies
> ranging from materials to components, turbines, wind farm project
> developers to independent power producers and utilities which allow
> the investor to fully participate, but this will be the topic for
> a follow-up article. <<<
>
> That's the picks and shovels of wind farming! That's where I'm looking
> for aeolian investments.

Nov 11 04:38 PM

[wind4me:]

pretty DAMN GOOD price point pick on (VWDRY) at $22 even if I must say so myself!

my (APWR) is going to be MY PICK for writing a future book about
www.Wind4me.com

if I am right, Obama and China to announce in 3 days time!


On Oct 21 10:36 AM wind4me wrote:

> since I cover nothing but WIND ENERGY and WIND STOCKS, let me weigh
> in on two wind stocks to purchase TODAY for future gains down the
> road APWR and VWDRY. APWR is partnered with GE for a gearbox factory
> in China and also has the Chinese government backing (APWR) with
> the Shenyang Power Alliance. Vestas (VWDRY) is a pure play global
> player in wind power and is currently approaching my buy back in
> price of $22

Nov 11 04:40 PM