Wind Power: Economics and Investment Opportunities

What is a good indicator of whether something is hot? When the top weekly in the world runs at least one article about it in every edition it publishes. That is what has been happening with The Economist and alternative energy over the past few months.

This week's piece was dedicated to the economics of wind power. Citing studies conducted in the Netherlands and Denmark, two wind power markets that are comparatively more developed than most North American markets (barring maybe Texas), the piece argues that, once a significant part of its initial costs have been paid off, wind power can reduce average power prices significantly because the marginal cost of producing it is close to zero (the fuel is free).

This is consistent with a report released in January by Emerging Energy Research that found that, under a scenario in which carbon emissions are priced at €30 ($41) per metric tonne, "the cost of energy production from land-based wind turbines would be well below the cost of natural gas and coal plants at today's levels" in Europe. Contracts for one metric ton of carbon for phase 2 of the EU ETS (Europe's emissions trading program) are currently trading at around €21. I need not remind you that cap-and-trade for greenhouse gases may be here soon.

As our regular readers know, I have been a wind enthusiast for some time now, and I continue to believe that wind has some of the strongest fundamentals of all forms of renewable generation. In the context of rising fuel costs and the imminent pricing of carbon emissions in the US, the ability of wind to create savings for customers may one day prove to be the strongest argument in its favor.

Investment Ideas

Of course there are the issues of grid stability and transmission bottlenecks, which could slow growth in the wind sector. However, as we have pointed out in the past, we believe that both of these apparent limitations may actually provide good investment opportunities.

On the topic of frequency regulation, two stocks in particular are worth watching: Beacon Power (BCON) and VRB Power Systems (VRBPF.PK). We have written in the past about opportunities in transmission and inverters.

The other major problem facing the wind industry is chronic shortages of wind turbines. Here again, however, this means that turbine manufacturers should do very well in the next few years. Some of the top stocks in this space are: Vestas (VWSYF.PK), Gamesa (GCTAF.PK), General Electric (GE) and Suzlon (SZEYF.PK). The Pink Sheets listings are ADRs - all of these firms have proper listings in their home countries.

Disclosure: The author is long Beacon Power.

Comments

[lawsonson:]

Good news, bad news. The fuel is free but the capital investment is high. The major problem is it's reliability- Other electric power sources have to be available when the wind doesn't blow which impacts revenues for wind power and further increases the capital investment required for other energy sources. It is like saying "I have to have two automobiles instead of one, a convertible to drive on good days and a 4-wheel van to drive on the bad days".
Personally, I like geothermal power- the energy source is free and it can operate at maximum output 24/7.
for what it is worth.. JS

2007 Jul 14 10:50 AM

[A. Nony Mouse:]

And of course geothermal is more abundant and more widely dispersed than wind...right JS?

2007 Jul 14 12:41 PM

[Long-Short Guy:]

Interesting:

<blockquote>...W... started as one man's attempts to find a cheap, clean energy source has become a frequent topic of coffee conversation among the small community of year-round residents in this town and has galvanized some segments of the state's environmental community.

The clash began in February when two of Mercurio's neighbors filed a lawsuit in a state Superior Court, charging that the township had acted improperly when it issued the permits that allowed him to build the weathered gray steel tower in his backyard.

The township has since agreed that it was in error. Its code prevents any structure from being built that exceeds 32 feet, or almost 10 meters, in height; with its 12-foot rotor blades, Mercurio's windmill grazes 40 feet. And this spring, the township's council considered amending the code to keep windmills taller than 12 feet from being built. That proposal is pending....</blockq...

Source:
Wind power? Not in my backyard

2007 Jul 22 02:44 AM

[Long-Short Guy:]

<blockquote>...E... Inc. plans to start construction this summer on a major wind-power project in Bruce County, now that the Ontario Municipal Board has overruled residents fearing noise and unsightliness.

The 182-megawatt project, one of the largest wind farms in Canada, is expected to be completed by the end of next year...</blockquote...

Source:
Enbridge wind farm wins okay

2007 Jul 22 02:46 AM

[Long-Short Guy:]

<blockquote>Texa... electric regulators voted on Friday to designate eight zones as the best sites for construction of new power lines to serve more than 20,000 megawatts of proposed wind generation, an agency spokesman said.

After evaluating the potential for wind-generation in about 25 areas in the state, the Texas Public Utility Commission agreed to designate eight areas as "Competitive Renewable Energy Zones." or CREZ zones, said PUC spokesman Terry Hadley.

"It's a really good day for wind industry in Texas - for economic development and for air quality," said Susan Williams Sloan of the American Wind Energy Association, a trade group for the wind industry.</blockquo...

Source:
Texas agency okays 8 zones for new wind projects

2007 Jul 22 02:48 AM