Wind Energy Blows Through Records

By Aaron Levitt | April 10, 2014 AAA

While hydraulic fracturing is making some huge gains in terms of natural gas production, another energy source in the United States is also shattering records. Installed wind energy capacity continues to hit new highs across the U.S. That echoes similar gains around the globe.

Perhaps more importantly, those gains could continue into the future as a series of positive factors are blowing in the renewable energy source's favor. For investors, the time to bet on increased wind capacity is now.

Rising Market Share, Lower Costs

For the wind power industry in the U.S., 2013 was a great year. This past January, wind was responsible for 4.8% of America’s electricity used. While that amount seems small- especially when compared to coal and natural gas- this percentage was the highest January on record and eclipsed last year’s record amount. According to American Wind Energy Association (AWEA), wind generation capacity in the U.S. has grown from just 25,000 megawatts (MW) to over 61,000 MW in just five years. That’s a 140% growth rate.

The key for that torrid growth has been some major transmission upgrades as well as falling costs for wind power.

Texas recently completed its ambitious Competitive Renewable Energy Zone (CREZ) project earlier this year- which helped build-out new long distance transmission lines designed to take wind energy and place it into the grid. That helped Texas see a huge surge in its wind generation capacity. Likewise, similar build-outs are occurring in Oklahoma, Colorado and the Midwest. 

At the same time, the cost of wind energy has fallen by 43% over the last four years. In some markets, that cost is now below coal and natural gas without tax subsidies. Globally, average onshore wind power costs the same as natural gas at $84 per megawatt hour. That’s important considering the U.S. is thinking about exporting much of our natural gas bounty overseas.

The additional grid build-outs and lower costs- plus the fact that the expired tax credits for wind energy are now back on the table- has the AWEA estimating that nearly 60,000 MW of new wind energy projects could be coming to the U.S. over the next few years. That’s basically double current capacity. While these projects will take time to complete, it does insure steady growth for the renewable energy source.

A Windy Portfolio

The recent records set by the wind industry in the U.S. along with its torrid future growth makes it an interesting investment option for portfolios. Diversifying into the sector makes for a great play. For those looking for a broad option, the closing of the PowerShares Global Wind Energy ETF left only the First Trust Global Wind Energy (NYSE:FAN). Not that this is necessarily a bad thing.

FAN tracks 47 different firms associated with wind energy. Top holdings include Aarhus, Denmark’s turbine superstar Vestas Wind Systems (OTCBB:VWDRY) and wind-heavy Fergus Falls, Minn. utility Otter Tail (Nasdaq:OTTR). Performance for FAN has been pretty poor since its inception. However, last year the ETF managed to destroy the S&P 500- by about 25%- as wind energy resumed its upwards momentum. Given the projections of newly installed capacity, FAN could post similar results into the future. Expenses for the fund run 0.60%. 

Installing that proposed 60,000 MW worth of additional capacity will take a lot of turbine muscle. And when it comes to turbines there are only a real handful of big players. Both Fairfield, Conn.-based General Electric (NYSE:GE) and Munich's Siemens (NYSE:SI) continue to duke it out over who will be the turbine maker of choice for the wind industry. Both have expanded turbine size for onshore applications and continue to see rising orders for their products. Likewise, parts suppliers like Fort Collins, Colo.-based Woodward (NYSE:WWD) and Pittsburgh's Allegheny Technologies (NYSE:ATI) have also seen rising sales from growing wind capacity. Woodward makes electric converters that are required for grids, while ATI produces specialty metals used in turbine towers, engines and blades. 

For those investors looking for a different route to playing the renewable energy source, the wind heavy utilities maybe a great buy. Wind now accounts for roughly 60% of Minneapolis-based Xcel Energy’s (NYSE:XEL) generation capacity in Colorado, while Juno beach, Fla-based NextEra Energy (NYSE:NEE) has nearly 10,000 MW worth of wind generation capacity and is the largest operator in the U.S. Both utilities offer stable dividends and a way to create an income stream of wind energy.

The Bottom Line

While natural gas production continues to break production records, so does renewable energy source wind. Across the U.S., more and more wind energy is coming online. And new grid upgrades will have that fact playing out well into the future. For investors, now could be the time to bet on the sector. The previous picks- along with Bilbao, Spain-based utility Iberdrola SA (OTCBB:IBDRY) –are ideal ways to play the industry.

 

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