Finding Opportunities in Wind Energy

Last Wednesday I published “Wind Energy: Now Is the Time to Invest” as an introduction to wind energy markets and a review of the reasons for which I believe wind offers a bright future for informed investors.

This year, an estimated 28,000 Megawatts (MW) of capacity are being installed worldwide, and by 2013 the new annual installed capacity will have more than doubled to 58,500 MW. The U.S. Department of Energy also projects dramatic growth with wind energy’s contribution to U.S. electricity supply to increase to 20% by 2030.

Probably the single largest challenge for a U.S.-based individual investor looking to participate in the growth in wind power is that the vast majority of pure play or significant industry players are foreign companies whose stocks are listed on foreign stock exchanges. A perfect illustration of the dilemma can be found in the list of wind turbine manufacturers in Table 1 below. The list represents the worldwide top 10 market share rankings in 2008.

Table 1: Wind Turbines Manufacturers

General Electric (GE) is the only U.S. manufacturer to make the list. GE manufactured over 50% of the wind turbines deployed in the U.S. last year and grew its global tower market share to 18.6%. It is now nipping at the heels of Vestas of Denmark, the world’s largest supplier of wind turbines, at 20% market share. Still, as we pointed out previously, GE makes a rather poor wind investment. For starters, it is nowhere near a wind pure-play and its participation outside the U.S. market is minimal. For example, in what is expected to become the largest wind market this year, China, GE holds only a 2% share and ranks #10.

If you could only buy one wind company it would have to be Vestas Wind Systems (VWDRY.PK) as the clear leader in the wind power industry. Vestas has a truly global reach, having installed wind turbines in 63 countries, and is one of very few industry players that can provide complete end-to-end wind power solutions. Vestas’ wind turbines account for nearly one-third of total installed global wind power capacity. Of the top eight country markets, Vestas is the #1 or #2 supplier of wind turbines except in China where they are a strong #4 with 10% market share, behind three Chinese manufacturers.

The list highlights the difficulty for the U.S. investor, as most companies are either private or traded on foreign exchanges. Just like the Vestas stock, a few others are also traded on the pink sheets as over-the-counter (OTC) American depository receipts (ADRs). This means they are not required to make the financial filings in the U.S. that are required for a listing on the major U.S. stock exchanges, and OTC stocks can present other dangers for the casual investor, such as very low volume and high bid/ask spreads which can erode profits.

For anyone only interested in taking a small wind position without investing time and effort, one way to simplify the process is to buy into the wind market as a whole via exchange traded funds (ETFs). Table 2 below lists the two specialized wind funds currently available in the U.S.

Table 2: Wind ETFs

Investing in ETFs presents the benefit of owning an entire basket of stocks in one shot, with the inherent diversification this represents, and the ability to easily participate in hard to reach foreign stocks. We wrote about the advantages of ETF investing in “A Guide to Investing with Green ETFs”. On the downside, investing in a broad static index tends to water down the best performers and results will typically lag a portfolio of handpicked stocks assembled by a knowledgeable and specialized analyst.

The good thing about stock picking is that there are dozens of great companies to choose from, including some long-term keepers from the top 10 wind turbine makers listed above. Even more exiting are the prospects one can find elsewhere in the wind supply chain. Upstream are the suppliers of the many critical components which the turbine makers generally outsource, such as blades, bearings, transmissions, generators, towers, power electronics and other key ingredients. Downstream are the wind farm project developers, independent power producers and utilities. Our next article in the wind series will explore the most promising companies in the extended wind value chain.

Disclosure: No positions

Comments

[Michael D.:]

You could also look at small regional suppliers such as AAER Inc. (AAERF.PK)

Oct 28 08:15 PM

[John Cordes:]

apwr

Oct 29 08:19 AM

[jerrydd:]

FPL, while not a pure play they are heavily into wind and gaining in solar. They are down now because their utility in Fla is down but that just means they have a long way up plus dividends of 3.8%.

Oct 29 11:15 AM

[captainccs:]

Take a look at American Superconductor [AMSC]. It's American. It just reported the 3rd consecutive quarter with positive earnings. It supplies wind turbine makers and also has equipment for the grid so it has a more diversified customer base including the Navy.

Disclosure: short puts.

Oct 29 11:38 AM

[7magic7:]

News from Reuters

Canada's wind power company to acquire U.S. developer

28/10/09
By Pav Jordan

TORONTO (Reuters) - Canada's Wind Works Power Corp said on Wednesday it agreed to acquire Zero Emission People LLC, a closely held U.S. company, in an all-equity transaction giving it the rights to develop wind power projects with a capacity of more than 400 MW.

Wind Works intends to form a new company with the assets, Chief Executive Ingo Stuckmann said an interview. It will need some $20 million to prepare the projects for construction.

The value of the deal was not disclosed by Wind Works.

It will cost another $1.2 billion to build more than 10 projects in Europe, Canada and the United States, each producing anywhere from 10 MW to 200 MW, although the company may sell projects before the construction stage begins.

Stuckmann said Wind Works aims to be a leader in global wind energy, an industry he estimates will attract $500 billion in investments over the next decade.

"We have a three-phase approach to start with, starting with a relatively quick project in Germany, highly predictable Ontario projects and a third phase of large projects in the United States," he said by telephone from Germany.

To do that the company needs to raise cash quickly, and Stuckmann said investor appetite has proven healthy so far.

"We want to raise the first $10 million in the next 12 months," said Stuckmann, adding that the new company would raise initial cash through a private placement and on stock markets. It is listed on an over-the-counter basis in the United States and Frankfurt.

"We'll then increase probably to $50 million in the mid-term," he told Reuters in an interview.

TORONTO, NEW YORK

Stuckmann said the company planned to list in Toronto within three to six months and predicted a New York listing within a year.

Wind Power is one of the world's fastest-growing energy sources and industry players say the market will quadruple in size in the next 10 years, driven in part by new green energy policies around the world.

Canada's wind energy sector aims to supply 20 percent of the country's electricity by 2025, from less than 1 percent these days.

The plan in the United States is even more ambitious, with wind energy seen supplying 20 percent of electricity by 2020.

Setting up a wind farm is not as straightforward as putting up giant wind turbines. It requires large swathes of land -- on average 100 acres per turbine -- with adequate and relatively constant wind speeds and which are close to consumers and an authority that is prepared to enter long-term power agreements.

It also requires capital -- some $3 million for each MW of energy capacity produced.

"We've done this before, now we just want to do it with a bigger cash backing," said Stuckmann, who over the past decade developed some 1,500 MW worth of wind power in U.S. and European markets, which he sold for about $3 billion.

John Pennie, chairman of Wind Works Power, said in a separate interview that the new company will vary its strategy according to country and project.

He said the new company could either enter partnerships, sell assets while retaining a 10 or 20 percent carried interest, or raise capital by issuing stock.

Once listed in Toronto, the company will go head to head with Canadian Hydro Developers , which last month agreed to acquire the rights to a 4,400 MW offshore wind prospect in Ontario from Wasatch Wind, Inc., a private U.S.- based renewable energy company.

($1=$1.07 Canadian)

(Reporting by Pav Jordan; Editing by Frank McGurty)

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Oct 29 12:52 PM

[wind4me:]

your article was written 2 days before the BLOCKBUSTER deal between CHINA and USA for 1.5 billion wind farm for APWR in Texas.

Yes, ETFS much safer way to go in WIND, GEX and FAN

However, a 1.5 billion wind farm for APWR considering they are doing 320 million revenues per year makes a small cap into a future monster!

Nov 03 11:55 AM