Riding With the Wind
On August 3, the Obama administration unveiled its Clean Power Plan, which will require the nation to source significantly more energy from renewable sources by 2030.
That’s a tall task, but the plan has one trend solidly in its favor.
A recent report published by the Department of Energy sees the wind sector booming and cites wind as a key factor in reducing carbon emissions.
Additionally, the Lawrence Berkeley National Laboratory’s 2014 Wind Technologies Market Report states that wind turbines are being installed at a rapid pace.
Costs are plummeting, technologies are advancing, and the industry is generating a growing number of jobs.
Meanwhile, Bloomberg New Energy Finance says wind power is the most cost-efficient energy source in both the U.K. and Germany. That’s impressive given that prices for fossil fuels, including crude oil, natural gas, and coal, are at their lowest levels in years.
What’s more, wind power is the cheapest energy source even without government subsidies.
Today, wind provides only about 5% of U.S. energy output – but that’s a larger portion than solar. And in order to meet the requirements of the Clean Power Plan, wind will need to be a key focus going forward.
Get Wind of This
Today, the U.S. wholesale cost of a long-term wind energy contract, purchased under a power purchase agreement (PPA) from a wind farm, is just $0.0235 per kilowatt hour.
That’s the lowest price in history and it’s lower than the average costs of wholesale electricity in many parts of the United States.
Such low prices can be attributed to a (recently expired) federal production tax credit for wind energy – but the real change impacting the industry is size. Turbines are getting both taller and bigger, which enables them to generate more power.
Since 1998, the level of the turbine’s central rotor hub above ground (hub height) has increased by almost 50%, while the diameter of wind rotors increased over 100% during that period. And these dimensions still have room to increase.
At the same time, the Clean Power Plan should provide renewed incentive for states to install wind energy and help offset the wind production tax credit’s expiration at the end of 2014.
In fact, since 2003, about one-third of all new electricity generating capacity in the United States has come from wind turbines. In conjunction with decreasing energy consumption, the United States is actually on pace to meet the 20% renewable milestone by 2030. Three states – Iowa, Kansas, and South Dakota – are already there.
And even if the United States doesn’t get there, the rest of the world just might.
The Global Wind Energy Outlook, published by the Global Wind Energy Council and Greenpeace, concludes that robust climate change policy could help wind power supply 19% of global electricity by 2030 and 25%-30% of global electricity supply by 2050.
Making Investing a Breeze
In short, wind power is a significant up-and-coming trend in electricity generation. But what does that mean for us as investors?
Well, FTI Intelligence says that competition is heating up in the industry, not only on product quality and price, but also on the value-added products and services that suppliers are now required to provide.
By assisting turbine equipment manufacturers and end users, suppliers can help bring down costs and allow wind power to compete with conventional energy sources.
Unfortunately, many of the newer and smaller entrants in the space are privately held. But you can still opt for liquid names and trade out of them when the market levels off.
Bear in mind that, as sourcing strategies across the supply chain become more flexible and more affordable, there will be – and in fact there already is – greater geographic market access with less risk. That should ensure profitability for wind turbine vendors and their partners in the component value chain.
The chart below indicates which turbine manufacturers are getting sizable deals. Remember, too, that Siemens AG (SIE) is a large multinational conglomerate, which makes it less of a pure-play.
Wind – Practically Free
Hands down, wind is efficient. As with solar, once a project is built, the marginal cost of the electricity wind turbines produce is close to zero. With the exception of maintenance, it’s almost free.
And who doesn’t like free?
Thus, wind power should be an important cog in the global move toward renewable energy in the coming decades.