Investing in wind power

Wind Power: past and future

Before deciding whether to invest in wind power, it is interesting to consider some statistics. From 2000 to 2007, global wind installations grew 426% from 17,502 MW to 91,993 MW. Germany, Spain, and the USA were the leading installers over that period with 22,247 MW, 15,145 MW, and 16,818 MW, respectively. By region, Europe was the far-and-away leader with 61.4% of total installations. Other regions ranked as follows:

• North America – 20.4%;
• Asia-Pacific – 17.9%;
• South and Central America – <0.3%;
• Middle East and Africa – <0.1%.

The global compounded annual growth rate (CAGR) of installations for the period was 26.8%, which is staggering when compared to geothermal's 3.2%. Going forward, most experts believe that the drivers behind the industry will inspire it to equally impressive growth in the medium term, and especially once economic conditions begin to improve.

The most recent figures available from the Global Wind Energy Council (GWEC) show that around 27 GW of new wind capacity was installed in 2008 – pushing global total installed capacity to 120.8 GW, despite the economic climate. By 2012, the industry will have grown another 131%, and total installed capacity could stand at 264,705 MW.

Germany, the USA, and Spain will still be formidable players in 2012, but India and China will be on the scene in a big way. China alone is expected to have a wind growth rate of over 38% annually for the next five years.

Wind companies: firm leaders established

While the 2008 numbers are still being compiled, a look at the 2007 numbers shows that clear winners have emerged in the wind energy industry. Here is a list of the top 10 wind turbine companies, ranked by number of contracts in 2007:

• Vestas Wind Systems, 23 contracts, 2,700 MW;
• Nordex, 17 contracts, 1,319 MW;
• Suzlon Energy Ltd, 12 contracts, 2,457 MW;
• Siemens AG, 11 contracts, 1,473 MW;
• GE Energy, 10 contracts, 1,596 MW;
• Mitsubishi Power Systems, 7 contracts, 3,048 MW;
• Composite Technology Corp., 5 contracts, 70 MW;
• Americas Wind Energy Corp., 4 contracts, 5 MW;
• Clipper Windpower, 3 contracts, 345 MW.

Some of these companies, like Vestas and Nordex, are dedicated wind turbine manufacturers. Others, like GE and Siemens, participate in the wind industry in a big way, but as a nominal (but growing) part of their businesses. This is a major fact to consider when investing solely in wind energy, as you'll want to take stakes in companies that derive the bulk of their income from wind-related activities.

Wind market factors

As both the wind market and the cleantech market as a whole continue to grow at breakneck pace, continual policy and technology breakthroughs are having significant impacts on the industry.

In the USA, for example, a Department of Energy (DoE) study released in May 2008 found that wind energy could generate 20% of US electricity by 2030, as compared to today's 1%. According to the DoE, “under the 20% wind scenario, installations of new wind power capacity would increase to more than 16,000 MW per year by 2018, and continue at that rate through 2030.”

Wind energy growth is already coming to the US in a big way, with European companies currently doing most of the work.

But to reach the 20% goal, more than US$500 billion needs to be invested in new turbine manufacturing capacity and capital projects. And a reasonable percentage of that money is going to end up on the balance sheets of major wind energy companies, many of which are publicly traded.

This will all be helped by the USA's new President Barack Obama who has thus far been as dove-ish towards renewable energy as the previous incumbent of the office was ambivalent. The recently-signed US Stimulus package that provides nearly US$900 billion includes provisions that will directly assist wind power development. Such measures include an extension to the PTC – which provides a 1.9-cent per kilowatt-hour (kWh) benefit for the first 10 years of a renewable energy facility's operation – as well as options for organisations to take an Investment Tax Credit (ITC) in lieu of the PTC for certain projects. Obama has also pledged to tackle clean energy infrastructure (transmission) and efficiency, and he has been explicit in saying he wants to “double the use of clean power in the next three years in the USA”. Wind will of course have a vital role to play if that plan is executed.

Another boost to the US wind industry came when legendary oilman T. Boon Pickens unveiled his ‘Pickens Plan’, which calls for massive investment to displace natural gas-produced electricity with clean wind power.

