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Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.
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Opportunities in the Wind Value Chain
When it comes to the selection of wind energy stocks, a look at the value chain beyond turbine manufacturers reveals what are, in our opinion, some of the best ways to play this market. With the turbine manufacturers located approximately in the middle of the value chain, we first look downstream to where the demand is coming from.
Demand for electricity ultimately comes from the consumers, industry and individuals, but the demand for renewable energy mostly originates with the utilities that are forced by regulatory mandates to gradually decrease the percentage of their energy mix coming from fossil fuels. Utilities seldom develop their own wind farms; instead they acquire them from project developers or simply buy the electricity from Independent Power Producers (IPPs). Table 1 below lists some of the key downstream wind market participants: the project developers, Independent Power Producers and utilities.
Table 1: Project Developers, Independent Power Producers, Utilities
How to Invest in Wind Energy
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 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 their global tower market share to 18.6% and 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 they are nowhere near a wind pure-play and their 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 8 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 3 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.
Now is the Time to Invest in Wind Energy
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:
More »First Solar to be added to the S&P 500 index tomorrow
Standard & Poor’s just announced that First Solar Inc. (FSLR) will be added to the S&P 500 index after the close of the market tomorrow, October 15, 2009, and replace drug maker Wyeth (WYE) which is being acquired by Pfizer Inc. (PFE). The obvious question this raises is whether getting listed on the S&P 500 index is good for a company or bad. I have explained in a recent article “Picking Solar Energy Winners” why I am bullish on First Solar, so I will not repeat all the reasons here but rather focus on the topic at hand.
More »The debate that follows index listing is typically divided along the bullish/bearish lines. Bulls cherish the added exposure from such a prestigious listing, and they suspect that because the numerous S&P 500 index funds will have to buy a lot of FSLR shares, it will be good, at least short-term. Well, it depends; maybe the company will have a secondary offering to cover the excess demand. Arguments about why it is bad are harder to come by and tend to be more creative, like two we’ve heard recently: “All the investors who correctly anticipated the listing will now sell their shares” and “Since the S&P 500 is poised to decline, it will be bad for FSLR”.
Back to serious matters. What happens to a company’s stock price when it joins the S&P 500 is actually known as the “Index Effect” and has been studied for years. The answer is: yes, the Index Effect exists, it is positive (the median excess return of S&P 500 additions was 3.8% for the past five years) and the effect is shrinking over time. Read “The Shrinking Index Effect” at Standard & Poor’s for the details.
The effect on FSLR’s share price may be small or inexistent but the listing broadly signals that solar technology has made it to the mainstream. People can dispute the future prospects of First Solar, or its attractiveness as an investment, but with the S&P 500 listing there remains no doubt that it is the leader in the solar market and maybe even of the renewable energy space.
Great news for Nevada Geothermal
We first mentioned Nevada Geothermal in these pages in a comment to our September 08, 2009 article entitled Geothermal Is Getting Red Hot, Part II. Here at The Green Investor we generally focus on larger companies such as geothermal pure-play Ormat (ORA), but the reason we have been so excited about Nevada Geothermal is that it is about to graduate from being an exploration and development stage company to a revenue generating electricity producer, and if it makes the transition successfully, its valuation multiples will change dramatically.
Since the uncertainty surrounding their financing was the main remaining dark cloud overhead, we now see Nevada Geothermal as a much less risky speculation, and looking at the recent share price appreciation it looks like the market agrees with us.
Nevada Geothermal shares are up some 75% since early September
Picking solar winners
Photovoltaic solar cells have been around for decades but they are still in the early commercial phase, with a great deal of evolving, maturing and growth ahead. By far the largest type of PV technology is based on polysilicon and manufacturing technology very similar to that of computer chips and other semiconductor devices. If you have something against acronyms or tech jargon we advise you to skip right over this section.
There are two basic types of solar photovoltaic technology: 1) crystalline and 2) thin-film. The market is mostly multicrystalline silicon today but thin film is emerging. Efficiency is the percentage of the available light energy converted to electricity. The table below shows how the various technologies compare:
Manufacturer power ratings are to be read as maximum output under ideal conditions, and to make comparisons even more tricky there are other factors affecting efficiency:
- Space utilization (it only takes half as much space when using panels with twice the efficiency), which means that higher efficiency technologies like crystalline silicon will have an advantage when there are space constraints such as urban rooftops