Harnessing the power of the wind has been the focus of many innovators for decades. Electricity generated by the large wind turbines that dot the landscape across North America has quickly become a key part of the energy grid and will likely grow in importance over the years to come. Over the past 10 years, the United States has increased its wind power capacity 30% year-over-year (YOY) and created an industry that employed 116,800 full-time workers in 2020.
The energy department’s Wind Vision report envisions a future where wind supplies 35% of the nation's electrical demand by 2050, which is a sharp increase from 8.4% in 2020. With such strong underlying fundamentals, it is little wonder that this industry is of growing interest to investors. In the article below, we’ll take a closer look at how investors can look to gain exposure to this important segment of the energy sector.
- The energy department envisions a future where wind supplies 35% of the nation's electrical demand by 2050, which provides significant upside potential for investors looking to gain exposure to the wind energy industry.
- Wind energy falls within two major categories: utility-scale wind and distributed wind. Utility-scale wind energy is the focus of most investors.
- Investments can span from wind-farm operators, utility companies, ETFs, green bonds, manufacturers of turbines, towers, electronic controls, and other integral components.
Types of Wind Energy
Wind energy falls within two major categories: utility-scale wind and distributed wind. Utility-scale wind energy is often thought of as turbines that exceed 100 kilowatts in size and those large-scale wind farms that connect to the nation’s transmission system. Distributed wind systems are smaller in scale and are often thought of as off-the-grid systems that power community-driven projects, residential in scale. The economics of distributed wind systems vary a lot by the amount of wind in a given location, local regulations, and supply costs. While there is still a strong investment rationale for those seeking to gain investment exposure in these types of projects, the focus of this article will be on the larger utility-scale systems. If you are looking to invest in a smaller-scale wind project, it would be best to consult with a local wind-energy expert.
Land-based Wind Energy
Land-based wind energy is what most people think of when they hear the term wind power—three propeller-like blades around a rotor that sit atop a tall tower. This type of wind energy has grown at a record pace in recent years. In 2020, $24.6 billion was invested and 16,836 MW of new capacity were added in the U.S. This form of investment represented 42% of all electric capacity additions in 2020.
Wind Turbine Suppliers and Instalation
General Electric Company (GE) and Vestas Wind Systems A/S (VWDRY) supplied turbines for 87% of U.S. wind power capacity installed in 2020. In 2020, GE captured 53% of the U.S. market for turbine installations, followed by Vestas at 34%, Siemens Gamesa Renewable Energy at 9%, Nordex at 3%, and Goldwind at 1%.
Offshore Wind Energy
As if creating a wind farm on dry land wasn’t difficult enough, the offshore wind segment is where turbines are connected off the coastlines around the country of growing importance for investors and while the turbine. Stronger winds, high barriers to entry, and the fact that it is less intrusive to the average citizen create a lucrative investment case. Offshore wind energy represents the wind farms that are being built off the various coasts and are connected to the nation’s power grid by underwater cables. On September 15, 2021, nine international and U.S-based banks announced that they were seeking $2.3 billion of senior debt to finance the construction of the first large-scale offshore wind farm in the U.S. The project is expected to generate electricity for more than 400,000 homes and businesses in Massachusetts and save ratepayers $1.4 billion over the first 20 years of operation. Furthermore, the project is expected to reduce carbon emissions by more than 1.6 million tons per year.
In December 2020, Congress passed extensions to the Production Tax Credit for Wind and established a 30% investment tax credit for offshore wind projects that start construction by Dec. 31, 2025. Given this type of incentive and the low number of offshore projects, it is not unreasonable to think this is a specific niche that investors will be interested in for quite some time.
Investors have a multitude of ways to invest in wind power depending on their risk tolerance, desired exposure, and risk tolerance. Investments can span from wind-farm operators, utility companies, manufacturers of turbines, towers, electronic controls, and other integral components, to financials and transportation. A good starting point for discovering publicly traded companies within the wind energy industry is to look at the constituents of an index such as the ISE Clean Edge Global Wind Energy Index, which is designed to track the performance of companies that are engaged or involved in the wind energy industry based on analysis of the products and services
offered by those companies.
Wind Power ETFs
Investors who are not interested in picking individual equities and rather invest in a basket of shares picked by a fund manager may be interested in researching the various wind-energy-specific exchange-traded funds such as the First Trust Global Wind Energy ETF (FAN), or the Global X Wind Energy ETF (WNDY). As this industry continues to grow in importance, it could be possible to see even more targeted funds in the future, but at this point in time, broad-level exposure is likely sufficient for most types of investors.
Institutional or accredited investors may also want to consider adding green bonds to their portfolios. These types of fixed-income instruments are designed to raise money for climate and environmental projects. These types of investments often carry the same credit rating as their issuer’s other debt obligations and are becoming a popular method for raising funds for large-scale wind energy projects. According to the Green Bond Report, released by financial services group SEB, the firm is forecasting investment in the global renewable energy sector to jump by around 25% to close to $400 billion. Specific to green, social, sustainability, and sustainability-linked bonds, the firm predicts an increase of 35% YOY and expects this segment to outperform conventional bonds in 2022.
The Bottom Line
Wind energy is a key part of the U.S. energy grid and given the momentum and forecasts highlighted in the article above, this does not look like it will change any time soon. As investors seek out ways to gain exposure to this segment of the energy sector, they often find themselves with a multitude of options, such as wind farm operators, utility companies, manufacturers of turbines, and other integral components down the supply chain. Some investors may even be interested in companies that finance wind farm operations or transport the various equipment to its various locations. Lastly, sophisticated investors may want to look at green bonds as part of their fixed-income portfolios. All said, regardless of one’s level of investment prowess, there are plenty of investment opportunities available in the wind energy industry.