And on the other side of the Atlantic, the outlook for wind is just as robust. Wind's share of the energy mix in the 27-state EU block is forecasted to reach 9.9% by 2010, 18.1% in 2020, and 25.5% in 2030, according to the European Wind Energy Association (EWEA). Wind power's share of new generating capacity is forecasted to be 34% in the period 2005-2020 and 46% in the decade leading up to 2030.

Put another way, over one third of new energy installations through 2020 will be wind related. From 2020 to 2030, 46% of all new power sources will be wind related.

Even more good news came late last year when EU leaders agreed on a new climate package. In addition to aspiring to reduce carbon emissions by 20% (from 1990 levels) by 2020, the deal also aims for a 20% renewable energy target by 2020 and a 20% cut in energy use. All those targets beg for the increased use of wind energy.

Wind energy for the retail investor

All these progressive policies and growing installations are good, but those numbers don't really point out where you need to be looking as an investor. For that, you have to look at the industry's less-sexy internal numbers – the asset transactions, announced deals, partnerships, equity offerings, and so on.

Asset transactions have been solid in the sector, with an expected pullback last year due to restricted credit and capital. Wind's 55 deals last year, valued at US$6.23 billion, were the highest of any cleantech sector by far. The next-highest sector was hydro power, which had 14 deals valued at US$1.08 billion.

Merger and acquisition (M&A) activity has also been hot. In 2008, there were 107 wind M&A deals valued at US$21.85 billion. 2009 is off to an even hotter start, with the US$12.4 billion acquisition of Essent by RWE Group. Other names that come up when looking at deals over the last quarter are Suzlon, EDF Energies Nouvelles, Enel, Iberdrola Renovables, and Vattenfall.

Making multi-million dollar purchases in this market is a sure sign a company has cash and credit and will emerge unscathed from the slowdown. Other companies worth investing in are leading pure turbine manufacturers like Vestas and Gamesa, and developers and financiers like Babcock & Brown Wind Partners.

The ISE Global Wind Energy Index, which tracks dozens of wind-related companies, fell about 59% over the past year, as global leaders like Vestas and Gamesa lost more than 40% of their value. This has led to an obvious buying opportunity, as some of the present and future juggernauts of this industry have arguably been left undervalued.

Since developing wind farms is highly capital intensive, project financing costs have skyrocketed as banks cut back on lending, and some power producers have been pushed out of the game. While this could lead to a slight weakening of demand, cash-rich utilities like Florida Power & Light will continue to plough ahead with wind investment plans, taking advantage of any turbine price breaks along the way.

Speaking of price breaks, European turbine producers are now facing serious cost competition from Asian manufacturers. A recent industry report by BTM Consultants concluded that about 18% of the worlds turbines are now manufactured in China and India, and that the total will continue to rise. In China, take a look at Dongfang Electric Corporation. In India, check out NEPC India Ltd.

Since the dominant wind companies are scattered across Europe and the US, some trading only on their domestic exchanges, it may be wise to look at a managed exchange traded fund (ETF). The First Trust Global Wind Energy ETF and the PowerShares Global Wind Energy ETF are two of the well known wind funds on the US market.

Each fund holds several of the companies mentioned thus far, as well as construction conglomerates that are instrumental in erecting wind farms. Like individual companies, these funds lost significant value as the recession set in. Both funds are down about 55% since their inceptions last summer, but will offer nice returns as the broader economy and the wind market rebound.

The calm before the storm – the time to buy?

Of course, the long-term prospects for the wind industry are extremely good, according to many experts. As mentioned earlier, installations are still forecasted to grow 131% by 2012. Right now, though, capital remains expensive, demand faces some tightening, and turbine prices could decline – the same is happening in the solar industry.

Consulting firm Accenture has said that wind power capital expenditures over the next two years could reduce by as much as 30%. Indeed, while it won't affect long-term prospects, both Vestas and Iberdrola have already cut back spending. Smaller, non-public companies that rely on external financing may not make it at all. A short time ago, power producers were so anxious to get turbines that queue times quickly grew to over two years. It's now predicted that European companies will take until 2012 to install the capacity once planned for 2010.

In many cases wind-related stocks have been drifting upward since November, and despite continued financial uncertainty and pending contraction in the short-term, prospects for the wind industry are still very good, both in terms of percentage of overall electricity generation and equity investment.

As the recession wanes, higher fossil fuel prices return, and renewed haste is placed on energy security and climate change, wind installations and related investments could find themselves the hot ticket once more.