Wind Energy: Now Is the Time to Invest

Includes: EONGY, FAN, GE
by: The Green Investor

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 (OTCPK:EONGY). 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. (NYSE: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.

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.

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.